Posted: 10:39 a.m. Thursday, June 20, 2013
By Brian O'Connell
NEW YORK (MainStreet) — These days, the talk on bond trading desks is higher interest rates.
The thinking is that as the Federal Reserve winds down its fiscal stimulus spending, banks and lenders will have to hike rates to attract investors to fill the breach.
That’s one theory — and certainly a valid one — but the truth is that saving rates are still historically low, to the point they’re threatening the financial securities of Americans heading into retirement.
Rates remain down across the board on bank savings vehicles.
Look at Wednesday’s rates of return on these savings vehicles:
One-year CD rates: 0.28 percent
Interest checking: 0.04 percent
Money market accounts: 0.10 percent
Bank savings: 0.07 percent
By any definition, those are measly returns, and they pretty much been that way since 2008 at the breakout of the Great Recession.
The paper, Planning for Retirement: The Impact of Interest Rates, taps into Prudential’s National Retirement Risk Index to estimate that 53 percent of U.S. households face diminished investment returns at a crucial time — when they stop earning a paycheck.
Who’s most at risk? Prudential points to lower-income Americans, who generally don’t take the needed financial steps to protect their retirement assets.
The CRR’s research concluded that interest rate levels alone would have only a modest impact on the [National Retirement Risk Index]. A key reason for this is that Social Security and defined-benefit pension income, which are not impacted by interest rate changes, make up the majority of total wealth for most Americans. Further, the NRRI assumes households annuitize their financial and housing wealth at retirement. This measure protects the income generated from those assets against interest rate risk as well as equity market and longevity risks. For those who do not protect their retirement income, however, these risks can have a significant impact on their retirement prospects.
Higher-earning Americans take more concrete steps, such as investing in annuities for a steady income stream in retirement or saving more money in retirement plans and personal investment accounts (and using key services such as automatic enrollment, automatic escalation of contributions and in-plan guaranteed lifetime income solutions.)
Meeting regularly with a financial adviser is another thing wealthier Americans do more than middle-income and lower-income U.S adults, Prudential adds in its report. It helps, as financial professionals can provide clarity on the impact of low interest rates on a retirement portfolio.
Those are the things all Americans should be doing as they prepare for retirement in a low-income rate environment.
If you don’t, you risk spending some of your golden years working under the Golden Arches.