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Thursday, April 25, 2013

Many Retirees Say Low Rates Are Harmful

As central banks around the world pour liquidity into the global markets, many financial market observers worry about the potentially distortive effects of historically low U.S. interest rates. They are not alone, as half of retired investors in a new poll maintain low U.S. interest rates are doing substantial harm to savers and investors -- something Fed policymakers should keep in mind as they pursue their unprecedented monetary stimulus efforts.

The Wells Fargo/Gallup Investor and Retirement Optimism Index survey is conducted quarterly and defines investors as those having at least $10,000 of investable assets.

More specifically, these retirees report that low interest rates are forcing them to do some things they might not otherwise do. For example, 45% of retirees say low rates mean they are living less comfortably in retirement. A similar percentage (43%) say they are giving less to charity -- something that should be of concern to charitable organizations. Further, 35% are providing less financial help to their children -- just when a lack of jobs may make such help more important than in the past.

Still more disturbing is the impact of low interest rates on retirees' risk taking. More than one in three retired investors (35%) say they are being forced to put their money into investments they might otherwise avoid, and one in four retirees (26%) report they are taking more investment risk than they might if interest rates were higher. Retirees may feel they are forced to do so not only in order to live comfortably in retirement but also because 35% fear they will "outlive" their retirement savings. While those taking extra risk are not in the majority, they represent a substantial minority of retirees.

Of course, this is what the Fed wants -- investors taking more risk -- and doing so makes sense given the flood of global liquidity and the surging stock market. If anything, it seems likely that an even larger percentage of retirees will feel the need to increase their investment risk in the months ahead. But what happens if the global economy strengthens, interest rates increase, and the markets reverse?

Today's monetary policy puts retired investors, who average 70 years of age, in a very difficult investment decision-making environment: take more risk with money you can't replace and live more comfortably in retirement, or don't do so and see your investment portfolio dwindle and the comfort of your retirement decline.

Obviously, low interest rates put investment advisers under intense pressure to help retirees navigate through today's challenging investment environment. More importantly, low rates -- and policymakers' effort to force investors, including retirees, to take more risk -- may place an implicit policy burden on monetary policymakers: keeping retirees they encouraged to take more risk from incurring major losses as they manage the transition to a more normal interest rate environment.


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