While low interest rates have been cited as a risk to retirees having an adequate income, a moderate increase in those rates likely would not change the financial picture, an analysis by the Center for Retirement Research has found.
The study looked at the effect on the center’s "retirement risk index" of the historically low interest rates that have prevailed in recent years, which can affect retirees disproportionately because they tend to invest more heavily in guaranteed fixed-income type investments that yield returns in line with interest rates. The risk index is a measure of a household’s ability to maintain the same living standards in retirement.
There has been speculation that a stronger economy overall will cause interest rates to rise in order to head off inflation, increasing rates on certain benchmark Treasury securities from the near-zero level of today to perhaps 4 percent.
The study said that the resulting increase in returns on retirees’ fixed income investments would not substantially change retirement risk levels, though. For the lowest-third income group of retirees, the risk level would remain the same, at 61 percent, while for the middle third it would fall only from 56 to 51 percent and for the upper third only from 46 to 40 percent.
It noted that for most households, financial assets that are responsive to interest rates are only part of their income or wealth. For example, a privately purchased annuity payout consists of both a return of the principal and an interest portion, and a change in interest rates would affect only the latter portion.
Also, income from sources such as employer-based annuities or Social Security are not affected by interest rates, and a change in interest rates affects the value of a main retirement asset, a home, mainly for those few who take out a mortgage in retirement or who are using a reverse mortgage to draw income from the home’s equity while they continue to live in it.
