The Impact of Higher Yields on Retirees
While the predominant fear of retirees is running out of money, the findings that most older retirees still had 80% of their pre-retirement savings after 17 to 18 years of retirement suggest that longevity risk may not be as menacing as many think.
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The Impact of Higher Yields on Retirees
On average, across all wealth levels, most older retirees still had 80% of their pre-retirement savings after 17 to 18 years of retirement, according to research conducted by BlackRock and the Employee Benefit Research Institute.1
While the predominant fear of retirees is running out of money, the above findings suggest that longevity risk may not be as menacing as many think. The solid financial position retirees have found themselves in after nearly two decades into retirement may be a result of three factors: 1) they have greater access to defined benefit plans, 2) they have a larger share of their spending met by Social Security benefits or 3) they have simply spent less than they could afford.
Younger retirees may not have the advantage of receiving defined benefit pension benefits. However, the recent rise in bond yields has helped these individuals increase the income generating power of their retirement savings. Let’s examine the significance of that potential income boost through the following hypothetical example.
Let’s assume a retired couple—Richard, age 71, and Ruth, age 70—retired five years ago. Their current retirement savings are comprised of a 60/40 portfolio valued at $1 million and $100,000 in a short-term CD. Now, let’s examine the income generated by those savings.
| Asset | Dec. 31, 2021 | As of Oct. 31, 2023 |
| Equity-$600,000 ($1MM x .6) @ average dividend yield of 2% |
$12,000 |
$12,000 |
| Bonds-$400,000 ($1MM x .4) @ 10-year Treasury yield (1.52%/4.88%) |
$6,080 |
$19,520 |
| Short-term CD-$100,000 (0.09%/5.0%) |
$90 |
$5,000 |
|
Total Income |
$18,170 |
$36,520 |
https://www.bankrate.com/banking/cds/historical-cd-interest-rates/
https://www.nerdwallet.com/article/banking/current-cd-rates
The hypothetical retiree couple has seen a doubling of income generated by their retirement savings in less than two years—well ahead of the rise in consumer prices during that period.
It’s little wonder then that The Wall Street Journal recently declared that seniors with money to spend were the U.S. economy’s secret weapon, citing that Americans aged 70 and older hold nearly 26% of household wealth—the highest since records began in 1989.2
So, for this generation of retirees with about $77 trillion in wealth, as well as lower levels of consumer and student debt and no mortgage (or one at a very low rate), the jump in income provided by higher yields may provide the boost to allow retirees to fund a longer lifespan and live out their retirement dreams, with less risk of running out of money.
Sources:
- https://www.blackrock.com/us/individual/literature/whitepaper/spending-retirement-assets-final-whitepaper.pdf
- https://www.wsj.com/economy/consumers/us-economy-seniors-spending-money-d9f529c5
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