Interest Rates: How Low Can They Really Go?

Updated: Feb 26

When the economy is in crisis, interest rates are the go-to tool for central bankers looking to stimulate spending and get markets moving in the short term. But the cuts made in the throes of the 2008 Global Financial Crisis are largely still in place, leaving rates near historic lows for 12+ years. Faced with the pandemic recession, central bankers were forced to cut even more, implementing 173 cuts globally between January and July 2020. It all raises the stakes on retirement security for both individuals and pension managers.

The Objective

of retirement income planning is simple:

Don't Outlive Your Assests

From an individual perspective, low rates are generally good because it costs less to borrow money: Mortgages are more affordable, car loans have lower monthly payments, and small business loans are more attractive. But low rates make life difficult for retirees. After accumulating retirement assets over a lifetime, individuals find the low-yield environment is a terrible time to annuitize their savings.

The objective of retirement income planning is simple: Do not outlive your assets. Low rates make a big challenge and the circumstances can be dire. If their portfolios cannot generate sustainable income, retirees are forced to take a larger share of principal in their distributions, depleting retirement savings faster. The problem is amplified by ever-increasing 21st century lifespans. In the end, not only will retirees need to live on less income, but they will need to live longer on that lower income.

Excerpt from 2020 Global Retirement Index



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