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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, social security, health care, and more. The show is an extension of the book, How to Retire On Time, which you can get a free digital copy today by going to www.howtoretireontime.com, or you can grab a physical copy on Amazon. Just search for How to Retire On Time. My name is Mike Decker. I'm the author of the book, how to retire on time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, we can pretty much talk about it all.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational as a not financial advice. If you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here.
David:Yes. Always happy to be here.
Mike:David's gonna read your questions, and I'm gonna do my best to answer them. You can always text your questions in to (913) 363-1234. Again, that number (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Can you explain why some rates, like savings rates, are going down while other rates, like mortgages,
Mike:are still higher than normal? So can I ask you? Because this is not your specialty in the business. It's not. I don't wanna make you look dumb, but I'm just curious.
Mike:So asking for a friend, if you were to ask your friends
David:Yeah. Yeah.
Mike:Yeah. There you go. I we've talked about it, but if you ask your friends, what do you think they would say?
David:Oh, like on this question here, how they explain that?
Mike:If you had to guess, why are mortgages still at a higher rate? So I think probably a lot
David:of people would think that mortgages are tied somehow to what the Fed rates are. Right? You hear about is it Jerome Powell? He always saying Yeah. We're gonna cut at rates a quarter of a basis point.
David:I don't know. Right?
Mike:Yeah. And so that that those Small. Little itty bitty cut.
David:So I think a lot of us kinda think like that that's linked together. Like, oh, well, if he'll just lower the overnight rate, whatever it's called, then my mortgage rate will go down, I can buy a house finally or whatever.
Mike:Yeah. And so we're all waiting.
David:Yeah. For good
Mike:old Fed chair pal Yes. To to drop rates. Right. So okay. My suspicion has been confirmed.
David:Oh, yeah. So
Mike:the Fed operates off of the overnight rate. That's basically the rate that helps fuel banks.
David:Alright.
Mike:K? Or other large institutions that would qualify for such. K? And the financial plumbing or how all of that works is insanely complicated, but it's basically it's what puts stress on the financial plumbing. It's not an original term, it's often used in the industry, of basically how the money can circulate through.
Mike:Okay? He can make money more expensive, or he can make money cheaper, which affects more of the banks, the high yield savings, all of that, as money is flowing at a very short term rate.
David:That's why money is called a currency. Right? Because it's moving around like an electrical current.
Mike:Yeah. I've never heard that expression, but I kinda like it. So now you have mortgage rates and auto loans. So the average person, their mortgage is around seven to ten years that they're gonna keep the mortgage, and then they're gonna sell the house and move somewhere else or pay it off or whatever. Some people made all thirty years of their payments, or maybe they, in the seventh year, moved to a fifteen year and sped things up.
Mike:I mean, things happen, but it's around seven to ten years that people actually hold their mortgages until something happens. So who issues the ten year treasury or treasuries in general? The treasury department.
David:Not Jerome Powell. No.
Mike:Those are separate entities.
David:They're like down the street from each other, probably. Right?
Mike:Gosh. Who is the forget who the new treasury secretary is. That person. Yeah. Whoever that person like, you look up who the treasury secretary is?
Mike:I forget who it is in Trump's because Janet Yellen was, I believe, released.
David:That's right.
Mike:Anyway, so this person, we'll find out in just a second, their job is real simple. They're trying to basically issue debt so the government can afford things. That's what a treasury is. It is a debt instrument that says, hey, people of the world, because it's not just The United States that will buy treasuries, if you were to take on part of our debt, we will issue a coupon rate at a competitive rate. Okay, now let's just say, I need to raise $500,000,000,000, just for an arbitrary number.
David:Okay.
Mike:Okay, I'm gonna issue 500,000,000,000, just making this up, of treasuries. And now I'm gonna give you, David, one percent coupon on that.
David:Okay.
Mike:Do you think you'll actually
David:I don't know. So just like a 1%, like Yeah. That's the rate of return
Mike:1% rate of return Seems kinda low. Year over year coupon. Yeah. When you could go out to a CD and get, you know, a CD for 4%. Could put the stock market.
Mike:You could do private lending at three, four, five percent. No one would take it. So then this person do you know who the person is? Yeah. His name's Scott Passant.
Mike:Thank you. That's it. Yep. Yep. Scott.
Mike:So Scott's now saying, alright. How about 2%? And the market's like, nah. Pass. 3%?
Mike:No. You guys have a lot of debt. I'm kind of concerned that you'll default. When I say default, it's not that they won't pay the debt back, it's default means they skipped a payment. Okay.
Mike:They just missed one of their payments. That's it. Default is not nearly as concerning as a lot of people think. Yeah, it hurts the credit, there's a lot of negative consequences of it, but a lot of people assume default means they lost their money. Default just means they missed a payment, or a few other things could happen.
Mike:I mean, yeah, I guess if the end of the world happened, is a possibility, but when people say default, they often misunderstand the term as it's being literally defined. Anyway. Okay. So then Scott goes out and says, alright, well how about 4%? And then the market goes, you've got our attention
David:Mhmm.
Mike:But can you do a little bit better? And then he says 4.2%, market says how about 4.3? This isn't an actual negotiation. He just knows he needs to get 500,000,000,000, or a hundred billion, or a billion, whatever the dollar amount is Yeah. To basically keep things going.
Mike:So he has to issue treasuries at a competitive rate that's really controlled by what the market is willing to pay for.
David:Okay. Okay.
Mike:So Fed Chairman Powell does his own thing that affects the banking industry, which is like high yield savings, maybe some CD rates and all that. But the loan industry is more built around ten year treasuries, which is based on market sentiment. So if you want lower loans, better rates Yeah. You're not necessarily looking at Pell. You're looking at the market, the American debt, and can we pay the debt down fast?
David:Okay.
Mike:If we can pay the debt down fast, there's a chance, a reasonable chance that mortgage rates will also go down because a treasury is less risky because the debt is down, America's more solvent, more financially stable. That's why they're they're separated. Now you need to understand reinvestment risk with all this. So anything that's more associated with the Fed's rates has a lot of reinvestment risk. So a one year CD, well, what's it gonna be like in one year?
Mike:What's it gonna be like in two years? Those rates could go up or down. So when you got fixed CDs, right, your standard CDF, fixed annuity Mhmm. You've got bonds, maybe not bonds, but like the short term stuff. Mhmm.
Mike:That's more affected by Powell. The longer term stuff, bonds, longer term fixed annuities, structured notes, those instruments, mortgage rates, the loan industry might be more affected by long term treasuries
David:Okay.
Mike:Or what the market feels is appropriate, because no lender's gonna take more risk than they need.
David:Right.
Mike:So everything's priced according to market sentiment.
David:Okay. Very illuminating. The error of our ways has been revealed.
Mike:And for everyone in Kansas City right now listening up, just wanna point out something. If you have a lot of CDs, you got a lot of money in high yield savings, I wanna just give you a word of warning or some caution here. That's a huge potential risk when it comes to reinvestment risk. There are other ways to prepare for potential market crashes, other ways to prepare for potential market volatility that could have more long term upside potential so you can grow and still try to outpace inflation. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcasts, just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles, or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to ww.yourwealthanalysis.com today to learn more and get started.