17 October 2017

Low Interest Rates Squeezing Retirement Savers

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Some retirees opt for higher-risk investment strategies to make sure they are OK for their remaining years.

Stocks are hitting record after record, the Dow Jones Industrial Average tripling since it bottomed out during the financial crisis exactly eight years ago.

For many retirees who’ve been riding that wave, these are risky and confusing times.

Take Steve Stein, a retired dentist here on New York’s Long Island. At 82, Dr. Stein said his nest egg of roughly half a million dollars is 95% invested in stocks. As a rule of thumb, financial planners suggest subtracting an investor’s age from 100 to determine what proportion of savings to allocate to stocks.

 “My dad used to put his money in CDs, getting 15%,” said Dr. Stein, whose father, a dental technician, encouraged him to become a dentist as a way to build a stable, successful life. “If interest rates were high, I would’ve invested in fixed income,” he said.

The average one-year CD hasn’t paid more than 1% since 2009, according to Bankrate.com.

The drop in interest rates since the financial crisis cost U.S. savers almost $1 trillion in lost income from savings accounts, CDs and bonds from the start of 2008 through 2015, taking into account money saved on debt costs, according to April 2016 research by insurer Swiss Re.

There are few signs of imminent improvement. The yield on the benchmark 10-year Treasury note has risen since the election to nearly 2.6%, but it is still below the 2.9% it yielded when U.S. stocks hit their low on March 9, 2009.

The Federal Reserve is signaling it will raise short-term interest rates more aggressively this year. Over more than a decade, the central bank has approved two increases in the federal-funds rate. Yet even with markets pricing in a faster pace of rate increases in 2017, few investors expect yields to approach any time soon the levels they routinely achieved during the decade leading up to the financial crisis. Then, long-term U.S. rates were often 5% or higher, a level they haven’t achieved since 2007.

Lawmakers such as House Speaker Paul Ryan (R., Wis.) have criticized the Fed’s low-rate policy as harmful to savers. Sen. Bob Corker (R., Tenn.) in 2013 said it amounted to “throwing seniors under the bus.”

Some financial advisers have said worries about declining income are overblown. While investment income has fallen, inflation has been low, meaning investors are better off now than they may feel.

Dr. Stein opened his first solo dental practice in 1963, following his discharge from the Army. In 2007, he sold the practice and settled into retirement. That didn’t last long. Interest rates fell to near zero during the financial crisis as the Fed unleashed unprecedented stimulus to shore up lending and revive a moribund economy. Dr. Stein turned to a temporary staffing agency to find part-time work.

Now fully retired since 2013, Dr. Stein is increasingly nervous about making his savings last—not only for himself, but also for his wife, who is 16 years his junior. They receive Social Security, and it covers most basic needs, but he still fears running out of money because health issues would keep him from working to make up the difference.

“If I don’t take risks, I won’t have the money, and I need the money,” he said.

Shares have been soaring since Election Day, but Dr. Stein said that is just “one more thing to worry about” because it might mean stocks are due for another fall.

Nearly all of Dr. Stein’s savings is in exchange-traded funds, a type of stock-tracking product he mostly uses to invest in health-care companies. He doesn’t hold bonds, which he views as providing too little yield. Instead, he has scooped up biotechnology stocks, which he has watched climb in the past decade.

He said he checks his portfolio’s performance every day and worries about big swings. He has seen some. One of his holdings, the SPDR S&P Biotech ETF, fell 16% last year. It is up 19% so far this year. The only way to realize these gains, however, is by selling pieces of the portfolio, something Dr. Stein is wary to do for fear of mistiming the market by selling stocks near their lows or buying near their highs.

Dr. Stein and some fellow investors gather most months in a side room of Bertucci’s, an Italian restaurant 35 miles east of Wall Street here on Long Island, for seminars sponsored by the American Association of Individual Investors. September’s guest speaker was Marvin Appel, an anesthesiologist-turned-financial adviser. His pitch: Invest in dividend-growth stocks, emerging-market funds, junk bonds and mortgage real-estate investment trust preferred stocks, vehicles that can offer higher returns than plain-vanilla, fixed-income investments but typically come with more risk.

Wayne Roth, a 68-year-old dentist who lives in Roslyn, N.Y., also on Long Island, told his tablemates over pizza and salad that he had 65% in stocks, most of which pay out dividends. He said he knew the allocation was high for his age, but he was “comfortable psychologically with that. If I bought bonds I wouldn’t be comfortable.”

Dr. Roth hasn’t stopped working. He said he had amassed a healthy nest egg, was frugal and avoided extravagances. Yet he was worried about how long the low-rate environment would last, and about trying to increase his wealth as much as possible through his stockholdings.

The mortgage on Dr. Stein’s Huntington, N.Y., home is paid off, but other fixed living costs continue to climb. Medical costs are making up a bigger chunk of his monthly budget than he expected. Food costs also have to be kept in check. He is happy when he can buy Perdue chicken from the grocery store for 99 cents a pound compared with the usual $1.50.

Dr. Stein wasn’t sold on the speaker’s pitch, which included a company that pays hefty dividends yet has still fallen more than 20% in stock-market value in the past decade. Although Dr. Stein still shows up to meetings one Wednesday evening a month, he worries about market timing and about putting money into the new “it” investments.

“I go to those meetings now for the pizza,” he said.

Click here for the original article from Wall Street Journal.

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