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Will Low Interest Rates And Longer Lives Reduce Living Standards In Retirement? Not Likely

Nov. 25, 2015 6:43 PM ET6 Comments
Louis Kokernak, CFA profile picture
Louis Kokernak, CFA


  • The prevalence of low inflation helps to offset the negative effects of low bond yields.
  • Adaptive distribution strategies will help retirees enjoy a higher living standard.
  • Conventional wisdom about asset allocation for seniors needs to be revisited.
  • Retiree spending declines with age.

Interest rates throughout the developed world have remained at historically low levels for seven years. Today, the US aggregate bond index offers a prospective yield of 2.4%, well below its long-term average. The Fed's accommodative monetary policy has rattled older investors, as they rely heavily on bond interest in their retirement years.

Americans are living considerably longer today. The average 65-year old lives almost three years longer than his counterpart from 1993. If life insurance companies and pension administrators are changing their assumptions based on mortality shifts, shouldn't individuals do the same?

Persistent low bond yields and long lives do complicate matters once a person stops working. However, there are some reasonable measures investors can take to maximize the value of their accumulated wealth. We'll examine some of recent research on retirement outcomes in this article. Not all the news is bad.

Conventional Retirement Distribution Rules

Financial planners have been trying to estimate sustainable retirement income levels for some time. One of the earliest practitioners to write substantively on the topic was William Bengen. His key paper appeared 20 years ago in the Journal of Financial Planning. He inferred the survivability of various withdrawal rates based on historical asset returns for a balanced portfolio of 50% stocks and 50% bonds.

Bengen concluded that a 4% initial portfolio drawdown could be taken in year one and adjusted upward for inflation thereafter. Such a strategy preserved wealth for each rolling 30-year period starting in 1926. A 30-year retirement takes the individual to age 95, which was plenty old to readers in the 1990s. While Bengen's paper never made mention of a 4% rule, later interpretation of his findings gave rise to the convention that 4% was the largest safe withdrawal rate with a balanced portfolio. The term "4% rule" was born.


This article was written by

Louis Kokernak, CFA profile picture
I have been a fee only financial advisor since 2002 and am a Chartered Financial Analyst and Certified Financial Planner. The cornerstone of the life savings strategy at Haven Financial Advisors is the investment in multiple asset classes with low cost and low turnover.The investment process is transparent.There are no "black box" funds or sudden swings in risk taking.

Analyst’s Disclosure: I am/we are long VTI, AGG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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