From ZIRP to NIRP Part III: How Low Interest Rates Devastate Retirees

Whereas central banks’ experiments with historically low interest rates have had mixed results on economic growth at best, they have also had devastating effects on American retirees’ nest eggs. As discussed in earlier segments of this series, rock-bottom (or even lower) interest rates and aggressive quantitative easing have done little to spur robust and sustainable economic growth in Japan and the US. Instead, they encourage risky investments and hurt savers and conservative investors.

Another negative outcome of such policies is that retirees on fixed incomes who are reliant on savings and interest are hurt by an extended period of miniscule returns. This is not an insignificant portion of the population. There are now more than 45 million Americans age 65 and older, representing over 13% of the population– a higher portion than at any prior point in US history. While nearly 20% of this group is currently employed due to the effect of the recession on their meager retirement savings, by some counts, an average of 10,000 boomers retire each day.

Once they transition into retirement, and shift from saving to spending, retirees normally seek to de-risk their portfolio. They typically turn to fixed-income products and move their retirement money into assets like certificates of deposit (CDs), low risk treasury bonds, and annuities. Unfortunately for this group, interest rates are extremely low. Whereas ten years ago, retirees could have relied on a yield on 10-year Treasury bonds that exceeded 5%, they are lucky to get 2% today. Rates on CDs, money market accounts, and savings also remain low. While some are sticking with their meager 1-2% returns, others have been encouraged to turn to higher risk investments in the stock market and real estate, pushing them to lofty valuations.

A 2015 report from Fidelity found that 35% of those between ages 51 and 69 are overexposed to the stock market. Moreover, 10% of this group have their entire 401(k) assets invested in stocks, meaning any sort of stock market volatility to could devastate them. Conversely, economists warn that if this generation begins to transition and de-risk their portfolios, the stock market could experience a sharp drop.


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