Interest rates have been low since 2009. But they went even lower during the pandemic as policy makers moved to shore up local economies. Low rates may have been good for growth and good for consumers, but the environment has made it difficult for retirees who need to generate income.
Interest rates were low. And moved lower.
OECD (2021), Long-term interest rates (indicator). doi: 10.1787/662d712c-en (Accessed on 02 August 2021)
It’s important for investors to understand how low rates can impact their retirement income, leaving them open to market drawdown and sequence of return risk.
How do low rates affect retirement income?
As investors near retirement, they generally have more conservative portfolios, which often hold more bonds than stocks.
When interest rates are low, the bonds will generate less income.
As a result, investors often turn to riskier assets, like stocks, to make up the difference.
But stocks give them greater risk exposure — including market drawdown and sequence of return risk.
When you earn your returns matters
With sequence of returns risk, it's not simply about gains and losses as the market moves. Timing is critical. When those gains and losses happen can have a big impact on your ability to preserve capital. For example, if you take a loss early on, it's harder to make up the difference. And if you generate returns early on, you're starting out ahead. Here's one example of what that could look like over 3 years for a portfolio of $450,000 (the median portfolio value for those surveyed).
Beginning portfolio value: $450,000
Starting out with a gain
*Withdrawals occur at end of each year