Low interest rates come with high cost for savers, retirees

While overleveraged homeowners, and those eager to join them, worry when record low borrowing rates will come to an end, savers on the other end of the spectrum are anxious to see yields get back to more normal levels.
Bank of Canada governor Stephen Poloz kept the central bank's key interest rate at the same place it's been for the last 3.5 years on Wednesday. But many would like to see rates rise. (Cole Burston/Bloomberg)

While overleveraged homeowners worry when record low borrowing rates will come to an end, savers on the other end of the spectrum are anxious to see yields get back to more normal levels.

The Bank of Canada kept its benchmark rate steady at one per cent on Wednesday, in line with what economists were expecting and the same level it's been at since September 2011.

Policy planners and Bay Street watchers hang on the central bank's every word for an indication of when it might be compelled to alter the rate slightly from its current low — and indeed, try to guess which direction it might incrementally move in once it does.

If the stock market crashes, that five-year plan might become a seven-year plan or even a 10-year plan- Investor Peter Wong

Much of the water-cooler discussion on interest rates in Canada centres on what a hike might mean for the key housing market (and those desperate to join it.) But some say there's a whole segment of the population being left out of that discussion.

Savers and investors also have a lot riding on rates, and despite doing everything right — paying down debt and setting a little aside every month — they've been on the wrong side of that balancing act for several years now.

Investors typically grow their money aggressively with riskier vehicles through their prime earning years, before transferring that equity to something a little safer later on.

Canadian seniors used to be able to finance healthy retirements on rock-solid, boring investments like government bonds, GICs and annuities. But with interest rates where they are, investing in those things has been a recipe to lose money of late, barely keeping up with inflation.

Risky business

Peter Wong runs a travel agency in Mississauga and is one such person. Like many others, he and his wife have spent years working and saving, planning their retirement. He had one of the "five-year plans" that financial professionals often recommend. But with rates at historic lows for much of the last five years, the plan has been rewritten many times.

"I've had to put my investments in riskier investments such as the stock market, and that's a little dicey for someone approaching retirement age," he says. "If the stock market crashes, that five-year plan might become a seven-year plan or even a 10-year plan."

He's certainly not alone. A 10-year government of Canada bond — once the bedrock of any retirement portfolio — is currently yielding just 2.4 per cent per year to maturity. Strip away inflation and taxes that must be paid on those gains, and any investor in that bond is actually losing money, Barrie, Ont.,-based financial planner Gwen Kavanagh says.

"The best five-year GIC out there is currently 2.6 per cent," she says. "[Seniors] are forced into higher-risk investments just to try and live. It's scary."

Kavanagh says the ranks of those with iron-clad pensions is small and shrinking, which leads everybody else to make tough choices. "They've had to give up something," she says, "Give up comfort [or] going into uncomfortable investments to get returns, or give up luxuries or downsize."

"Now their house is their retirement fund for a lot of people," she says.

Poor yields

Wong has been looking to put his savings into an annuity, a guaranteed investment vehicle that pays out a fixed payment every year in exchange for a lump sum investment up front. But with rates around 1.5 per cent, he's not willing to commit to losing ground, when waiting a little could see higher and safer returns.

He and others have been looking for any sort of sign from the central bank that rates will one day increase from their so-called "emergency" lows, but much like what happened the previous 29 statements, there was very little indication that's coming in today's rate decision.

"The timing and direction of the next change to the policy rate will depend on ... new information," the Bank of Canada said today. That's the central bank's way of keeping its cards close to its chest, and giving itself lots of leeway to change rates if and when it sees fit — including possibly cutting them.

The Bay Street consensus remains what it was before today's decision: that the earliest we might see a rate hike is some time in 2015 at the earliest.

Investors like Wong know the bank's mandate is to look out for all aspects of the Canadian economy, not just his portfolio. But instead of endless hand-wringing about the negatives of hiking rates, he'd like to see it happen at some point so he can get on with his retirement.

"They've been saying that for years," Wong says. "I'll believe it when I see it."


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