How to retire in a low-interest-rate world

Marcus Allan Ingram

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It’s always smart to think ahead when saving for retirement. But if you began planning as recently as 10 years ago, you may need to do your math all over again.

Marcus Allan Ingram, chair and associate professor of finance at the University of Tampa, located in southwestern Florida, says today’s low interest rates mean yesterday’s calculations may no longer make sense. It’s much more difficult now to get even a modest 5 percent return annually on your investments, so the ideal amount needed for a secure retirement has become “a moving target,” he says.

That doesn’t mean you have to simply give up. Ingram says test-driving your retirement can give you a realistic picture of how much you’ll need to retire — and the steps you need to take to make today’s vision a reality tomorrow.

Is there an advantage to using a retirement planning coach?

You asked about a retirement planning coach. I thought that was a very interesting way to phrase it because normally we think that retirement planners and people who help plan retirement are often other financial professionals. They are brokers or insurance agents. I really do suggest people use an unaffiliated retirement planner, someone who is not making money for selling them a particular product. (The planner should be) someone who wants to give them advice and who charges for that advice straight out as a fee.

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Is it financially smart to set a retirement date when you are planning your retirement?

I think that might be the most crucial variable. There are so many different moving parts in the retirement formula: how much you think you can save between now and retirement, what you think your demands will be for income to live the way you want to live in retirement, and of course, how long (you) expect to live. But the one thing that can help balance those out is choosing the correct retirement date.

What is the ideal amount of savings needed to retire?

That is really a moving target. I think we are seeing that the challenges in retirement planning are not the same from one generation to the next. In the prior generation, the key issue was how much money you had saved.

The idea was that if you could earn 5 percent on your investments on average, then for every $1 million that you could save, you could collect $50,000 in investment income minus whatever your taxes were.

Now we see that we have had this extended low-interest-rate environment that has gone on for 15 or 20 years of very low interest rates. Now, long-term rates are below 2 percent. So that kind of formula does not work.

People are living so long in retirement that they are going to need that portfolio to continue to grow. So you might retire with $1 million or $2 million, but 10 years after retirement, you would need that portfolio to continue to grow. If you are drawing off all of the income and the principal is not growing, that is probably not a workable solution.

For the person who wants to travel during retirement, what tips can you give him so he can live out his dreams?

There is a lot of evidence that suggests people overestimate how much wealth and how much disposable income they will have in retirement compared to the reality of how much they have saved and what their pension is. So my real concern is when people say they want to travel during retirement, do they realistically have enough money to do that?

If you want to retire with a great deal of wealth and travel, one thing to do would be to test-drive the retirement plan while you are still employed. That is, see if you can live on what you consider to be the income you are going to draw from your retirement plan while you are still working.

If you think you can live on $40,000 or $50,000 a year in retirement, you should try to live on $40,000 or $50,000 for a year before you retire. That will give you a more reasonable expectation about how much travel you will be doing and whether you’ll have to cut back on your gifting and that sort of thing. It just puts you in a stronger position to estimate what you will really be able to do in retirement.

What advice would you give people who are trying to project for 40 years down the line? Should savings be two or three times the amount of their income?

I can’t predict that because of this relationship between inflation and interest rates. It changes everything on a nominal basis. On a real basis, it will not change a lot, but if the dollar becomes much less valuable, you will clearly need a lot more of them.

We just have not seen that for a whole generation. We quit worrying about inflation. So now we worry about how to get 5 percent on our money. I think that is the biggest issue facing retirement. Since you are only able to earn 2 percent or 2.5 percent on your savings, you end up having to work a little longer.

Right now is the time when people are re-evaluating their retirement plans and then choosing to extend their working life because these low interest rates have made obsolete the math that they did 10 years ago. So again, the retirement date can be a moving target.

We would like to thank Marcus Allan Ingram, Ph.D., chair and associate professor of finance at the University of Tampa, for his insight.