We all know that market turbulence can have a devastating impact on your retirement plans.
And longevity can also pack a mean punch, making it more likely you could outlive your portfolio dollars. “Most people don’t realize that they or their spouse could live in retirement for 20, 30 years or more,” says Kimberly Supersano, chief marketing officer at Prudential Annuities.
And now for the third and possibly fatal blow that could sink your retirement security – low interest rates.
Prolonged low interest rates can have a major and negative impact on retirement income, concludes a new study by Ernst & Young and Prudential Financial.
The researchers ran three scenarios:
1). Retirement investors encountered market volatility or longevity risk, but not both.
2). Retirement investors encountered both market volatility and longevity risk.
3). Retirement investors encountered market volatility, longevity risk, and a prolonged period of low interest rates.
In each scenario, researchers measured the likelihood of “failure,” or the probability that your portfolio runs out of juice before you do.
In the third scenario, where investors encountered market turbulence, increased longevity and a prolonged period of low rates, portfolios failed in half of all tests, twice as often as with other scenarios.
Living in an environment of sustained low interest rates “almost doubles the probability of exhausting one’s assets,” says Kimberly Supersano of Prudential.
The Takeaway: Despite the bad news headlines, there are several common-sense steps you can take to counter the effect of low interest rates.
- You can postpone your date of full retirement by working longer or looking for part-time income for an extra year or two. That reduces your longevity risk by shortening your retirement period.
- If you are just entering retirement, start by taking only modest retirement withdrawals. One recent study suggests reducing initial withdrawals below 4% of portfolio value. Or, in retirement, monitor withdrawals and portfolios carefully for sign of premature depletion, so you can adjust your withdrawals if needed (this is the path we often take with clients, so they have valuable feedback on the impact of their withdrawal decisions).
- Beware the “too safe” portfolio with too high a bond allocation or over-concentration in the safest, lowest-yielding bonds. Many retirees don’t realize how much growth they really need to just stay in place due to inflation.
- You can better prepare for retirement by making sure you hit your savings goal of putting aside 10 to 15% of income each year while you’re still working.