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February 24, 2012

Historic Interest Rates Good For Mortgages Bad For Pensions

Interest rates continue to fall and have entered all-time low territory. So why is there is no jubilation and lines of people at the banks trying to buy homes or refinance existing loans?

Low Interest Rates Fail To Stimulate Housing

Despite the cheap money, it is still challenging for many homeowners who are underwater on their existing loans and who may have other credit blemishes due to job loss, job change or inconsistent income. Certainly, there are some people who are able to take advantage of the cheap money but not the massive numbers that we saw in boom years long past. Government stimulated initiatives continue to roll out which incentivize banks to refinance struggling homeowners into lower rate loans.

Retirees Suffer From Prolonged Low Interest Rates

There is a scary flip side to the interest rate environment. Pension funds which rely heavily on bonds and other interest rate based securities to generate sufficient invest returns to pay retirees are suddenly not making enough to cover their obligations. Compound that with retirees trying to living off their life savings which barely generates 1% return and you can begin to see the potential epidemic.

Perfect Storm Endangers Pension Funding

The longer we endure this type of interest rate environment, the wider the funding gap of pension plans. This will put pressure on stocks if companies are forced to close pension gaps with current earnings. When you also consider that 1) our massive Baby Boomer generation is retiring right now and 2) the longer life expectancies of Americans due to better health care, you can see how there are several layers creating a perfect storm of massive pension underfundings.

Good News, Bad News Economy

Most subjects dealing with the economy and finances have a pro and con. Just like when you buy and sell stocks, there is a winner and a loser. With economics, there are two sides to every coin. For example, low interest rates help homebuyers but hurt people living on fixed incomes. When interest rates rise, many investors will benefit, but people with adjustable rates on credit cards and other debt will have to pay more interest. Even if you do not understand all the details, as a consumer, it is wise to stay aware that good news in one sector means the potential for bad news elsewhere.

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