Fed Squeezes Savers and Pension Funds
CVN Choices
09-02-2010
The Federal Reserve`s idea is that low interest rates would
speed the economic recovery. So far that hasn`t happened
but they have certainly hurt people trying to rebuild
their savings as well as the nation`s badly underfunded
pension funds.
For individual retirees the equation is simple. When
interest rates fall, you need a lot more safe investments,
like bonds, to generate the same level of income.
That is equally true for large corporate and government
pension funds. John Ehrhardt of the consulting firm,
Milliman, says, `We are actually more underfunded than we
were at the end of 2008 because of the drop in interest
rates since then.`
The result is that many pension funds have put their money in
increasingly risky investments, such as stocks, hedge funds,
and even commercial real estate.
Most public pension funds base their financial planning
on the assumption that they can earn 8.5% on their assets.
With money in `safe` investments like U.S. Treasury
bonds earning between .5% and 2.5%, the money in risky
investments needs to have monster returns of between
10% and 15% to have any chance of pulling the overall average
up to 8.5%.
The other option is to pull most of the money out of the
`safe` investments and put it into riskier ones to make
it at least possible to hit the 8.5% mark.
|
