Low Interest Rates are Leading to Different Decisions about Retirement and Lower Savings

Published on April 17, 2018

You Can Combat Market Fluctuations with a Self-Directed Retirement Plan

Persistent low interest rates appear to be having an effect on people’s decisions about retirement, according to a paper from the National Bureau of Economic Research. The paper looks at the ways persistent low returns may shape decisions that workers and retirees are making regarding retirement savings and retirement patterns; it determines four specific ways that low investment returns could affect retirement and saving behavior.

 1. Low-return environment means less in retirement plans.

It stands to reason that low yields lead to lower accumulation of retirement wealth. For example, the paper looks at 401(k) plans at two different yield levels, zero percent and two percent. In the zero percent scenario, middle aged women optimally accumulate an average of about $88,200 in their 401(k) plans. When the yield is two percent yield, they average $117,700 at the same point in their life cycles. It’s a similar pattern for men: middle-aged men accumulate $83,200 in the zero-rate environment, and $120,600 when the interest rate is at two percent.

 2. Low interest rates alter the types of accounts workers use for retirement savings.

The paper reveals that workers allocate more of their savings to non-retirement accounts and less to 401(k) accounts when the yield is zero percent. An explanation given is that during low-return periods, the tax advantages of saving in 401(k) plans are relatively less attractive, considering the gain from saving in pretax plans is lower. Of course, it also follows that the return on assets in the retirement account are lower in a low return environment.

 3. Workers claim Social Security benefits later when interest rates are low.

It seems workers prefer to “take advantage of the relatively high payoff to deferring retirement under current rules.” The paper also notes that claiming at the earliest possible age of 62 declines quite notably, more so for men but also for women.

 4. 401(k) assets are drawn down sooner in a low-rate environment.

According to the paper, people are exchanging the advantage of delaying their claim Social Security benefits (for higher lifelong distributions) with taking more from their retirement plans at an earlier age. Alternatively, when expected yields are high, workers can claim early Social Security benefits and withdraw less from their retirement assets, which will earn higher returns for a while longer.

Self-directed retirement plans can offset lack of returns due to low interest rates.

Depending on the types of alternative assets you include in a self-directed retirement plan, you could avoid zero percent yields or settling for only two percent return on investment. Nontraditional investments like real estate, precious metals, private equity and energy assets could be the boost your retirement plan needs to shield it from market volatility.

For savvy investors who know and understand certain types of alternative assets, opening a self-directed retirement plan can be a great way to turbocharge your retirement portfolio… and enable you to take control of the types of investments you prefer to include. Read up about self-direction as a retirement wealth-building strategy in our white paper library, check out our informative videos, and connect with us at 1-888-857-8058 or Info@NextGenerationTrust.com.


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