In the US, EU, Japan, and UK, central banks are keeping interest rates at near zero percent. In more than a dozen developed countries the rate is actually negative. Interest rates are at historic lows in most developed economies, and despite some marginal rate hikes recently, these low rates will likely continue for some time throughout the developed world.Interest rates are one of the most influential factors in the economic system. Interest rates affect all types of financial markets by setting the cost of borrowing and the rate of return on investment, retirement and savings. When interest rates are high, borrowing becomes more expensive and encourages to save more as interest rates are high. When interest rates are low, borrowing is cheaper, but investments yield less. The interest rate thus directly influences how much people save and invest.
Why are interest rates so low?
In wake of the financial crisis, interest rates have been kept low in an attempt to boost borrowing, economic growth and spending. Central banks also keep interest rates low as a way to manage national debt. Finally, there continues to be a low inflation expectation. The general economic theory followed by central banks is that interest rates should be raised when inflation gets too high. This is because inflation is spurred by spending, and if interest rates increase, people will invest more and borrow less. Therefore, because inflation is expected to remain low, central banks simply do not see the need to make any significant interest rate hikes.
How do low interest rates impact your retirement and savings plans?
Lower interest rates are good for younger people that need to borrow more money. However, once you start trying to save for retirement, these low rates can be a hardship. Traditional assets used to fund retirement, such as savings accounts, government bonds (treasuries), bond funds, and pensions, will see a substantial fall in return. If you decide to start saving today for retirement in the next several years, earning more than 2% per year will be almost unattainable with a conventional savings account or pension. Riskier investments are an option, but there are ways to maximize your investment return safely.Diversifying investments wisely in CDs, real estate, and well-maintained mutual funds can give a higher return with the assumed risk. To make these investments, however, you need to understand basic principles of finance and economy forecasting. You also need to know what investments are right for you based on the number of years you need to save for. And, it helps to be cognizant of the way political developments can impact investment markets. Not everybody is a financial expert, but everybody deserves to retire in dignity.
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15 years regular contribution - save monthly, quarterly, semi-annually or annually