Many people depend on their savings to provide income to meet their living expenses in retirement.
With low interest rates, retirees could be facing shortfalls in income. Most financial plans targeted savings to generate income based on historic interest rates, which were much higher than the rates available today are. The resulting shortfall between planned and actual income could be the catalyst for a new bull market in stocks — the kind that comes along once in a generation.
Federal Reserve data show that total household interest income has fallen to the same level seen in 2005, even as the amount of money held in savings has risen to record levels. High savings and low income could lead to difficult choices.
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Investors hold about $9 trillion in bank accounts and money market funds. The average rate on these accounts is about 0.5 percent. An investor with $100,000 in a savings account would earn only $500 a year in income. Most retirees had counted on significantly more income from their investments.
Data from the Investment Company Institute show that households currently have about half their investments in fixed income and half in equities. Portfolio reallocation to a more traditional 60 percent allocation to equities would drive more than a trillion dollars into stocks and push prices higher.
This reallocation of more than $1.1 trillion could provide the cash to fuel a once-in-a-generation bull market in stocks. It would also allow investors to double or triple their income with dividend-paying stocks.
Retirement is lasting longer and longer, with the typical retiree needing income for 21 years. At 0.5 percent interest, retirees will be forced to explore options for generating income. Stocks now make more sense for retirees who have time horizons measured in decades and the greatest risk they face might be the risk of outliving their assets.
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