Financial impacts and opportunities in a low interest rate environment

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Over the past 40 years, interest rates in the United States have fallen dramatically. With each successive drop, it was tempting to think “this is it, now interest rates will finally start to rise again”, but that has yet to happen. Indeed, although the interest rate on the benchmark 10-year US Treasury bond has risen slightly from its low of 0.9% at the end of 2020, it remains well below historical averages.

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In this article, we explore the impacts and opportunities of a low interest rate environment for saving, investing, borrowing, and estate planning.

Rethink investing

The most apparent and direct impact of a low interest rate environment has been on savers. Long ago, those who put money in a bank savings account could rely on the interest earned on those funds to cover living expenses and build wealth. In recent years, most savings accounts have earned almost 0% interest. When you consider the erosive effect of inflation, the purchasing power of these economies has actually declined over time.

Likewise, the role of fixed income securities in investor portfolios is called into question. Callan’s research suggests that in 1989, investors could earn a 7.5% return from a portfolio allocated exclusively to fixed income and cash. we government bills, notes and bonds, also known as treasury bills, have long been considered the safest investments in the world. With less volatility than stocks, fixed income securities have been used for decades not only to add valuable diversification to a portfolio, but also to provide investors with a steady stream of income. But at today’s interest rates, the “safe” choice seems much riskier to meet your income needs.

While low interest rates make it more difficult to generate income from cash and fixed income securities, the solution is not simply to take more risk by investing in securities with the potential for higher returns. raised. Instead, investors need to think more creatively about how to generate income and carefully balance the trade-offs between risk and potential return.

We also understand that interest rates will not always go down, so additional preparation is needed for when this scenario occurs.

Low cost credit opportunities

For investors who need cash, secured loans can offer a profitable financing alternative in a low interest rate environment. Also called a margin loan, the idea is that instead of selling one of your taxable investments and potentially paying capital gains taxes, you borrow against those assets from your custodian (e.g. Schwab, Fidelity). They lend you money at a generally variable and usually very low interest rate, often lower than Home Equity Lines of Credit (HELOC) or standard bank rates. Using your assets as collateral to create your own source of loan can help you meet your short-term cash flow needs, refinance higher interest rate debt, or invest in higher yielding assets. , while allowing your existing portfolio holdings to continue to grow. In some cases, the loan can be structured so that the interest is tax deductible. However, this strategy is not suitable for all situations, so you should carefully consider all the risks and rewards of margin borrowing.

Estate planning

Because interest rates are used to determine the value of residual interest in a trust, low interest rates generally favor some estate planning strategies over others. For those with large estates, a zero Grantor Retained Annuity Trust (FREE) can be a valuable tool, especially when interest rates are low. The tool allows the donor of the gift (the grantor) to fund an irrevocable trust, which pays the grantor a predetermined annuity over a specified period. If, during this period, the assets of the trust exceed the interest rate of the annuity (called rate 7520), the growth or “residual interest” of the gift is transferred without inheritance tax or tax on gifts. . In short, FREEs can remove the appreciation of assets transferred from the settlor’s estate, at little or no gift tax cost. In combination with professional investment management, a FREE offers wealthy individuals and families the opportunity to donate assets that exceed the annual donation exclusion, while maintaining their exemption for life. Learn more about FREE here.

These are just a few strategies that could be beneficial in a low interest rate environment. However, the right strategy for you will depend on a variety of factors, so it’s always a good idea to speak with a professional financial advisor about your unique situation and needs. Also, keep in mind that interest rates won’t always be low. For this reason, any strategy you choose should be flexible enough to accommodate the possibility of higher rates in the future.

Article by Grant Ruder, CFP® and Chris Maxey, CAIA


about the authors

Wealthspire Advisors is an independent RIA that provides comprehensive financial and investment planning services to retirees, multi-generational and high-income families with complex tax, estate and charitable planning needs.

Chris Maxey, CAIA, Senior Vice President, focuses on portfolio construction, asset allocation, fund manager research and due diligence. As a member of the company’s investment committee, Chris provides ongoing advice and expertise in the capital markets to wealth advisers.

Grant Ruder, CFP®, Managing Director, incorporates expertise in investment management, cash flow, retirement planning, insurance, estate and tax planning. He serves high net worth individuals and their families, endowments and other institutional clients.

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