Interest rate levels can be a major factor affecting income in retirement, especially since they affect the level of income retirees earn on their retirement resources, according to a report recently published by the Society of Actuaries.
“Low interest rates produce lower income, so retirees must spend more of their retirement resources than during high-interest rate periods,” according to the report. “Higher interest rates usually mean higher inflation, so retiree income and expenses may increase at the same time.”
“The real risk of interest rates in retirement is the variability in the interest rates, which affects the income derived from your invested assets," said Carol Bogosian, a co-author of the report and president of CAB Consulting. “And this is becoming more important. As more people are using defined contribution plans or their own personal assets to develop their income.”
Lower rates reduce your retirement income in several ways, said Bogosian.
First savings don't accumulate as rapidly as you move into retirement.
Second, income from savings is reduced while in retirement. “You don't get as much in your interest income off your bonds, your other fixed income and your CDs,” she said.
Third, purchasing annuities to provide you some lifetime income requires a larger lump sum payment be made for the same dollar benefit purchased when interest rates are higher.
And fourth, “lower inflation may accompany lower interest rates, but that inflation may not affect you as much as it affects maybe another person,” said Bogosian.
How to manage the risk? Watch the video above to learn about the two tactics to consider.