Low interest rates are delivering a mighty blow to just about everyone's retirement readiness.
People across all but the lowest income quartile are projected to take a significant hit from today's historically low interest rates if they wind up being permanent, according to research from the Employee Benefit Research Institute. If interest rates remain low, more than one in four baby boomers and Gen Xers - who otherwise would have had adequate retirement income - are projected to run out of money in retirement.
The impact varies by income levels, the study finds. For example, only 11.9% of people in the highest income quartile have an 80% chance of not running short of money in retirement. More than twice as many people in the lowest income quartile (24.7%), in contrast, have that 80% chance.
"There appears to be a very limited impact of a low-yield rate environment on retirement income adequacy for those in the lowest preretirement income quartile, given the relatively small level of defined contribution and IRA assets and the relatively large contribution of Social Security benefits for this group," Jack VanDerhei, EBRI research director and author of the study, said in a statement. "However, there is a very significant impact for the top three income quartiles."
The impact is minimized if the current low rates prove to be temporary. For example, 36% of Gen Xers with no future years of defined contribution eligibility would have adequate retirement income if hypothetical real bond returns of zero were to last only five years after retirement. If the zero yields persisted for a decade, only 35% would have adequate retirement income, and if they remained permanent, only 33% would have sufficient money in retirement.
For the younger Gen X generation, the decline in retirement adequacy would range from four percentage points under a five-year, low-yield rate environment, to seven percentage points if rates remain depressed for 10 years, and 11 percentage points if those low rates are permanent, assuming they have one to nine years of remaining eligibility in a defined contribution retirement plan.
Social Security, pensions
The analysis, however, accounts for retirement savings alone. If Social Security benefits, pensions and net housing equity are brought into the picture, the impact on retirement readiness is muted, the study finds.
The report draws upon the EBRI Retirement Security Projection Model, which simulates the percentage of the population that will be at risk of not having retirement income to cover average expenses and uninsured heath care costs at age 65 or older.
Margarida Correia is Associate Editor for Bank Investment Consultant, a SourceMedia publication. She can be reached at firstname.lastname@example.org.
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