The idea of providing retirement is to accumulate as much money as possible with the least amount of risk. However, it is difficult to calculate the expected return rate, as it depends on the year.
Historical Perspective on Safe Returns
There is a price to pay for safety in a low-interest environment. If you want to guarantee your capital and desire a guaranteed return, you should expect your yield to be low. If a three-month certificate of deposit pays an annual yield of 1.5%, it means you will earn only $1,500 a year for every $100,000 you invest.
What about locking your money away for a longer period? You might be able to secure a guaranteed rate of 3.5% on a fixed annuity for 10 years, but you will face significant surrender charges if you withdraw before the tenth year.
Historical Safe Investment Returns
A safe investment like a certificate of deposit produced a return of 17.2% in 1981. You would have received $17,200 in interest income for every $100,000 you invested. But that same product only produced 2.18% in 2003, or $2,180 in annual interest income for every $100,000 you invested.
Note: If you retired in 2003 and invested only in safe accounts yielding between 2% and 3%, it would be difficult to maintain a standard of living post-retirement. Inflation will drive up prices, while investment income will steadily decline.
You can compare returns on safe investments to historical stock returns by looking at the performance of the S&P 500 over the years. Returns were higher with stocks, but only if you stayed invested through the ups and downs.
Retirement Planning in a Low-Interest Environment
Look for ways to integrate different types of retirement investments, whether they are safe or risky, in a manner that can provide you with the cash flow needed if you plan to retire during a low-interest period. Most retirees will have to plan on spending some of their original capital over the years of retirement.
Start by setting up a retirement income plan – a timeline that outlines what you have and what you will need in the years ahead. You can then see if your savings are large enough to cover the gap after you have determined your cash flow, even if it shows a low return.
For example, create a spreadsheet that begins with the first year of retirement and the total amount of your investments. For each year, calculate a new annual balance by adding the expected return on investments and subtracting expected expenses.
Safe Investment Returns
CD rates have improved slightly since eight years ago with average annual yields of less than 1% for three-month CDs that ended in 2016. Yields increased to 1.15% in 2017 and then to 2.19% in 2018. Such returns are still insufficient for investors to expect their money to outpace inflation. The yield fell to 0.17% in 2020, for example.
One-Year CD Yields in the Past
Year Yield Annual Income per $100,000
- 2000 6.46% $6,460
- 2001 3.69% $3,690
- 2002 1.73% $1,730
- 2003 1.15% $1,150
- 2004 1.56% $1,560
- 2005 3.51% $3,510
- 2006 5.15% $5,150
- 2007 5.27% $5,270
- 2008 2.97% $2,970
- 2009 0.56% $560
- 2010 0.31% $310
- 2011 0.30% $300
- 2012 0.28% $280
- 2013 0.17% $170
- 2014 0.12% $120
- 2015 0.23% $230
- 2016 0.64% $640
- 2017 1.15% $1,150
- 2018 2.19% $2,190
- 2019 1.76% $1,760
- 2020 0.17% $170
Source: https://www.thebalancemoney.com/income-from-safe-investments-2388531
Leave a Reply