The Capital & Conflict mailbag is brimming with your letters again. And this time, I’ve been forced to do something radical. When you get a letter like the one below, there’s only one thing you can do…
Before I explain what that is, let me share the note itself. It arrived Monday evening, in response to my letter on collecting a decent income and retiring rich:
Hi Nick
As someone whose income has plummeted since the government and their lickspittle banker pals divorced interest rates from reality, I certainly don’t feel better off than I was at your comparison point when I had already retired.
Even though my state pension had not commenced, back then I could get an easy, risk-free six percent plus income on my savings.
Now the only risk-free option comes in around one percent – that’s more than five grand a year less than before.
It’s one note… of hundreds that I’ve received (and indeed publisher Dan Denning has received too). They all detail the same problem. We’re in the middle of the worst possible time to be an income seeker.
Finding a way of getting paid in today’s world is extremely difficult (and pretty worrying). Unless you want to eat into your capital – and most of us don’t – you’re left with very few options.
Or so most people would think
See, this is such a big problem among our readership that I’ve decided to try and do something about it. It’s all a part of our drive to make the ideas we share with you more urgent, actionable and valuable. Sometimes that’s easy: you go out and try and solve problems.
So today I’m pleased to announce a new dimension to our investment research. It’s called the “30-Day Income Challenge”.
In the simplest terms, it aims to help you bank a big income without touching traditional income payers – like FTSE 100 stocks, gilts or savings accounts. It could help you earn as much as 7% per year (though we’re aiming for 5.5% as a target).
So, if you’re one of the hundreds of people who’ve written to me – or you read letters like the one above and think, “That’s me” – I have good news. You’re not alone! Help is at hand! All the information you need is here.
How can I be sure I’ll get paid when I need it most?
It’s certainly true we’re doing this against an awful backdrop for income seekers. It’s the kind of situation that can keep you up at night worrying. No one wants to resort to selling assets (like your house) or eating into your capital for income.
Yesterday I looked at annuities. But the low interest rates paid on savings are horrible reading too.
As my correspondent above put it, once upon a time you could expect 5%-6% on your savings. These days that’s more like 1%. Those numbers really add up.
Let’s say you have £250,000 set aside. At a 1% interest rate, you make £2,500 a year.
Perhaps you can deal with that if the situation is an “emergency” – as record low interest rates were first described eight years ago. But what if the emergency lasts decades? What if rates take another ten or 20 years to normalise? What then?
Over a decade, you’d earn £25,000. Over two, you’d make £50,000. Now compare that to what you’d make if interest rates were at 6%. Over a decade you’d earn £150,000. Over two decades, you’d make £300,000 in income.
In short… you make a quarter of a million pounds more long term earning 6% compared to 1%.
OK, you don’t need me to tell you that earning 1% is a hell of a lot worse than 6%. That’s obvious. But sometimes seeing the numbers in black and white makes you realise just how much it is costing you. And if numbers like that don’t make you wake up and want to do something about it, nothing will.
Which is what our Income Challenge is all about. There are ways of earning 6% today. Not by trading, using options or anything like that. But by taking advantage of a specific (and rarely covered) kind of income opportunity. I’ve prepared all the information you need to make your move on it here.
Welcome to the “new normal”
Because here’s the thing:
There’s a very good chance that interest rates won’t normalise any time soon. The “wait and see” approach can be very dangerous. You could be waiting a long time. It’s already been eight years.
How long do you think it’ll be before rates get back to where they were before the financial crisis?
Our income expert David C Stevenson tried to figure that out. As he put it:
At the centre of my worldview is what I believe to be a simple, brutal reality – there is a very good chance that we’ll be in a low interest rate (sub-2%) environment for the next two to three decades, until at least 2050.
Yes, you read that correctly.
Although interest rates might at some point rise a little, to, say, 1.5%, I believe that low rates are here to stay. You may not like the set of policies that central bankers have followed – you may even regard it as morally hazardous. But unless something drastic changes, none of those thoughts and observations will sway the decision-makers. So we’re stuck with low rates for decades.
Why? Firstly, in an indebted developed world, borrowers – including central governments – simply can’t afford normal interest rates. Over the long term, interest rates have been fairly volatile, but the average has been around 5%.
So we might normally expect rates to rise from their current record-low levels towards that figure. However, over the last few decades we’ve all collectively accumulated too much debt to be able to sustain high interest rates. I suspect that if rates did get back to closer to 5%, then the UK property market would melt down and the government would abolish the NHS because of ballooning deficits.
Secondly, if you look at market estimates for bond yields and inflation expectations, it tells us that investors believe that we are midway through a very long deflationary market where prices actually fall over time.
In this environment, interest rates of 1.5% might actually be rather on the high side if inflation is closer to zero than to 3%. You only need look at Japan over the last 20 years to see this in action.
Thirdly, central bankers are telling us that interest rates will remain low for many years hence. When the US central bank, the Federal Reserve, raised interest rates by just one quarter of one percentage point – 0.25% – late last year, financial markets erupted in turmoil. Emerging markets wobbled, the dollar strengthened and analysts panicked about impending recession. On almost any reading of future intentions, the Fed will struggle to raise rates above 2% in the next few years. By then another recession will be in place and rates headed down again.
Ask yourself: how would I fare if interest rates stayed close to rock bottom levels for the next 30 years?
Would your portfolio pay you enough? Or would you be forced to seek out alternatives like selling assets or eating into your capital?
It may not be a pleasant thought. But you need to figure out what you’re going to do about it. You didn’t create this situation, but you need to deal with it. You need to fight back! As of today, I declare the fightback officially on!
You need to get out on the front foot, be positive and take control of the situation.
How can you do that?
Best,
Nick O’Connor
Associate Publisher, Capital & Conflict
Category: Central Banks