You’ll need at least $1M to retire: Blame the Fed
Retirees need to generate more income from retirement funds than ever, so even a $1M nest egg may not cut it
Free money is coming to an end.
But the damage has already been done for many retirees — and a small rate hike will do little to help.
Retirees now need to save $1 million if they want to get half of their income from relatively low-risk Treasury investments, according to new research from Michael Thompson and his coauthors at S&P Capital IQ.
That’s up from the $200,000 to $300,000 they needed to save to reach the same financial goal between 1990 and 1997 in inflationadjusted dollars, Thompson says.
The reason retirees need so much more now?
Rock-bottom interest rates on safe investments such as Treasuries are to blame.
“It’s startling to think like this,” Thompson says. “Rates are so low, in order for you to not take exceptional risk to try to have a reasonable retirement portfolio, you need a million dollars in assets.”
Retirees have been pummeled by the Federal Reserve’s decision to keep interest rates low for a historically long period of time. A gradual shift might be coming starting Wednesday. The Federal Reserve finally increased shortterm interest rates, 0.25%, for the first time since 2006.
The hike, though, is so late in coming and so gradual it will offer little help for retirees now. A hypothetical $100,000 retirement account will generate enough income to cover only 3.9% of an average household’s income this year, S&P Capital IQ says, using inflation adjusted statistics.
A minor bump in short-term interest rates still wouldn’t get that anywhere near the 9.6% of average income retirees enjoyed from their investments since 1981, Thompson says. In 1981, investors got 31.3% of their average income from their Treasury investments.
Making things worse, retirees today need to generate more income from their retirement funds than ever before, so even a $1 million nest egg may not cut it at today’s interest rates.
Even as returns for safe investments such as Treasuries have eroded, companies have largely eliminated pension plans for workers.
That means workers are responsible for generating even more of their retirement income from their investments.
So, anyone expecting to retire must work longer, save more or take on more risk on their investments. None of those options are ideal.
“People can get there (retirement), but they’ll have to save a lot more money or to a lot more risk than traditionally recommended for retirement,” Thompson says.