Friday, November 05, 2010

Low interest rates and low returns make it hard for people to save enough for retirement

Here comes another dire warning that Americans need to save more principal for their retirement, in the MSN New Investor Center, “Warning: Retirement Disasters Ahead”, republished from Brett Arends of the Wall Street Journal, link here .
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The basic problem? People approaching retirement make less on their principal. Interest rates are low. Bank of America recently renewed a 7 month CD for me at just 0.45% annual interest (at least the early withdrawal penalty is limited by the interest earned).

Stocks are again priced high relative to earnings (especially this week because of recent GOP election gains, along with rhetoric from Boehner and others on cutting deficits), and bonds are higher than is sustainable.

The article notes compound interest (like you study it in middle school math) is less effective now. 10000 saved every year for 30 years would generate $760000 at 5.5% but only $420000 at today’s 2.5%.

Pension fund managers face the same kinds of problems. The article suggests that higher returns could come from stock buybacks, and emerging overseas markets.

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