Managing Post-Retirement Risks: Interest Rates

Lower interest rates tend to reduce retirement income in several ways:

• Workers must save more to accumulate an adequate retirement fund.
• Retirees earn less spendable income on investments such as CDs and bonds; any income reinvested earns lower rates.
• Payout annuities yield less income when long-term interest rates are low at the time of purchase.

Predictability

Long-term and short-term interest rates can vary within a wide range. Underlying forces that drive interest rates include expected inflation, government actions and business conditions.




Managing The Risk

Income annuities provide retirees with a guaranteed fixed income, despite changes in the interest rate environment, but most do not adjust the income for inflation.


Prevailing interest rates will impact the amount of annuity payout the retiree can purchase from a given lump sum.


Investing in long-term bonds, mortgages or dividend-paying stocks also offers protection against lower interest rates, although the value of these investments will fluctuate. The risk is that rising interest rates will reduce the value of such assets available to meet unexpected needs.




Conclusion

Long-term interest rates often move up or down at about the same rate of inflation.


Higher real interest returns, above rates of inflation, usually make retirement more affordable. this occurs when retirees' assets include sizeable amounts of interest-paying bonds, CDs, etc.


However, some retirees have adjustable-rate mortgages or substantial consumer debt, so higher interest rates are an added burden. For such retirees, the higher interest rates that accompany increased inflation may reduce their spendable income just when it's most needed.


Low interest rates in some recent years make it clear that retirees relying on income from interest-bearing investments are subject to interest rate risk.$




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