Jumbo Size Nest Eggs Are Needed

Historically low interest rates had a sharply adverse impact on retirement income.

S&P Capital IQ and SNL Financial released “Retirees Can No Longer Afford to Live on Investment-Grade Fixed Income Returns,” a new research note that analyzes the annual cash flow generated by the 10-year U.S. Treasury note per calendar year, dating back to 1976.

Retiree nest eggs now need to be much larger than what was required 40 years ago to generate the same level of investment income. The report tracked total inflation- and risk-adjusted retirement income generated from a $100,000 principal investment.

More principal was required to generate same returns. The average annual income generated on an inflation-adjusted $100,000 principal investment in U.S. Treasuries has been 13.3% of median household income between 1976 and 2015. Based on that 40-year average figure, principal invested in 2015 would need to increase by more than 600% to generate that same level of return.

Seven-figure investment required for modest income. In order for the 10-year U.S. Treasury note to generate annual retirement income approximating 50% of median household income, retirees would need a seven-figure investment principal account, or roughly 24 times 2015 median household income levels.

Shrinking nest eggs. Not only do current-day retirees need an attractive fixed-income interest rate, they also need stronger personal income growth that enable adequate lifetime savings, likely driven through self-directed 401(k) investments as opposed to defined benefit employer-funded pensions.

“The last seven years of short-term interest rates at or near zero percent has created some serious problems for retiree and near-retiree investors,” says Michael Thompson, chairman of S&P Investment Advisory Services. “The net result has been low-risk profile investors moving further and further out on the risk curve, investing in corporate bonds and equities to generate the same level of income they historically earned in the fixed-income markets. Long term, that is not a sustainable solution.”

S&P Capital IQ and SNL Financial, a business unit of McGraw Hill Financial, provide financial and industry data, research, news and analytics to investment professionals, government agencies, corporations and universities worldwide.

The full research note can be accessed through the S&P Capital IQ and SNL website.