But it’s much different when your retirement savings depends on getting a return on investment (ROI). In that case, near-zero interest rates can put pensions and other retirement accounts in serious jeopardy.
The Fed dropped interest rates to 0-0.25% starting last September. And according to the Wharton School of the University of Pennsylvania, those near-zero rates could stick around for a while:
Expects to hold interest rates near zero at least until 2023 because of the pandemic. That spells lower returns for retirement accounts, and it adds to the underfunding of pensions that has worried retirees for many years now.
“Low returns from the market are essentially a tax on retirees,” said Olivia Mitchell, Wharton professor of business economics and public policy.
Then there are real interest rates, which are measured by the difference between 10-year treasuries and Fed inflation expectations. We figure this out by comparing the yields on Treasury inflation protected securities (TIPS) to 10-year Treasury yields. Here’s a comparison of real interest rates (2000-present) from the official Cleveland Fed chart:
You can see that since 2012, the real rate has struggled to get to 1%, and recently dipped into the negative.
Low rates mean low returns
According to an op-ed on MarketWatch, the drop in real interest rates isn’t a good thing:
This persistently low-rate environment means workers will have to contribute significantly more to their 401(k), or invest in riskier assets, than they did at the turn of the century.
Many of the assets retirement savers have relied on for decades, including Treasury bonds, CDs, annuities, money market accounts, even the humble savings account, cannot preserve your purchasing power any more.
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interest rates, fed, us federal reserve, central banks, birch gold group, inflation
