What impact will the zero interest rate policy have on your consumption after retirement?

Pension savers exchange savings, in most cases, to more fixed-income securities in order to receive a predictable income to live on after retirement.

For example, let’s say you choose to live on $2,000 a month after retirement at 65, with the expectation of living until you’re 85, this would mean that for 20 years you will live on your savings. Let’s ignore taxes and inflation, which would only increase the demand for a higher yield.

If the interest rate is 5% on your capital after retirement, you would need a capital of just over $300,000 at the date of retirement. If the interest rate however is 0% on your capital after retirement, you would need a capital of $480,000 at the date of retirement.

If you receive a return of 0 percent then you would need another $180,000 in savings. With $300,000 you will only have a pension until you are 77 years old or alternatively $1,250 per month until the age of 85.

The lower the yield, the more you have to save until retirement or if you are already are retired, the lower the yield, the less you have you to consume.

Yes, but this is just for retirees, you may say.

With today’s inverted population pyramid, low birth rates and longer lifespan in the western world, Japan and soon China and Korea, we face a completely new society, with new problems and new solutions.

If the social welfare system doesn’t provide you with enough security and dividends on your savings no longer leave room for more consumption, then zero interest rates will not help! / Ulf Egestrand