Investors Need to Be Aware of Interest Rate Risks

June 21, 2013 ( - Low interest rates pose a risk to investors, according to a Prudential paper on the implications of recent research from the National Retirement Risk Index.

By PLANSPONSOR staff | June 21, 2013
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“Many people focus on the accumulation objective,” Bruce Ferris, head of sales and distribution, product management and marketing for Prudential Annuities, told PLANADVISER. “But it’s just as important to think about cash flow needs in retirement. What gets left out is an understanding of cash flow in retirement and the factors that can threaten cash flow, such as tax, inflation, health care costs and sequence of returns.”

Ferris pointed out the decades-long conventional wisdom that a 4% drawdown would sustain an individual through 30 years or so of retirement. It was true for many years, he said, but study after study has proven this is no longer the case.

The most recent update to the National Retirement Risk Index, published in October 2012, found 53% of households are at risk of being unable to maintain their pre-retirement standard of living during retirement (see "Many Unable to Keep Standard of Living In Retirement"). (The index is produced by the Center for Retirement Research at Boston College and sponsored by Prudential.) In its research, the center took a closer look at the impact of low interest rates on the Index. 

Interest rate levels alone would have only a modest impact on this Index. A key reason is that Social Security and defined benefit income, which are not impacted by interest rate changes, make up the majority of total wealth for most Americans, according to the center’s research. The index 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.