What to Do Next in a Low Interest Rate Environment

When the recession officially ended in June 2009, it left behind a trail of damaged and edgy investors, including a large segment of boomers planning to retire within what was to be the next five to 10 years (which is about now).

Many of these future retirees took to heart the hard lesson of market volatility -- and are apprehensive to this day about getting back in the market. Others are nostalgic for the days of double-digit returns on their investments. And most everyone has a new appreciation for the sizable nest egg needed to weather future market swings and to secure their retirement.

[See: 7 of the Best Stocks to Buy for 2018.]

While the market has rebounded and even continues to reach new highs, there is still a nagging after-effect of the market crash that continues to plague Americans: investment indecision. This uncertainty on where to put their money is driving a trend in which investors do nothing at all and keep their money on the sidelines.

And the ongoing "low-for-long" interest rate environment is now making this situation much worse. Hoping for better days ahead, many are simply unable to commit their retirement nest egg to any realistic investment strategy. And it's hard to convince them that standing still is actually doing more harm than good. These so called "ostrich investors" tend to fall into two categories.

Nostalgic investors. These investors may have been in their peak earning years during the pre-recession bull market, learning to expect a high rate of interest return, even on the most conservative products such as CDs. Because of the interest rates they experienced in the past, they are likely waiting for interest rates to rebound to pre-recession levels.

But the pre-recession interest rates are not likely to happen again any time soon. And even if these nostalgic investors were to find an investment paying exponentially higher returns, their portfolio would likely be exposed to a higher level of risk. The reality is that a financial strategy that may have worked well in the past can fall flat in this environment. This certainly can make it a lot easier to want to keep money on the sidelines until things "get better."

Risk-averse investors. These investors can't forget the market's precipitous fall and unnerving volatility. They likely lost a good portion of their savings in the recession and realize that they don't have time to recover from similar losses now.

[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]

They may fear that locking in to today's interest rates would prevent them from taking advantage of higher yields in the future. For now, they feel that doing nothing with their money is safer than exposing any principal to risk -- no matter how small that risk may be.

Indecision is a decision. Regardless of whether someone yearns for the good old days or is scared off by them, the cumulative effect of waiting out the market is costly -- and quantifiable. After all, the "magic of interest" doesn't work if interest never accumulates.

For instance, taking a 10-year hypothetical example, starting with $100,000, with a 2 percent annual interest rate using simple interest (no compounding), the $100,000 could grow to approximately $120,000. Every year spent waiting, gains from the interest are lost. Less money will be added to the nest egg while many of the expenses and taxes remain. So short of delaying retirement or tightening the belt within retirement, action needs to be taken.

What to do next. First, understand that there is indeed a high cost of waiting. So once the decision is made to get money off the sidelines, take a look at what is actually a vast array of opportunities that are out there even in today's low interest rate investing environment. Next, consider appetite for risk. Yes, while some risk might be involved to get higher returns, it does not need to be "all or nothing." There are widely varying levels of risk to consider based on the type of investment made. (A financial professional can be of great assistance in the process.)

Looking closer at some potential options, conservative or retired investors may turn to products like bonds. While bonds can add an element of stability to a retirement portfolio, their value will fall when interest rates rise, which presents a potential conundrum.

CDs may also be an option for those seeking safety, but expect a small return given the interest rate environment. Investing in stocks and mutual funds allows for the chance to accumulate more money for savings by taking on more risk. These investments can be attractive, but there is no guarantee on return and there is risk for loss.

Last, there are several types of indexed solutions such as fixed indexed annuities, which may be longer-term with less liquidity, and limited accumulation potential, but have the option to convert assets to begin income during retirement. In addition, products such as index variable annuities can offer potential gains via a variable option or target option while protecting against market downside via guarantees.

[See: 8 Cheap ETFs to Build Your Nest Egg.]

Making the decision to get money off the sidelines is not easy. However, taking that first step is important in order to meet financial goals regardless of where interest rates head in the months and years to come.

As vice president of Advanced Markets, Debra Repya oversees the development of advanced strategies and creative marketing programs that assist financial professionals in acquiring and serving clients with retirement planning, estate planning and other tax-related strategies. Prior to joining Allianz Life Insurance Company of North America (Allianz Life) in 2010, Repya was senior advanced strategies counsel for Securian Financial Services, providing tax and legal support to registered representatives working in advanced markets. Before that, she was the director of advanced marketing for Minnesota Life, a division of Securian Financial Group. Repya earned her bachelor's degree in English and German from Augustana College in South Dakota, and an master's of science in guidance counseling from the University of Nebraska-Omaha. She also earned her J.D. from Hamline University School of Law. Repya is a chartered life underwriter, chartered financial consultant, and is FINRA-registered with Series 7, 24, and 63 securities registrations.