August 29, 2013 (PLANSPONSOR.com) - Many retirees have seen significant reductions in wealth relative to pre-crisis expectations, despite the recovery of the stock market since the financial crisis.
Very low, short-term interest rates have also taken a
substantial bite out of retirement income, according to a report from the
Center for Retirement Research at Boston College. “How Has the Financial Crisis
Affected the Consumption of Retirees?” found that what really matters, however,
is the impact of the crisis on retirement consumption.
The report updates a recent study that found that the crisis
had little effect on the consumption of retirees who had either very small or
very large amounts of financial assets. In contrast, the broad middle class did
suffer a drop in consumption. Some of these households invest mostly in
short-term deposits, while others invest in a broader range of assets. Some
attempt to live off the interest and dividends, while others follow the
lifecycle model and draw down their wealth during retirement.
The report examined the impact of the crisis on financial
assets, the impact of the crisis on retirees’ wealth and income, and how the crisis
affected the consumption of two types of middle-class retirees. The report’s conclusion is that although
lifecycle investors in balanced portfolios experienced relatively modest
declines in consumption, the reductions for those attempting to live off the
interest on short-term deposits were much greater. The results of the analysis
for these specific behaviors represent extremes, with most people lying
somewhere in between.
The financial crisis had varying effects on stocks,
short-term deposits, and long-term bonds. The stock market declined
dramatically from October 2007 to March 2009, and then gradually recovered its
pre-crisis peak. But the true measure of the decline is relative to pre-crisis
expectations of continued increases in stock prices. By June 30, 2013, stock prices were 24% below the level that
might have been expected from the vantage point of October 2007. In contrast,
after a blip, dividend payments on stocks recovered to hit record highs, as
have corporate profits.