More than one-fourth of Baby Boomers and Gen Xers are projected to end up running short of money in retirement if today’s low interest rates are assumed to be a permanent condition.
Historically low interest rates are having a significant impact on retirement planning.
More than one-fourth of Baby Boomers and Gen Xers who would have had adequate retirement income under historical averages return assumptions are projected to end up running short of money in retirement if today’s low interest rates are assumed to be a permanent condition and if retirement income/wealth is assumed to cover all simulated retirement expense, according to a recent study conducted by the Employee Benefit Research Institute.
Low interest rates is making generating retirement income a greater challenge. Thirty years ago, for example, a 10-year Treasury note yielded just under 11 percent 30 years ago. Ten years ago, it yielded about 3.33 percent
Across the wealth level spectrum, so-called Main Street investors with a net a net worth between $100,000 and $1 million, not including primary residence, are the least confident that they will have sufficient income to live comfortably during retirement, according to ongoing research conducted by Spectrem’s Millionaire Corner. Fifty-five percent expressed this attitude, compared with 81 percent and 89 percent of Millionaire and Ultra High Net Worth investors, respectively.
Similarly, interest rates are of a greater national concern to a majority (55 percent) of Main Street investors, compared with 47 percent of Millionaires.
While there is a “very significant impact for the top three income quartiles,” EBRI projects “there would be a limited impact of a low-yield-rate environment on retirement income adequacy for those in the lowest pre-retirement income quartile, given the relatively small level of defined contribution and IRA assets and the relatively large contributions of Social Security benefits for this group,” said Jack VanDerhei, EBRI research director and author of the study, in a statement.
Social Security payments are not affected by interest rates.
The impact of low interest rates on retirement income security is lessened if the current low rates are temporary, the EBRI found. For example, when retirement readiness is based on the assumption that retirement income/wealth must cover 100 percent of expenses, 36 percent of Gen Xers with no future years of defined contribution eligibility would be predicted to have adequate retirement income if low interest rates last only for the first five years after retirement, compared with 35 percent if that environment persists for a decade. In contrast, one-third of this group is forecast by EBRI to have sufficient money in retirement if the zero-real-bond-return scenario is assumed to be permanent.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.