Low Interest Rates Make It A Tough Time to Retire

[Midpack]

Nothing earthshaking, but a decent balanced summary of one retirement income academic's (Pfau, he has fans and detractors both here) outlook. Where his blog/papers usually advocate his preferred retirement income recommendations, the article below mostly presents the various options. FWIW

Low interest rates make it a tough time to retire

Q. In a recent article, you noted that now is a tough time to retire given today's low interest rates and high stock valuations. Why is that?

A. It's simply because the higher the returns one can expect to earn from their investment portfolio, the more they can sustainably spend from their portfolio throughout retirement. But low interest rates and high stock market valuations both suggest that we should expect lower investment returns in the future, which means we have to spend less as well.

 

[Lsbcal]

It seems the title of the article is somewhat at odds with the body of the text. In the last question Phau seems to say that now is not necessarily any worse then other eras to retire.

It may not be a good time to retire if (1) the retiree is somewhat narrowly funded, and (2) the retiree is an "income investor". Many of us here do not fall into that mix. Maybe a few do.

If one retires and has 20 to 30 years to plan for, isn't the low rate environment most likely to be only a small percentage of those years? For example, you retire at 60 and figure on maybe 30 years to go with the next few (5 years or less?) being low rate years.

My feeling is this rate structure will probably not last too long, but then again I would not have expected this coming in late 2009 after we were past the low in the stock market. In the next 20 years I'd expect a lot of different yield curve scenarios making this period just another in a long string of economic variations.

 

[mathjak107]

it is almost becoming a flavor of the month thing as the parameters change that should determine your course of action.

it took 35 years for rates to get this low , it can take a very long time to bounce back so anything i do will be based around low rates and high valuations.

of course what to do changes monthly with pfau,kitces and blanchett.

 

[daylatedollarshort]

From the article (the italics are mine) -

"The worst-case scenario is just that they ended up playing it too safe. The scrimped and saved and missed out on enjoying retirement as much as they could have, because they were too worried about negative events that ended up not happening."

I am not sure that people with a safety first approach are the ones who are worried about negative events. The safety first folks are choosing safety and lower returns in exchange for not having to worry so much about bear markets, sequence of returns risk or running out of money. So I didn't really get that part.

I guess the implication is also that more income makes people happier, but is this really true? At least some research shows that beyond a certain income level, additional income may provide diminishing returns on the happiness front:

The 10 Things Economics Can Tell Us About Happiness - The Atlantic

 

[NW-Bound]

...
I am not sure that people with a safety first approach are the ones who are worried about negative events. The safety first folks are choosing safety and lower returns in exchange for not having to worry so much about bear markets, sequence of returns risk or running out of money...

I guess the implication is also that more income makes people happier, but is this really true?...

While I do not practice your approach to portfolio safety - I kind of like volatility as it adds spice to life - I agree with you that if a person is happy with a potentially lower return, who is to argue with that?

I like to have more money, but if I end up with less, I am sure it is not going to kill me. Diseases can, yet I cannot do much about that!

 

[W2R]

It seems the title of the article is somewhat at odds with the body of the text. In the last question Phau seems to say that now is not necessarily any worse then other eras to retire.

I am waiting to see an article saying that this is a absolutely terrific economic environment in which to retire, and that anyone thinking of retiring soon should RUN to HR and get it done right this minute.

It sure has been a terrific retirement for us from 2009 to now, low interest rates or not. The market has been booming the whole time so far.

 

[eytonxav]

It sure has been a terrific retirement for us from 2009 to now, low interest rates or not. The market has been booming the whole time so far.

This sounds too much like a whee in sheep's clothing

 

[W2R]

This sounds too much like a whee in sheep's clothing

Possibly, although I haven't had an all time high net worth since the first of the month, a whole three weeks! I should say AFAIK, since I haven't been looking every day.

 

[audreyh1]

I thought I read a Kitces article a while back that pointed out it wasn't the low interest rate periods that were dangerous to a portfolio, but rather the high inflation periods.

 

[GrayHare]

I don't see much difference: low rates or high rates, we're still only going to earn a few percentage points above inflation.

 

[mathjak107]

historically though rates had real returns on cd's in the 2% area vs negative rates now. that makes a big difference in results.

 

[jerome len]

Every article points out the need for diversification to me. ......CNBC guest reported that every 1% increase in the Fed's interest rate costs the government 150 billion a year.....and, they (we) can't afford an increased deficit of that size. So, CD's just won't give enough income in the near future. When will it change? I don't know. So, I buy muni bonds.....short to long term, dividend ETF and mutual funds and REITS. It's not as simple as it used to be but my goal is income with minimum fees and taxes......So far, the past few years, this is working. BUT I do remember the high interest rates of the 80's.....and the high inflation that resulted. Interesting years......too bad no one has a crystal ball.