As the national unemployment rate continues to hover around 9.5 percent, we’re all facing hard times. And current and prospective retirees are some of the hardest hit. The longer it takes for the economy to recover, the less money they will have to spend in retirement and the harder it will be for many to retire at all.
Where financial advisors and self help books base many of their retirement assumptions on historical return rates of 4-5% on fixed income investments and 8-9% on stocks, consumers will now have to be content earning 2-3% percent on bonds, and potentially facing years of stagnant stock markets (if you believe the pundits). Lower returns mean it’s getting more and more difficult to accumulate enough money for a fruitful retirement.
Quantitative easing, in a nutshell
The Federal Reserve System was set up by its founders to pursue an active monetary policy to stabilize the economy. When times are good, they’re supposed to apply the brakes to keep us from accelerating off a cliff. And when times are bad, they add fuel to the sputtering growth fire and try to get us back on the right path. In theory, the Fed helps reduce the injuries inflicted during economic slumps by acting as a central bank that can inflate bank reserves and money supply and force a stable expansion of the economy.
It still remains to be seen whether their efforts will pull us up this time around, but in a (desperate?) attempt to boost investment and create jobs, the Federal Reserve said it would buy $600 billion more of long-term Treasury bills over the next eight months. The effort, known as QE2, or Quantitative Easing Part 2, is an expansion of the Fed’s strategy to keep interest rates at ultra-low levels for an extended period of time. By reducing borrowing rates to effectively zero, they hope that consumers and businesses will pull out their charge cards, borrow and spend money, and create jobs in the process.[ad#In-Post Links]
Unfortunately, lower interest rates also mean lower investment rates. So unless these efforts result in economic growth or extended inflation of investment assets, they will mean stagnant retirement accounts. So current retirees will face depleting their reserves, and pending retirees may have to consider staying in the work force.
Other government efforts hurting retirees
In an effort to fight the growing deficit and retire many of the government’s own debts, the higher-ups are looking into other cost cutting proposals include cutting social security and Medicare growth, and reducing interest rate deductions on mortgages. Meanwhile, another plan is considering a raise in the retirement age, topping out at 69 years old rather than 65.
Federal Reserve Chairman Ben Bernanke recently told Congress it needed to start planning how to restore its own fiscal balance and hold back deficits that could measure in the trillions of dollars. Bernanke conceded, “The task of economic recovery and repair remains far from complete. … the preconditions for a pickup in growth in 2011 appear to remain in place.”
What does this mean? Reasonable retirement goals will demand more saving now to meet the higher future costs of living and to make up for reduced potentially reduced returns. According to recent statistics, people aged 65 to 74 are spending 12.3 percent less than they did ten years earlier while they are also cutting dining out spending by 27 percent and household furnishings spending by 35 percent. Meanwhile, spending for health care rose 75 percent and health insurance spending rose 131 percent. Keep these numbers in mind while you’re planning for your own retirement.
This is a post from Tim Chen who is the founder and CEO of NerdWallet.com, a website that helps consumers to compare rewards credit cards. Tim also educates consumers about debt management and personal finance at the Forbes Moneybuilder Blog, the Huffington Post, and the U.S.News.