Low interest rates hurt retirees living off of their savings accounts
Since the Great Recession in 2008, interest rates on savings and fixed-income investment products dropped just as the prime rate dropped. There has not yet been a recovery of interest rates, and the low percentage of interest income is having an effect on both retirees and those who have retirement plans in the near future.
Retirees are affected by low interest rates because in many cases, they are living off of the interest gained from their savings vehicles. According to Bankrate, the drop of interest rates on a certificate of deposit from 4.5 percent five years ago to today’s standard rate of 1.5 percent means a drop of $250 in monthly interest income on every $100,000 in savings.
But, according to a study from the Employee Benefit Research Institute, late Baby Boomers and those in the next generation, Generation X, are affected by the low interest rates. The EBRI study showed that 27 percent of Generation X-ers who would have had adequate income to retire comfortably at the interest rates from 2007 are going to struggle in retirement because of the interest rates received over the last five years.
Making matters worse is that interest rates on savings and fixed-income investment products are running at or below the inflation rate, which means the money earned is not gaining on the cost of purchases.
The study also said the low interest rates could affect the withdrawal rate from retirement portfolios. The usual standard of 4 percent withdrawal from a balance obviously is not matched by the interest rates which are less than half that 4 percent.
Riskier investments such as the stock market can top the level of inflation, but for seniors living on the fixed income of interest payments, pensions and Social Security, stock market investing is not a viable option.
Low interest rates obviously help when it comes to loan rates, creating a market for mortgages and auto loans. But for those planning to live on their savings, the low interest rates are damaging.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.