Road to Retirement: Retired and waiting for interest tax to rise?

For the last 10 years, interest tax have remained stubbornly low to the disappointment of galore retired investors. Back in the good old years of the nineties, if you were retired, you could have invested with with in some safe U.S. Treasury bonds and earned 6 percentage or more, generating a nice financial gain stream for retirement.

But since the financial crisis in 2008, it’s been a different story. galore retired investors have been waiting for interest tax to rise so they can enhance their financial gain. But as the expression goes, you might be waiting until the cows come home.

The hope of higher tax has unbroken galore retired investors on the sidelines, sitting in cash or short-term CDs waiting for the market to rain higher interest tax on them. Compared to investment in the stock market over the last five years, that’s been a costly decision. If you had invested with with $100,000 in the bond market five years ago, you’d have about $113,000 today, if you had invested with with that money in the broad stock market, you’d have about $171,000.

Photograph by Ellen Jaskol
Charlie Farrell

The good stock market returns have caused some investors to wonder if they should increase their allocation to stocks or continue to hold out hope that interest tax will rise. There is no clear answer on this. It’s basically a judgement call. Here is my two cents’ worth: I think that interest tax are unlikely to rise much over the foreseeable future. Why? Because we just have too much global debt.

You see, every debtor has a loaner. And when the debtor owes the loaner a lot of money, the debtor starts to control the relationship. There is a expression that is ascribable to John Paul Getty that goes thing like this, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” This is roughly the situation we have with global debt.

Investors have loaned dozens of money to creditors who would have difficulty repaying those loans if interest tax rise. If loaners put too much pressure on borrowers and they go under, then they may not get thing back. If you want to keep your debtors “alive,” then a good move is to keep interest tax low. This makes it easier for borrowers to repay their loans. It besides makes it easier for borrowers to take on more debt and keep the economy moving along.

I think that’s roughly what’s going to happen. We may have periods where interest tax rise for a short time, but as those higher tax cause problems in the economy, the interest tax are likely to come back down.

Thus, I think retired investors are faced with a choice. Take on more risk with stocks or live inside the paltry returns of bonds. galore retired investors often get quite conservative, feeling like they can’t risk losing thing. But with retirement lasting up to 30 or more years, there is a reasonable risk that if you don’t earn higher returns, you could run out of money.

What to do?

Over the next 20 years, I think the odds favor being more aggressive; meaning having more in stocks than bonds, even if stocks are high-ticket these years. The reality is stocks have been “high-ticket” for the last 25 years. They’ve listed well above their historical valuations but still provided decent returns, albeit sprinkled with periods of huge volatility. It’s besides important to note that as every year goes by and stocks trade at a higher valuation, history is being rewritten. So you can’t get too anchored to historical valuations that are not fully reflective of our current economic and monetary environment.

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Because stocks are comparatively high-ticket, you should expect lower long-term returns, but they have to be compared to your options in bonds. If bonds only return 3 percentage (which is a generous assumption considering 20-year Treasury bonds only yield 2.75 percentage today) and stocks only return 6 percentage (which is well below their long term average of 10 percentage), that’s still doubly as much return, and that can make a big difference in your ability to live off your money for multiple decades.

Don’t get me wrong. I like bonds, and most investors need some. But holding too much of your wealth in bonds can create risks down the road since after taxes and inflation, galore investors are losing money in bonds. I know this is contrary to how some people think they should manage money in retirement.

They think, “I’m older and should be conservative.” But retirement generally doesn’t just last 10 years, and interest tax aren’t 6 percentage. property change, and you have to adjust. piece stocks might not provide the big returns of the past, if they do doubly as well as bonds, that’s probably enough to justify the risks.

Charlie Farrell is a CEO of Northstar Investment Advisors LLC. This article is for information and education purposes only. Past performance is no guarantee of future returns, and all investment involves the permanent risk of loss. Consult your individual financial adviser for guidance specific to your circumstances.