The sustained low interest rate environment brought on by the financial crisis of the late-2000s has forced financial planners to revisit some of the broad assumptions we’ve made in the past for projecting portfolio returns. A new article in the Journal of Financial Planning, “Planning for a More Expensive Retirement,” takes this anecdotal reality to an empirical level by studying the implications of continued low returns on retirement plans.
The authors discovered that “a low-return environment would have a negative impact on client spending throughout their life cycle” and that — as a result – advisors “may need to modify expected returns in planning” that will provide their clients with more realistic projections for their retirement funds.
In fact, the Wall Street Journal recently reported that the historic drop in interest rates since the financial crisis cost U.S. savers almost $1 trillion in lost income from savings accounts, CDs and bonds from the start of 2008 through 2015. With these low rates squeezing retirees, some have opted for higher-risk investment strategies to make sure they obtain the returns needed, which of course raises the level of risk built into those portfolios.
This challenge of a low-return investing environment is just another unwelcome building block in the growing American retirement security crisis. Your clients generally depend upon three funding sources for their retirement income: pensions, assets (e.g., investments, homes, etc.) and Social Security.
Unfortunately, only one-third of Americans now receive income from pensions and just over half obtain income from assets, according to the Congressional Research Service. Due to reduced pension and home values, about half of all Americans are at risk of not having sufficient retirement income. That means Social Security is the main source of retirement income for most Americans. And of course, Social Security only replaces about 33% of your client’s average wage from the year prior to retirement.