The idea behind retirement savings is to accumulate as much money as possible, with the least amount of risk. It's difficult to calculate an expected rate of return, however, because it depends on the year.
There's a price to be paid for safety in a low-interest-rate environment. If you want to guarantee your principal and want a guaranteed return, you should expect your return to be low. If a three-month CD is paying a 1.5% annual percentage yield (APY), that means you'd earn only $1,500 annually for every $100,000 you invest.
What about locking your money up for a longer period of time? You might be able to get a 3.5% guaranteed rate on a 10-year fixed annuity, but you'd face hefty surrender charges if you were to cash it in before the 10-year point.
- Safe investments often have low returns.
- Locking money into longer-term vehicles, like a 10-year fixed annuity, could result in higher rates.
- A retirement income plan can help you see whether your savings will keep up with inflation if you keep it in safe investments.
Historical Safe Investment Returns
A safe investment such as a certificate of deposit yielded 17.2% in 1981. You would have received $17,200 in interest income for every $100,000 you invested. But that same product yielded just 2.18% in 2003, or $2,180 of interest income per year for every $100,000 invested.
If you retired in 2003 and had invested only in safe, interest-bearing accounts earning between 2% and 3%, you would have found it difficult to maintain your standard of living post-retirement. Inflation would have caused prices to rise, while your investment income would have steadily declined.
You can compare the returns on safe investments to the historical returns on stocks by looking at how the S&P 500 index has performed over the years. The returns have been higher with stocks, but only if you have stayed invested throughout the ups and downs.
Retirement Planning With Low Interest Rates
Look for ways to combine various types of retirement investments, both safe ones and riskier ones, in a way that can deliver the cash flow you need if you're planning for retirement during a period of low interest rates. Most retirees will have to plan on gradually spending down some of their principal over their retirement years.
Start by making a retirement income plan—a timeline that shows what you have and what you'll need in future years. You then can see whether your savings are large enough to cover the gap after you have your cash flow outlined, even if it shows a low return.
For example, create a spreadsheet that begins with your first year of retirement and the total amount of your investments. For each year, calculate a new annual balance by adding your expected investment returns and subtracting your expected expenses.
Safe Investment Returns
CD rates have improved slightly since an eight-year stretch with average annual returns less than 1% for three-month CDs ended in 2016. Returns increased to 1.15% in 2017 and then to 2.19% in 2018. Such rates of return still are not enough for investors to expect their money to outpace inflation. Witness the drop to a 0.17% return in 2020, for example.
|Historical One-Year CD Returns|
|Year||Return||Annual Income Per $100k|
Federal Reserve Bank of St. Louis Economic Research. "90-day Rates and Yields: Certificates of Deposit for the United States," access Jan. 5, 2020.