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Interest rates have 'modest' impact on retirement preparedness

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A confluence of factors is playing a major role in America’s troubling retirement security situation. A drop in housing wealth and a decline in equity values coupled with a protracted low interest rate environment and an increase in Social Security’s full retirement age have rendered many Americans underprepared for a comfortable retirement.

A recent Prudential Financial (Prudential) paper, which examined the National Retirement Risk Index (NRRI)—a measure of the number households at risk of not being able to preserve their pre-retirement standard of living in retirement found that 53 percent of American households are at risk, a jump of nine percentage points over a three-year period.

The index, which is sponsored by Prudential and published by the Center for Retirement Research (CRR) at Boston College, took a close look at the impact interest rates were having on the NRRI.

With news that the Fed was contemplating a relaxing of their quantitative easing program last week—giving the market the jitters—it would be safe to assume that Mr. Bernanke will keep interest rates at historic lows for the foreseeable future.

What the research found was that interest rates alone tend not to have a large effect on the NRRI. Social Security and defined pension income—which are immune to interest rate variations—make up a majority of total wealth for most Americans.The assumption the NRRI makes—that Americans will annuitize their wealth at retirement, therefore protecting themselves from fluctuating interest rates and the volatility of the equity market—is not necessarily a safe one, as many economists have expressed concern that Americans, in general, do not annuitize enough of their wealth and have even termed the phrase “the annuity puzzle” to describe the occurance. 

Sixty-five percent of retirement age individuals were found to be worried about the impact of low interest rates on their retirement. The paper strongly urged this demographic to meet with planning professionals and discuss adding guaranteed lifetime income products such as variable annuities, to their retirement portfolio.

The paper also urged plan sponsors and financial advisors to assist employees and clients by injecting themselves into the conversation.