By Grant Ruder and Chris Maxey
Over the last 40 years interest rates in the U.S. have fallen dramatically. People have wanted to say, “This is it, rates will finally stop going down.” That has yet to happen, and even in the past 12 months, rates fell further, reaching as low as 0.9% for a 10-year U.S. Treasury at the end of 2020. What are the impacts of this?
Rethinking Investing
The most apparent has been the penalty on savers. Savers could previously rely on income from a savings deposit account to cover routine expenses and build wealth; that is no longer true. Many savings accounts now yield 0%. The other impact has been felt by investors. Fixed income portfolios played a similar role to cash, offering safety, stability and income, but with low interest rates, that ability is under question.
Despite the negative ramifications, we at Wealthspire remain focused on opportunities created from these situations. It was arguably “easy” to put together a winning portfolio in 1989 and research from Callan suggests investors could achieve a 7.5% return simply by owning 75% cash and 25% fixed income. Today, we need to think more creatively to balance the tradeoff between generating return and excessive risk. We also understand that interest rates won’t always decline, so additional preparation is required for when that scenario happens.
Become Your Own Source for Lending
Collateralized, or margin lending, is the concept of using taxable investment assets to borrow against. In doing so, your custodian (e.g., Schwab, Fidelity) would lend you cash at a rate of interest, usually variable. As many of our clients can attest and benefitted from, typically these rates can be very low, often lower than HELOCs or standard bank lending rates. Using your assets as collateral to create your own lending source can be rewarding and help you with short-term cash needs, refinance higher interest debt or invest, all while keeping your portfolio assets invested and growing. In some cases, the margin can be structured so that the interest is tax deductible. There are many factors to consider before implementing this strategy, which you can learn more about here.
Estate Planning
For those with taxable estates or interested in gifting assets in excess of the annual gift exclusion while preserving their lifetime exemption, the use of a zeroed-out Grantor Retained Annuity Trust (GRAT) is a valuable technique, particularly in low interest rate environments. The technique, in summary form, allows the giver of the gift (grantor) to fund an irrevocable trust, which pays the grantor a predetermined annuity over a set term. If over that term period, the trust assets outperform the annuity interest rate (called 7520 rate), the growth or “remainder interest” of the gift is transferred free of estate and gift tax. At present, the February 2021 7520 rate is 0.6%. As you can see, the use of a GRAT in low interest rates and professional investment management can be a highly successful tool. For more information, please review our Trust & Estate team’s piece here.
