Retirement actuary Dan Cassidy has news that probably won't surprise you: Continuing low interest rates make it difficult to save for retirement whether you are an individual or an investment expert managing a pension fund to ensure that there is enough in the pot to pay all the promised pensions.
Cassidy, who is on the board of the Society of Actuaries and managing director of retirement plan consultancy P-Solve Cassidy, doesn't believe things are going to get any better soon. He points to Japan's decade-long periods of high unemployment, low interest rates and deflation as a scenario that could be mirrored in the U.S. "We see a risk of low economic growth for a decade or longer and very low interest rates for a very long time," he says.
Whether you believe in this gloomy scenario or not, anyone living in retirement now or doing retirement planning for an event that's coming soon has to figure out how to balance their assets to squeeze enough return out of savings while avoiding significant risk. Cassidy offers anyone in this position five suggestions for navigating low interest.
- Maximize your Social Security. Social Security is inflation-adjusted, but it doesn't go down in periods of deflation.
- Cut consumption. If you don't really have to spend it, save it.
- Buy an annuity for the long haul. Put 10 percent or maybe a little more of your savings into a deferred annuity. If you buy it at 65 and don't draw it until 85, it will provide insurance against the risk that you'll outlive your money.
- Consider Treasuries. On the suggestion that the Federal Reserve is planning to allow interest rates to rise, the rate on 10-year Treasuries has increased to about 2.5 percent. That may not seem like much compared to the recent past, but Cassidy says if there is deflation, buying them will protect your nest egg and give you some return. What percentage of your money should you shelter? Cassidy says if you're lucky enough to be entitled to a well-managed, old-fashioned, defined benefit pension, be glad, and don't feel obligated to invest as conservatively. If you don't have this kind of security, he thinks putting as much as 40 percent of your nest egg in fixed income could be wise.
- Take some risk with the rest. The government's purpose in keeping interest rates low is to encourage people to invest in riskier assets such as stocks, and the market has responded well. Getting a piece of that pie could be what saves your retirement.