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Low interest rates are about to really mess with America’s baby boomers

A salesman waits for customers in the showroom at the Boston Harley Davidson dealership in Everett, Massachusetts December 3, 2011. Harley Davidson Inc, often dubbed as an exclusive brand for well-heeled baby boomers, is gaining momentum on one of its lengthier and more elusive pursuits: luring young U.S. buyers. Picture taken December 3, 2011. To match HARLEY/(ANALYSIS) REUTERS/Brian Snyder (UNITED STATES - Tags: BUSINESS TRANSPORT) - RTR2UU7O
Reuters/Brian Snyder
Tough road ahead.
  • Allison Schrager
By Allison Schrager

Reporter

This article is more than 2 years old.

Boomers in America have had it pretty good. They were born in a time of economic hope and growing prosperity. They paid cheap tuition and faced a job market that didn’t require a college degree. Real GDP growth averaged nearly 3% during their working years. This translated stable career and a healthy stock market in which to park their savings. If they invested $10,000 in a broad stock market index fund in 1971 they’d have $140,000 today, after adjusting for inflation.

Even Social Security, talked about for decades now as a broken system, isn’t estimated to run short until 2034, just when many boomers will have made their exit.

It seemed like they timed it all perfectly—that is, until last week, when interest rates fell to record lows.

Rates have been trending down for the last 20 years. Many people expected them to go back up, or at least assumed they couldn’t go lower. But in some countries, the entire yield curve is negative. And following the UK’s Brexit vote and the additional economic uncertainty it brought to the scene, it appears low rates will be around for a long time.

Low interest rates come at the wrong time for baby boomers, who are in their peak wealth years and are getting a low return on their savings. For once it seems the economy is favoring younger generations. Gen-Xers and millennials are in their peak debt years (between student loans and mortgages) and benefit from low rates. No wonder young Americans have higher levels of consumer confidence than their parents.

It’s not just a low return to saving that harms boomers. Low rates mean a more expensive retirement.

About 10,000 boomers retire each day. Once you reach the transition from earning and saving to spending, it is often wise de-risk your portfolio, by shifting your assets into bonds, for example. After retirement, when you have fewer sources of income, you are more vulnerable to swings in the stock market. That makes fixed-income products a safer bet.

But bonds and annuities are more expensive when yields are low. Suppose you bought a 20-year fixed nominal annuity (even if you don’t actually buy an annuity, it is a good estimate of the cost of predictable retirement consumption). In 1996, $1 million in savings would’ve bought about $83,000 a year in income. That same annuity would’ve cost you $1.47 million last week.

The 20-year decline in interest rates is the equivalent of losing one third of your wealth. And the low rates undermine all those years of great stock returns.

Between such high prices for bonds and annuities and the fact that many boomers have meagre retirement savings to begin with, some will feel pressured to stay in the stock market hoping to earn higher returns. But this leaves them exposed to risk; a bad day in market can destroy retirements and a boomer’s sense of security.

After having it relatively easy for so long, things are getting very difficult for boomers, at least when it comes to trying to plan for a predictable retirement.

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