Opinion: Many people would have to increase their 401(k) contributions.
The press keeps asking how zero or negative interest rates would affect retirement security. Here’s my answer, and I’m sticking with it until someone corrects me.Those starting out their careers would be affected in two ways. The bad news is that they would have to contribute more to their 401 plan to accumulate a pile big enough to generate the income required to hit their target replacement rate.
Now consider those in mid-career, say age 50, who have been accumulating assets in their 401 and therefore hold a mix of stocks and bonds. If interest rates decline then bond prices rise. Similarly, to the extent that equity prices reflect the present discounted value of future earnings, a lower discount rate should increase equity prices. So the good news is that the value of assets in their 401 accounts would rise.
Finally, we have people just approaching retirement, who have made their savings decisions on the basis of higher returns. In a zero interest-rate environment, they would suddenly find that their assets are not going to provide the level of income they had expected. It seems to me that they would be in an unambiguously bad spot.The first is to work longer than they had planned and get a higher benefit from Social Security.
This somewhat long-winded answer indicates the story is complicated. It really doesn’t yield itself to sound bites. And that’s before considering the macro picture. If the world would have fallen apart had the Federal Reserve not dramatically lowered rates, then everyone is better off than they would have been slogging through a prolonged deep recession.
More from MarketWatch Retirement Alicia H. Munnell Alicia H. Munnell is the director of the Center for Retirement Research at Boston College.
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