Having just concluded a long driving trip, I was reminded again just how helpful the technology under the hood of today’s automobiles can be: the warning lights when you’ve still got enough gas left to find a gas station, the low tire pressure light that tells you of a slow leak before you have a flat tire, the binging that lets you know you’ve left your headlights on (again), and my personal favorite, the klaxon-like bell that alerts you that your parking brake is still engaged (since that red “brake” light on the dashboard clearly wasn’t sufficient notice).

For some time now, the Federal Reserve has held short-term interest rates near zero in an effort to support an economic recovery — and has, in fact, announced its intention to maintain that policy until such time as the recovery seems to have taken hold. However, as many retirees and workers have discovered, those historically low interest rates are crimping their retirement savings — and a new study by the Employee Benefit Research Institute quantifies the impact of a sustained low-interest rate environment on America’s retirement readiness.

Using EBRI’s unique Retirement Security Projection Model® (RSPM), we found that more than a quarter of Baby Boomers and Gen Xers who would have had adequate retirement income under an assumption that historical average market returns would prevail are instead simulated to end up running short of money in retirement if today’s historically low interest rates are assumed to be a permanent condition (assuming retirement income/wealth is assumed to cover 100 percent of simulated retirement expense).

Not that everyone is affected to the same degree. In fact, the analysis reveals that the potential impact varies by income levels: The low-yield-rate environment appears to have a limited impact on retirement income adequacy for those in the lowest preretirement income quartile, since they have relatively small levels of defined contribution and IRA assets and since they rely more heavily on Social Security income in retirement. However, the research found there is a very significant impact for the top three income quartiles.

While the research also found that the impact is lessened if the current low rates are temporary, it seems that every time the Federal Reserve even mentions an end to its current policies, there is a strong reaction from the market. 

Several sectors of the economy have benefitted from the Federal Reserve holding short-term interest rates near zero to support a recovery, but there are warning signs in the EBRI analysis about longer-term consequences that policy makers should also consider — and implications for retirement readiness should historical averages return.