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.
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Street Journal.