The curse of low interest rates

By Allan Sloan, senior editor at large

(Fortune) -- What's good for America isn't necessarily good for all Americans. The case in point: low interest rates.

The government has cut short-term rates (which the Federal Reserve controls) to essentially zero, and has spent more than $1.5 trillion buying assets and mortgages to hold down long-term rates (which are controlled by the financial markets). This is good for the U.S. economy as a whole, and especially good for borrowers. But these artificially low rates are terrible for savers, especially for retirees who want to convert their lifetime savings into lifetime income.

Allan Sloan, senior editor at large

Interest rates are so low, the recent rate uptick on longer-term Treasury securities notwithstanding, that it takes a surprisingly large amount of money to generate even a modest amount of lifetime income.

Consider, if you will, the following numbers from New York Life, which I asked to price annuities for me, because it's an AAA-rated outfit that's helped me crunch numbers over the years.

How much would New York Life pay a 65-year-old heterosexual couple that forked over $100,000 for a lifetime annuity that would last until both members had died? The answer: $527 a month. (Same-sex couples would get a different benefit: higher for two males, lower for two females. Hence my use of "heterosexual.")

If you're a single 65-year-old male, your $100,000 would buy you $613 a month for your lifetime.

Back when long-term interest rates were much higher, payments on annuities were higher because New York Life or any other annuitizer could have invested your money at rates way above what they can get today.

They work off a spread -- the more they can earn on the money you give them for your annuity, the more they can afford to pay you. The lower rates are, the less they pay. And rates now are pretty low, by historical standards. I expect them to go higher -- but then again, I've expected that to happen for years.

These low interest rates have a secondary effect. They make pensions, whose benefits are typically fixed despite changing interest rates, enormously valuable these days. For example, if our hypothetical couple had $500 of monthly pension income that would continue through the lifetime of the last member to die -- what's known as a joint-and-100%-survivor benefit -- it would be the equivalent of almost $100,000 of savings, based on New York Life's numbers. And $500 a month isn't exactly caviar money.

Sure, as tax mavens among you know, an annuity payment is somewhat more valuable than the same-size pension payment, because all pension income is subject to tax, while part of your annuity income is tax-free because it's a return of your investment. But comparing pension income with annuity costs gives you a reasonable idea of how big the "capital value" of your pension is.

Please understand that I'm not recommending that you buy a New York Life annuity, or any annuity at all. I'm just showing you how much it costs these low-interest days to buy lifetime income from a highly-rated company. I'm also trying to show how valuable lifetime pension benefits -- and by extension, Social Security benefits -- are.

Let me offer up one more example. Let's say that you're part of a 65-year-old heterosexual couple that has $30,000 a year -- $2,500 a month -- of joint-and-100%-survivor pension income. What's that worth? Well over $400,000, based on a quote from our friends at New York Life, who were offering a $2,651 lifetime monthly annuity for $500,000. (It would be $3,128 for a 65-year-old single male.)

So cherish your pensions, if you're fortunate enough to have them. And remember that despite all the talk about how wonderful today's low interest rates are, there are lots of people for whom low rates are a curse, not a blessing. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.