Interest rates are plummeting again and this is bad news for those who want to live on a fixed income in retirement. Ten years ago the ten year treasury yield was above 5%. Today it sits at 1.7%, which is below the rate of inflation.

treasury yield

Low interest rates over the past five years have undoubtedly ruined many retirement plans and forced some people back to work or into high-fee annuities that can be worse than treasury bonds. Let’s take a look at just how difficult it can become to live off of treasury income in retirement today compared to just a few years ago.

I ran the following analysis in the WealthTrace. I took a couple that is 65 years old, has $500,000 in investable assets (all in IRA funds), they’re invested 100% in 10 year treasury bonds, they will receive $30,000 per year in social security benefits, and they spend $45,000 per year. I also assumed 2.5% inflation and that they both live to age 95. I wanted to see if and when this couple runs out of money in retirement today vs. five years ago when ten year treasury bond yields were 5%.

Yield On Ten Year Treasury Age When Money Runs Out Amount Of Money Left At Age 95 ($)
1.7% 80                                       –
3.0% 91                                       –
4.0% 97                                25,000
5.0% 100                              100,000
6.0% 105                              230,000
7.0% 110                              390,000

This couple will run out of money when they are 80 years old at today’s level of interest rates. This is way too close for comfort for anybody’s retirement plan, especially since I did not even include any buffer for unexpected expenses. We see that if yields rise again, back to 5% where they were six years ago, this couple would have money in the bank until age 100, which gives them much more room for unexpected expenses in their lives. And if yields on the ten year treasury were 6%, this couple would pretty much have it made in retirement as their funds would last until they are 105 years old.

It doesn’t really help us much to talk about what could have been. Interest rates are incredibly low, and that is the world we live in today. The question is, what can they do about it? What if their goal was to have their funds in retirement last until at least age 100? I used our financial planning tool to run some scenarios and found a couple of ways they can do this: 1) They can cut spending by $5,000 per year or 2) They can work part-time for $35,000 per year for 15 years. Neither of these options sounds too enticing to most people.

Another goal they may have is to end their plan with at least $50,000 that is a safety buffer in case of higher expenses. Currently they cannot accomplish this by being 100% in treasuries. But what if they moved 1/3 of their funds into dividend growth stocks that have a history of paying and growing dividends over time?

I normally only recommend and invest in companies which have a dividend yield above 2.5% and a solid history of increasing their dividends over time, even in recessions. Three of my favorites that meet these criteria are Johnson & Johnson (JNJ), Coca-Cola (KO), and AT&T (T).

Company Div. Yield 5 Year Div. Growth Rate
JNJ 3.0% 6.9%
Coca-Cola 3.1% 8.4%
AT&T 5.3% 2.2%

If we take 1/3 of this couple’s investments that is currently in treasury bonds and place it into solid dividend payers that yield 3% and average 7% for their dividend growth over the next 30 years, how would this change things for them? It turns out that at age 95 they would have about $20,000 left. If we move half of their money into the dividend payers they would have $60,000 left.

This analysis shows that bonds will not suffice for most people planning for retirement. It also shows that a) it is incredibly important that you can beat inflation over time and b) the power of growing dividends over time can change a retirement plan immensely. It is sad that so many in retirement have to deal with interest rates that are below inflation. But that doesn’t mean there is nothing they can do about it.

About the Author:
Doug Carey is the owner and founder of WealthTrace, which builds financial planning software and retirement planning software for consumers. He has over 20 years of experience in the financial markets. He is a Chartered Financial Analyst with a Masters degree in Economics from Miami University in Oxford, Ohio and a B.S. degree in Economics, with an emphasis in Finance, from Ball State University.

Doug also writes on the topics of retirement planning and investing for Seeking Alpha where he has had over 200,000 people view his articles. He also provides online retirement coaching and financial planning for his customers.