For many pre-retirees and "in place" retirees, this extended period of low interest rates presents a financial conundrum; how to keep pace with rising costs, when your income specifically can't?

Feeble returns on safe investments such as bank deposits and bonds may hinder retirement income models for another decade according to a recent interview with Bill Gross, manager of the world's biggest bond fund. Currently the average yield on a five-year CD is about 0.8% compared with 2.26% back in 2009. 

But, for the record, the problem here lies not so much in the environment of low rates, as it does in the misguided approach that most American's take to retirement. 

It's long been said, that inflation, especially when it's lowest is at it's most insidious levels. With an average inflation rate of around 3%, retirees hardly notice year by year the rate at which their prices are rising.  When rates are low, inflation spends much less time as a topic addressed by the mainstream media, and the less that investors/retirees hear about it, the less that they factor it into their thinking in planning for their future. 

It's All In How You Look At It

America suffers from many ills as it relates to retirement. Many of those are self inflicted like the problem that low yields portend for keeping pace or actually enjoying retirement. But, many of those exact problems are caused by the perception of retirement. 

Striving to reach an artificial finish line such as "your retirement date" or turning 65 or collecting your first Social Security check, clouds our thinking.  Many retirees have a life expectancy much longer than they think that they do.  Given that, it might be best of we reframe the problem: 

"The finish line is your date of death, not your date of retirement.

I'd bet if we looked at the problem that way, we'd understand better that keeping pace with inflation and not relying on "fixed income" in a world of nothing but variables, probably isn't a wise path to take. 

The "income straight jacket" is especially concerning. 

The income straight jacket exists because too many American's believe that when they retire their time horizon for investing has now ended, they've made it, they got to the finish line. So, it would appear to be time to employ a different strategy.  Instead of investing for growth, the default becomes to position the portfolio to replace the very thing that they had when they were successfully making it (i.e., when they were working) namely income. 

Portfolios replete with high dividend paying stocks and fixed income abound. But there's a problem lurking in the shadows; when interest rates rise and the underlying value of their entire portfolio starts to drop, the decisions that need to be made become more problematic. 

Not only can't their portfolio income keep up because many of those rates are locked in; but the value of everything is declining as well, making the notion to initiate some change even more daunting. Who wants to sell as prices are dropping off the cliff?

Over the last few years there's been more than a few articles on the impact of lower than average interest rates on retirement and retirement income. But I'll submit that if you used bad math and poor judgement to build your portfolio in the first place, it's not a surprise that the "market" has found a way to make your bad decisions cost you. 

The Problem With Low Rates Is Our Reliance On Them Not To Be....

In and of themselves, lower than normal interest rates should not be much of a concern. Oh sure, they deserve some attention on how things are built and managed, but lower than average rates are not the death nell that we're hearing about. 

I'd bet that there are few people who are complaining that inflation (a number typically tied to the overall level of interest rates currently in play) isn't high enough or that you're ready to step up to the plate and have your mortgage and/or home equity loan rates move up to around 7%. 

Thinking that you're going to earn 8% on fixed income or bank investments when the inflation rate is 3% is about the same as the Client who would like to earn 10% on the stock market but just not have any risk....it isn't going to happen.  At point of fact, I'm not sure that it could happen. 

A local sports radio celebrity often comments about "mediocre" sports teams who seem to playing way better than they should be.  His comment about those teams seems true here as well; 

"The reality is that if your teams got problems, real problems, it's only a matter of time until those problems become real and your run is gonna end...."

Likewise for building a portfolio. 

Or a house, or a car, boat, sports team or business.  Weaknesses have an odd way of finding weaknesses in a relatively efficient manner. 

So stop waiting for rates to go up if for no other reason than you can't make that happen and start focusing on what you can do for yourself.

Sit down with someone who knows how to construct a plan for your retirement and your portfolio based on all the relevant factors, not just the ones we'd like to see happen.