A LOW interest rate policy is designed, in part, to make people save less and spend more. The problem is that this approach eventually hits a wall. That is because the biggest reason people need to save is to cover their retirement, when they need to convert their savings into an income. And then low rates have a perverse effect.
Say you want a $20,000 private income (indexed to inflation) in retirement to top up your state pension/social security. The size of the pot you need depends very much on the income you can generate. So look at this simple table
Income rate Size of pot ($)
5% 400,000
4% 500,000
3% 666,666
2% 1,000,000
If 2% seems a low income rate, remember that US TIPS - the only way of guaranteeing an inflation-linked income -...Continue reading
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