Most retirement plans created over the past 30 years have assumed that government bond yields during retirement would be a lot higher than they are right now. As illustrated in the chart, the yield on the 10-yr US Treasury fluctuated between 4% and 8% during most of the 1990s, and between 2% and 4% over the past 10 years. However, the yield has stayed below 3% for most of the past two years. Even so, interest rates in the US are not nearly as low as they are in the rest of the world.
In fact, over 30% of global government bonds had a negative yield throughout 2017; and approx. 70% of global government bonds had yields lower than one percent. Even after bond yields started increasing this year, US bond yields remain below their long-term averages, and it’s not out of the question that they may remain so for an extended period of time. This low-rate environment has many causes, including a “flight to quality” in the financial markets and large bond purchases by central banks across the world. Low bond yields may be the new normal, and many retirees would do well by revisiting the financial assumptions in their retirement plans.
For example, a $400,000 retirement account with $30,000 in annual distributions would deplete 20% faster with 2% bonds yields vs. 4% bond yields. You may be able to use a reverse mortgage to reduce your expenses or supplement your income during retirement. This could allow you to take fewer distributions from your retirement account. This would preserve your assets for a longer period of time, and help you to account for today’s lower bond yields.
Please see a financial advisor for more details on how low bond yields may be impacting your retirement plan. Please contact me for more details on how a reverse mortgage could help.