Do retirees always get hurt more when interest is very low?

Do retirees always get hurt more when interest is very low?

Expert Solution

1. Lower interest rates prevailing currently is great for people who are borrowing but terrible for the retirees who design their future times by their ability to live off their interest income after exiting from the work place.

2. Unlike younger age group, who have ample of time in hand to decide their retirement plans, retirees are facing unique challenges that previous retirees didn't face.

3. Manners in which cut in interest rates affects a retiree are as follows:

The ongoing rates cut has changed the scenario of long-term care insurance policy, which has put pressure on Insurance companies for hiking the premium amount and lowering the insurance coverage of the policy. This is presently one of the biggest fear, retirees are facing.
Annuities (these are the periodic payments earned by the indiidual in return to their lumpsum investment) are getting impacted by releasing lower payouts due to interest rate cut. Insurance companies flows out their economic pain to its consumers (which includes retirees group as well)
Few retirees hopping onto the option of diversifying their portfolio by higher equity allocation, perhaps is not turning out to be the best option. They are increasing their equity base in the fear of missing out moment (what we generally call as FOMO), anytime when the markets correct itself, a huge downturn may be witnessed, devastating the spending requirements of retirees. Increasing the risk and moving in for equities in higer portion (chasing for high yields) is definitely not a wise behaviour reflected by retirees during rates cut.
Most pension funds are at high risks. Higher interest rates are needed for pension funds to sustain since most of its monies are invested in fixed income.

4. Conclusion: The only hope of seeing rise in interest rates or identifying the right investment opportunity, may be the only wise call retirees should focus on, rather than increasing their risk by chasing higher yields.

jeff jeffy answered 2 years ago

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