Not only do current-day prospective retirees greatly need a reasonably attractive risk-adjusted fixed income coupon interest rate, but they also likely need stronger personal income growth that enables adequate lifetime savings.
In addition, retirees need enough excess investment principal to act as a buffer against the corrosive portfolio effects of future consumer price inflation, concludes a report from S&P Capital IQ and SNL Financial, “Retirees Can No Longer Afford to Live on Investment-Grade Fixed Income Returns.”
In contemporary times, a seven-figure investment principal account is now needed to generate fixed retirement income equating to half of median U.S. household income, as opposed to a $200,000 to $300,000 account (in 2013 dollars) between 1997 and 1990, the firm’s analysis found.
S&P Capital IQ and SNL Financial analyzed the annual cash flow generated by the 10-year U.S. Treasury note per calendar year, dating back to 1976. They tracked total inflation- and risk-adjusted retirement income generated from a $100,000 principal investment.
The average annual income generated on an inflation-adjusted $100,000 principal investment in U.S. Treasuries has been 13.3% of median household income between 1976 and 2015. Based on that 40-year average figure, principal invested in 2015 would need to increase by more than 600% to generate that same level of return.
“The last seven years of short-term interest rates at or near zero percent has created some serious problems for retiree and near-retiree investors,” says Michael Thompson, chairman of S&P Investment Advisory Services. “The net result has been low-risk profile investors moving further and further out on the risk curve, investing in corporate bonds and equities to generate the same level of income they historically earned in the fixed-income markets. Long term, that is not a sustainable solution.”
S&P Capital IQ and SNL Financial, a business unit of McGraw Hill Financial, provide financial and industry data, research, news and analytics to investment professionals, government agencies, corporations and universities worldwide.
The full research note can be accessed through the firm’s website.