Friday, August 10, 2012

Retirement Accounts Hurt by Low Interest Rates

Recently, there has been a lot of political rhetoric on taxes about the helping or hurting the middle class.   The bigger issue for me is low interest rates.   Just a few years ago, it was possible to get 5% interest rates on CDs.  Now, I'm lucky to get a 1% return.

Here's how higher interest rates can help retirement accounts:
  • Spendable earnings.   At 5% interest rates, $1 million in savings yields $50,000 per year in a CD that is FDIC insured and guaranteed to return principal.   $50,000 is a very good income since the median middle class income is just a little under $50,000.   Add the average Social Security benefit of $14000 and get an annual retirement income of $64,000.     At 1% interest rates, $1 million in savings yields only $10,000, quite a bit less than $50,000.
  • Savings growth.  Also at 5% interest rates, my savings will double about every 14 years.   At 1% interest, it will take about 70 years to double, five times longer.  This fact is also important for those with pensions since the ability of companies to meet these obligations may depend on savings growth. 
Unfortunately, interest rates will likely stay low until 2014, which will make it difficult to grow and live on retirement savings for the next few years.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC

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