Are low interest rates punishing savers? Hardly!

Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

It’s easy to see how savers feel punished in today’s low interest rate environment. You have to look hard to find a daily savings account that pays more than one per cent.

Fixed income investments aren’t much better, with 5-year GICs barely touching 2 per cent. All of this means parking your short-term savings will do little more than keep up with inflation – you’re treading water, at best.

Rates have fallen steadily for a quarter century

We’ve seen a steady decline in rates for the past 25 years – around the time when the Bank of Canada adopted its inflation-control target to preserve the value of money by keeping inflation low, stable, and predictable. In January 1991, the overnight rate was 10.88 per cent, the interest paid on daily savings was 9.66 per cent, and inflation ran at 6.9 per cent. By 2002, the overnight rate fell to 2.25 per cent, daily savings interest dropped to 1 per cent, and inflation held steady at a now familiar 1.4 per cent.

RelatedCan you succeed with an all-GIC portfolio?

So should we long for the days when GICs paid 10 per cent or more? Are low rates really  punishing savers? Hardly. Unless you save an incredibly high proportion of your income, the idea that you can risk-free-return your way to a comfortable retirement is absurd because a high real rate of return on short-term saving instruments is neither realistic nor sustainable in the long term.


The Bank of Canada raises interest rates to cool inflation so when interest rates do eventually return to normal (whatever that is), it’ll mean the economy has improved and the cost of goods has increased. It might feel better to get a 4 or 5 per cent nominal return on your $1000 savings, but if a basket of goods that costs $1000 today will cost $1040 in a year, the nominal return is meaningless because your real return is zero.

Saving is about putting money aside for future needs. When that future is in the relatively near-term, saving means preserving capital – even if that means earning just slightly more than under-the-mattress interest rates.

Debt repayment

You could certainly argue that artificially low interest rates have fuelled our sky-high household debt numbers. But today’s low rates are an advantage for prudent savers who still carry mortgage and/or line-of-credit debt.

Low, predictable rates make it easier to juggle financial priorities while raising a family. Who remembers feeling relieved to lock-in a mortgage at 11 per cent in 1980 before rates shot up to 21 per cent just a few months later? Now we talk about making a game plan for when rates might nudge up by 0.25 per cent.

We’re also fortunate to have the option to consider investing rather than aggressively paying down low interest debt.

Retirement income

Gone are the days (thankfully) when it was assumed that you should sell your entire investment portfolio on the day you retire and put it into ultra-safe cash and GICs.

If anything, today’s low interest rate environment has forced us to think more strategically about our retirement savings. We’re starting to understand that longevity risk is real and there’s a good chance your nest egg will need to last 30 to 40 years in retirement.

Now we think in terms of buckets – put three-to-five years worth of expenses into short-term savings instruments like cash, GICs, and money market funds, while keeping the rest of your nest egg invested for the long term in order to grow and fight off inflation.

Low rates don’t mean we should blindly reach for yield, but instead we should change our mindset about saving and investing in retirement.

Further reading:

How to use a total-return approach to draw down your nest egg in retirement

Buckets and glidepaths: What to do with your money after retirement

Yes, you’re being penalized for saving (but keep at it, anyway)

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally appeared on Boomer & Echo on March 1, 2015 and is republished on the Hub with his permission.

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