Zacks Investment Management

Sarah and Damon S. from Fort Wayne, IN write: Hi Mitch, my husband and I are wondering what will happen to our savings accounts if interest rates go below zero. These savings accounts pay so little as it is, I’m wondering if there will even be any interest left to earn. 

Mitch’s Response: Thanks for writing Sarah and Damon — you pose a great question that I’m sure many other readers and investors are wondering about. 

In an effort to boost the economy into a sustained recovery, interest rates have been ultra-low since the 2008 financial crisis. It’s only been in recent years that the Federal Reserve has taken steps to incrementally “normalize” interest rates by raising the discount rate. Some readers may have noticed that as the Fed has been raising interest rates, deposit rates at banks have also started to slowly creep higher.

But as you pointed out, the interest rate story is changing again. Global economic growth projections are weakening as the U.S. and Chinese economies continue to square off in a trade war, and central banks across the world are responding with lower interest rates and renewed plans for monetary stimulus. If interest rates return to near-zero levels, retirees and savers can pretty much forget about earning risk-free returns that outpace inflation. 

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Is Now the Right Time to Invest? Get Our Answer!

The market has been volatile over the last year and this week has been no exception with heightened volatility. From rate cuts to trade disputes and trade war updates, there are many reasons why the market is jittery.

With all this going on, you may be wondering if now is a good time to invest…or would it be better to wait a few months and see if things settle down.

If you want more insight into this question, I recommend reading our guide, The Secret to Picking the Right Time to Invest. You’ll learn some of our key reasons, supported by data, why timing the market doesn’t work, and why the key is simply to invest (and stay invested).

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This interest rate environment has upended traditional principles of saving and investing, in my view. Many baby boomers and retirees may fondly remember the decades (70’s, 80’s, 90’s) when Certificates of Deposit paid north of 5% and cash deposits at banks earned solid rates of interest. In the chart below, it’s easy to see the years when interest rates were higher and saving was actually incentivized. 

Interest Rates, Discount Rate for the United States

Source: Federal Reserve Bank of St. Louis²

Not the case today. And with interest rates going even lower, it poses a valid concern of what your options are in terms of earning interest on savings. 

The bottom line is that retirees and future retirees are likely to have few options for risk-free returns in the next 10 years or more. In my view, it makes sense to have one year’s worth of living expenses set aside in cash, in a liquid account that likely pays very little interest — that’s just a fact of life. But your remaining assets are likely going to need to continue working for you, and growing over time, so that your long-term retirement needs are met. The answer, in my view, is to make a long-term commitment to investing in stocks — up to the degree that your risk tolerance and goals allow. 

I would argue that equities are very risky for short-term investors or investors who have short-term cash flow needs. But if your goals are long-term and the money is meant to last for your lifetime, then the time horizon for growing the assets is not just one year or five years, it’s probably more like 20 or 30 years. Over these longer stretches of time, I would argue, equities become a lot less risky. 

With low interest rates and market volatility, you may be wondering if now is a good time to invest…or would it be better to wait a few months and see if things settle down.

If you want more insight on this question, I recommend reading our guide, The Secret to Picking the Right Time to Invest.³ You’ll learn some of our key reasons, supported by data, why timing the market doesn’t work, and why the key is simply to invest (and stay invested).

If you have $500,000 or more to invest, click on the link below to get this free guide today!

Disclosure