Impact of Low Interest Rates on Retirement Readiness

The retirement savings situation is tough enough with the median retirement balance just $3,000 for all working-age households, but historically low interest rates certainly aren’t helping.

A new study by the Employee Benefit Research Institute (EBRI) quantifies just how much the sustained low-interest rate environment is hurting peoples’ retirement savings. More than a quarter of Baby Boomers and Gen Xers who would have had enough retirement income will run out of money in retirement because of the current low interest rates.

The study assumes retirement income/wealth is assumed to cover 100% of simulated retirement expense and compares today’s environment to historical average returns. However, the potential impact varies by income levels.

“There appears to be a very limited impact of a low-yield-rate environment on retirement income adequacy for those in the lowest pre-retirement income quartile, given the relatively small level of defined contribution and IRA assets and the relatively large contribution of Social Security benefits for this group,” Jack VanDerhei, EBRI research director and author of the study, said in a statement. “However, there is a very significant impact for the top three income quartiles.”

The study assumes that the current low rates are permanent, but the impact is lessened if the situation is temporary, according to EBRI. The impact of low rates is magnified by years of future eligibility for participation in a defined contribution plan.

“For the younger Gen X generation, the decline in retirement adequacy would range from 4 percentage points under a five-year, low-yield-rate environment, to 7 percentage points if rates remain depressed for 10 years, and 11 percentage points if those low rates are permanent, assuming they have one to nine years of remaining eligibility in a defined contribution retirement plan (such as a 401(k)),” according to the report’s results.