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Low Interest Rates Pose Risk To Those Who Don’t Protect Retirement Income

Americans who do not protect their retirement income are at risk of having their retirement prospects eroded by prolonged periods of low interest rates, according to a new paper by Prudential Financial, Inc. (NYSE:PRU).

The most recent update to The National Retirement Risk Index (NRRI) was published in October 2012 and found that 53 percent of households are at risk of being unable to maintain their pre-retirement standard of living during retirement. The NRRI is produced by the Center for Retirement Research (CRR) at Boston College and sponsored exclusively by Prudential. In its new research, the CRR took a closer look at the impact of low interest rates on the NRRI.

The CRR’s research concluded that interest rate levels alone would have only a modest impact on the NRRI. A key reason for this is that Social Security and defined benefit pension income, which are not impacted by interest rate changes, make up the majority of total wealth for most Americans. Further, the NRRI assumes households annuitize their financial and housing wealth at retirement. This measure protects the income generated from those assets against interest rate risk as well as equity market and longevity risks. For those who do not protect their retirement income, however, these risks can have a significant impact on their retirement prospects.

The CRR’s research further found that, while interest rate levels have little impact on the NRRI overall, middle and high income groups benefit more from rising interest rates than the low income group. This is because, for higher income groups, financial wealth represents higher portions of total wealth.

“It remains critically important for Americans to protect their retirement income against market, longevity, and interest rate risks,” according to Bob O’Donnell, president of Prudential Annuities. “Guaranteed lifetime income benefits available in today’s variable annuities are one strategy that may help protect against these risks, providing a retirement income stream you cannot outlive, along with a measure of control over, and access to, the underlying assets.”

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