Low Interest Rates Pose Risk To Retirement Income

June 18, 2013

NEWARK, N.J.– Americans who do not protect their retirement income are at risk of having their retirement prospects eroded by prolonged periods of low interest rates, according to a new paper by Prudential Financial, Inc. (NYSE:PRU).

The most recent update to The National Retirement Risk Index (NRRI) was published in October 2012 and found that 53 percent of households are at risk of being unable to maintain their pre-retirement standard of living during retirement. The NRRI is produced by the Center for Retirement Research (CRR) at Boston College and sponsored exclusively by Prudential. In its new research, the CRR took a closer look at the impact of low interest rates on the NRRI.  

 The CRR’s research concluded that interest rate levels alone would have only a modest impact on the NRRI. A key reason for this is that Social Security and defined benefit pension income, which are not impacted by interest rate changes, make up the majority of total wealth for most Americans. Further, the NRRI assumes households annuitize their financial and housing wealth at retirement.   This measure protects the income generated from those assets against interest rate risk as well as equity market and longevity risks. For those who do not protect their retirement income, however, these risks can have a significant impact on their retirement prospects. 

The CRR’s research further found that, while interest rate levels have little impact on the NRRI overall, middle and high income groups benefit more from rising interest rates than the low income group.  This is because, for higher income groups, financial wealth represents higher portions of total wealth.

“It remains critically important for Americans to protect their retirement income against market, longevity, and interest rate risks,” according to Bob O’Donnell, president of Prudential Annuities. “Guaranteed lifetime income benefits available in today’s variable annuities are one strategy that may help protect against these risks, providing a retirement income stream you cannot outlive, along with a measure of control over, and access to, the underlying assets.”

A new Prudential paper, “Planning for Retirement: The Impact of Interest Rates On Retirement Income,” summarizes the latest NRRI research andreferences a case study to help illustrate the likelihood of the average retiree exhausting his or her retirement savings based on a number of scenarios, including a sustained low interest rate environment.   In the absence of protecting retirement income, the likelihood of exhausting retirement assets increases dramatically when assets are exposed to an extended period of low interest rates.

Specifically, the Prudential paper discusses the implications of its findings on individuals, including needs related to:

·         Protecting retirement income against market, longevity, and interest rate risks through guaranteed lifetime income products.

·         Optimizing Social Security, as it offers a stable source of retirement income that is not impacted by investment and longevity risks. Prudential’s white paper, “Innovative Strategies to Help Maximize Social Security Benefits,” offers strategies to guide individuals in utilizing Social Security to help attain greater retirement security.

·         Saving more in retirement plans and personal investment accounts, while meeting regularly with a financial professional, to help measure progress in terms of an actual retirement income goal.

The paper encourages plan sponsors to assist employees in:

·         Helping employees do a better job of saving for retirement by enhancing defined contribution (DC) plans to help achieve more certain outcomes. This can be accomplished by adding features such as automatic enrollment, automatic escalation of contributions, and in-plan guaranteed lifetime income solutions.

·         Encouraging employees to track their overall savings progress.

For financial advisors, the paper notes the importance of:

·         Helping clients determine an appropriate target retirement age, track retirement savings and understand the role of guaranteed lifetime income products as well as Social Security.

·         Educating clients on the impact of interest rates on different types of retirement income products. 

·         Ensuring clients understand that without a customized financial plan and proactive steps to insure their income, improvements in the economic climate alone will not be enough to ensure a secure retirement.

Prudential Financial, Inc. (NYSE: PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century.  For more information, please visit http://www.news.prudential.com/. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company, Hartford, CT, or its affiliates.


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