Warren Buffett: “Retirees face a bleak future”, by Simon Black

Negative real interest rates mean there’s no way to save for retirement with even a modicum of safety. From Simon Black at sovereignman.com:

Warren Buffett minced no words in his most recent annual shareholder letter (which came out over the weekend) when he told investors that “retirees face a bleak future.”

Buffett was referring to the pitifully low interest rates that dominate fixed income investments (like bonds and annuities).

In September 1981, he writes, investors could buy a 10-year US government bond yielding nearly 16%.

Now, inflation was a lot higher in the 1980s than it is today. But even after adjusting for inflation, the average annual yield for any investor who held that 1981 bond to maturity over the next decade would have been 5.7% per year.

Today, that same 10 year bond yields just 1.4%. But the official inflation rate in the United States is also 1.4%. This means that, after adjusting for inflation, your net yield today is ZERO.

What’s even more incredible is that there are obvious signs inflation may be on the rise; for example, the most recent Producer Price Index of wholesale price inflation reached its highest level since 2009.

Yet simultaneously the Federal Reserve keeps saying that they want to keep interest rates low. And they’re doing their best to push the 10-year yield even lower than 1.4%.

In other words, inflation could go higher, and interest rates lower. So anyone who buys bonds will actually suffer a negative yield after adjusting for inflation.

And this is precisely what Buffett was talking about.

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