How Low Interest Rates Impact Retirement Plans

Includes: INTC, JNJ, KO
by: Doug Carey

It is sometimes hard to believe that only five years ago the ten year Treasury yield was above 5%. Today it sits at 1.8%. We all know that this has not made it easy for those in retirement and wanting to live on the income from bond payments. In fact, low interest rates have made it downright impossible to live off of bond income for most people.

Let's take a look at how the world has changed for those in retirement and invested 100% in Treasury bonds. I ran the following in our retirement planner. I took a couple that is 65 years old, has $500,000 in investable assets (all in IRA funds), they're invested 100% in 10 year treasury bonds, they will receive $30,000 per year in social security benefits, and they spend $45,000 per year. I also assumed 3% inflation. I wanted to see if and when this couple runs out of money in retirement today vs. five years ago when 10 year Treasury bond yields were 5%.

Yield on 10 Year Treasury

Age of First Shortfall











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At today's interest rates this couple will run out of money when they are 88 years old. This is way too close for comfort for anybody's retirement plan, especially since I did not even include any buffer for unexpected expenses. We see that if yields moved back to where they were five years ago this couple would not run out of funds until they are 98, which gives them much more room for unexpected expenses in their lives. And if yields on the ten year treasury were 6%, this couple would pretty much have it made in retirement as their funds would last until they are 103 years old.

Unfortunately, it doesn't really help to talk about how much better off so many retirees would be if interest rates were higher. This is the world we live in today. The question is, what can they do about it? What if their goal was to have their funds in retirement last until at least age 100? I ran some what-if scenarios and found a couple of ways they can do this: 1) They can cut spending by $6,000 per year or 2) They can work part-time for $30,000 per year for 15 years. Neither of these options sounds too enticing to most people.

My favorite option for helping out people in this situation is to find a way for them to beat inflation using dividend paying stocks; But not just any dividend paying stocks. I only recommend and invest in companies which have a dividend yield above 2.5% and a long history of increasing their dividends over time, even in recessions. Three of my favorites that meet these criteria are Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), and Intel (NASDAQ:INTC).


Div. Yield

5 Year Div.
Growth Rate










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If we take half of this couple's money that is currently in treasury bonds and place it in a basket of solid dividend payers that yield 3% and average 7% for their dividend growth over the next 20 years, how would this change things for them? It turns out that they would not run out of money until they are 103 years old if they do this.

What this analysis shows is that a) it is incredibly important that you can beat inflation over time and b) the power of growing dividends over time can change a retirement plan immensely. It is sad that so many in retirement have to deal with interest rates that are below inflation. But that doesn't mean there aren't other options.

Disclosure: I am long JNJ, KO, INTC.