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Why QE3 Makes Retirees Queasy

Readers of and of Encore in particular are probably familiar by now with stories that start something like this:

Retirees and other income-seekers, hunting for higher yields in the low-interest rate environment, have been pouring money into riskier investments like [dividend-paying bank stocks/mah-jongg tournament betting pools/South Sudanese pipeline partnerships].

If you like the theme, settle back and enjoy: the Fed’s announcement last week of a new, open-ended round of “QE”—quantitative easing, or bond buying designed to grease the wheels of the economy—means downward pressure on rates is likely to continue for a while.

Coincidentally, a group called Better Markets, an advocacy group lobbying for more aggressive financial reforms, recently released a report with the eye-catching, spoiler title The Cost Of The Wall Street-Caused Financial Collapse And Ongoing Economic Crisis Is More Than $12.8 Trillion. Whatever the merits of that number, now being debated on the pages of Slate’s Moneybox, the Washington Post and elsewhere , there are even more costs that the report excludes, its authors say, because they’re “simply unquantifiable.” Among them: the income investors in general are losing due to lower rates. As the report notes: “Zero interest rates have prevented families from rebuilding their net worth…because yields are historically low or even negative.”

Because I know just enough math to get myself in trouble, I decided to try to quantify the unquantifiable.  Just how much does a low-rate universe cost a hypothetical safety-seeking retiree? Here’s my stab at some crude, I-am-so-not-an-economist calculations:

Couple X is retiring. They’ve decided to split a $600,000 portfolio into three equal piles and invest it on in 10-year Treasurys, 5-year CDs and a mix of investment-grade corporate bonds that yields the average for that sector. And because they’re a hypothetical couple who live in my head, they’re making all these investments on the same day.

If they’d retired five years ago today—before our most recent recession kicked in–they’d have nailed down annual yields 4.81% a year on the Treasurys, roughly 5% on the CDs and roughly 6% on the investment-grade bonds, according to data from the Treasury Department and the BondsOnline Group. Annual pre-tax income from their portfolio: $31,620, not a bad supplement to the monthly Social Security checks.

If they’d retired today, based on yesterday’s closing prices they’d be earning 1.83% on their Treasurys, 1.37% on the CDs, and 2.92% on the corporate portfolio. Now we’re talking annual income of $12,240—less than 40% of what they might have earned with different timing. Without making some other aggressive moves or trimming their spending, this couple is more likely to be eating into their principal to pay for living expenses each year. Now they’re wondering if they can wait another year before fixing the roof, and the grandkids are wondering why Pops and Mamaw can’t afford to upgrade to the next-generation Wii.

Bottom line: Today’s monetary policy creates a pool of retirees who feel they have to take some bigger investment risks, whether they like it or not. Spread that calculus over some 40 million retirees over the age of 65, and about $5.2 trillion in assets held in IRAs, and you’ve got a lot of money roaming into some very unfamiliar places.



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Comments (5 of 15)

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    • I was beginning to think I was the only one that realized what was going on. Every senior needs to vote out every incumbent until the politicians finally get it that they work for us, and to stop giving OUR money to deadbeats and nations that want to destroy us and others because we’re different. Please tell me why our military is in 160 countries! Sorry for the rant. Look to REITs for at least some returns.

    • How many senior citizens will decide to defer their retirement, just because they will not have enough income from their investments? Every non-retired senior is holding a job that might otherwise go to a currently unemployed worker. Low interest rates are causing major disruptions in our economy.

    • Isn’t repeating the same action over and over (QE1,2,3); while expecting different results (economy hasn’t been “stimulated” either of the first two times) called MADNESS? This artificially holding interest rates near zero is positively destructive to our economy, punishing thrift and encouraging debt. Do they never learn???

    • Federal plus state interest and dividend income TAXES will wipe out your “earnings”

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.