The State of Retirement

Why Lower Interest Rates Aren't Good News for Retirees

How does financial repression affect your clients?

A new book by Nahum Daniels looks at the challenges for growing the income-portfolio for pre-retirees and those already in retirement

Interest rates keep dropping, causing rising concern among some retirees, financial experts say. That’s because, while cutting lower interest rates can stimulate the economy by making it cheaper to borrow, consumers usually earn less interest on their savings. Falling interest rates are part of what economists call “financial repression,” which can pose challenges to retirees and to those who are nearing retirement, says Nahum Daniels, author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You.

“Our banking system does not shoulder a specific mandate to provide financial security to America’s retirees,” says Daniels. “In fact, some of its actions may actually prove harmful.

“Retirees need to know how financial repression will affect them, and what, if anything, they can do to counteract its consequences without creating even bigger problems for themselves.”

Financial Repression

Financial repression, a term coined by Stanford economists Edward S. Shaw and Ronald I. McKinnon, means that governments essentially use the private sector to service public debt. The tie-in with interest rates is that governments effectively reduce the burden on public debt by keeping interest-rate levels below inflation. Low rates could lead to more business borrowing and economic growth. But Daniels adds that the downside of falling interest rates is it effectively taxes the country’s savers.

“Shrinking interest rates work to the detriment of retirees,” Daniels says. “Low rates also mean the Social Security trust fund earns even less on money it lends to the government, worsening the growing shortfall as baby boomers retire.

“It’s crucial for retirees and those nearing retirement to protect their portfolios against the whipsaw effects of interest-rate volatility — i.e., falling rates that drive stock and bond prices higher, followed by rising rates that drive those same prices lower.”

Daniels explains three ways retirees can counteract the effects of financial repression:

Our banking system does not shoulder a specific mandate to provide financial security to America’s retirees; In fact, some of its actions may actually prove harmful...

De-risk the portfolio
““Losses in or near retirement can be hard to recover from, especially if you’re taking annual withdrawals from your nest egg, so avoid those losses by de-risking your portfolio,” Daniels says. “The traditional way of de-risking is rebalancing your asset allocation, which means scaling back on stocks and investing more in safer vehicles like CDs or annuities.”

Think short-term with bonds
“Returns on bonds are critical to achieving future income objectives,” Daniels says. “If you’re buying bonds, keep to minimal-risk investments that have maturities of two to five years. Individual bonds are one of the best-known types of fixed-income securities, and you can avoid possible capital losses on the fixed-income portion of your portfolio by keeping bond duration low. The trade-off for stability, however, is low yield.”

Consider a fixed-indexed annuity
“You can anchor your nest egg to the fixed-indexed annuity, which is a form of longevity insurance that seeks to deliver returns that are competitive with investment-grade, or minimal-risk bonds, but are built to avoid the ups and downs,” Daniels says.

“Investors in retirement or very close to it need to recognize the potential risks imposed by a banking culture that serves its own purposes,” Daniels says. “Financial repression represents that. This is a banking culture that is not particularly focused on the needs or future well-being of America’s retirees, so it’s critical these people know what their alternatives are to stabilize their hard-earned retirement funds.”




About Nahum Daniels
Nahum Daniels ( is the founder and chief investment officer of Integrated Retirement Advisors, LLC. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.