Interest Rates and Retirement

It will have been over five years of abnormally low interest rates by the end of 2014. This means that interest paid on high quality bonds and principle-secure investments will continue be virtually zero.  In addition, with interest rates now so low there can be no capital gains on bonds unless interest rates go negative. Some say this is critical to our economic recovery. That may be true but it is bad news for retirement. Funding both traditional defined benefit pension plans and cash balance plans has become more expensive as plan investment returns continue to underperform actuarial projections and plan return targets.  Traditional pension plans permitting lump sum distributions are especially affected. Lump sums are calculated using current interest rates and the lower the interest rate the larger the lump sum. This incentivizes retiring participants to take lump sums depleting plan assets and increasing the required funding level to make up the shortfall. With interest rates near zero, those in IRAs and employer-sponsored defined contribution plans could be forced into riskier investment strategies by the certainty of lower accumulations if they maintain their allocation to fixed investments. This will be especially true for those approaching retirement who are most in need of returns but who are most at risk if the equity markets fall. The continuation of low interest rates combined with the message that our economic growth depends on consumer spending, not consumer saving, is bad news for saving in general.  Returns matter and no returns on saving gives younger workers another reason to choose spending over saving. Continually telling younger workers that spending creates jobs just ices the cake. We have push back against the message that spending is more important than saving. We have to continue focusing on the future. Saving and investing is critical to our long term prospects.