Investing used to be easier for retirees. Many sought to
generate enough income from the yield created by bonds or short-term
investments like money market funds to meet their living expenses.
This was easier in 1981, when yields, another term for
interest, on the benchmark 10-year U.S. Treasury note reached 15.8 percent. In
early 1990, the yield was still impressive, at 9.0 percent.(1) But that’s a far
cry from today’s market.
Interest rates on the 10-year Treasury now are less than one
percent. That doesn’t even keep up with the past year’s inflation rate of 1.3
percent.(2) A caution for investors is to avoid “reaching” for yield by putting
significant assets in fixed income securities that generate more income. For
example, high-yield bonds (also known as “junk” bonds) may create more income,
but they are typically subject to greater price volatility than Treasury bonds.
In today’s historically low rate environment, you may want to venture into the
bond market with caution.
Looking for alternatives
Given the record low interest rates, you might want to
consider other strategies to generate retirement income that is sufficient to
meet your ongoing needs, but also sustainable over the course of your
retirement. Here are five strategies to consider that may help you more
effectively manage your retirement income stream.
#1 – Maximize Social Security
The later in life you begin collecting Social Security (you
can start between the ages of 62 and 70), the higher your monthly benefit. If
you can delay the start date for collecting Social Security, it can contribute
more to your income stream.
#2 – Give dividend-paying stocks a closer look
Since most of us can expect to spend 15-20 years or more in
retirement, the growth potential of stocks is still important in a retirement
portfolio. Stocks that pay a competitive dividend (at a level that exceeds what
you can earn from most bonds) can help generate income and a reliable form of
“built-in” return in your equity portfolio.
#3 – Try to boost Roth IRAs
Distributions from Roth IRAs have the potential to be free
of taxes. On an after-tax income basis, you won’t need to draw as much from
Roth IRAs as would be required from traditional IRAs or workplace retirement
plans, which are taxable. Try to boost the value of your Roth accounts prior to
retirement through regular contributions and by converting traditional IRA
assets to Roth IRAs.
#4 – Consider a “bucket” strategy for your investments
Segment your retirement portfolio into three “buckets” that
represent different time periods when you’ll need to tap those dollars. Money
needed in the short-term (the next two to three years) should be held in fairly
liquid vehicles that aren’t subject to fluctuation in value. A second “bucket”
is targeted for money needed three to six years in the future. It can be
invested in vehicles that generate a higher yield, but with limited fluctuation
in value. The remaining funds (held seven years or more) can be invested in a mix
of stocks, bonds and other investments as you accept more risk in search of
higher returns.
#5 – Add stability with annuities
Annuities can generate a consistent stream of income for a
set period of years, over the course of your lifetime, or the lifetime of you
and another person, typically your spouse. Many people use annuity income to
supplement funds needed to cover essential expenses they face in retirement
since it is a reliable cash flow source. Be sure you understand all applicable
costs and fees of annuities before making a purchase.
In many instances, it makes sense for retirees to have
exposure to fixed income in their portfolio. That said, retirees may also need
to need to look for additional sources of yield to make sure their portfolio can
last throughout their retirement and keep up with inflation. Work with a
financial advisor to make sure your investments align with your situation and
long-term goals.
(1) Source: Federal Reserve Bank of St. Louis, 10-Year
Treasury Constant Maturity Rates, 1960-2020. (fred.stlouisfed.org/series/DGS10)
(2) Source: U.S. Bureau of Labor Statistics, The Economics
Daily, “Consumer Prices Up 1.3 percent in 12 months ended August 2020,” Sept.
17, 2020.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor
and CEO with Whitlock Wealth Management, a private wealth advisory practice
with Ameriprise Financial Services, LLC.
He specializes in fee-based financial planning and asset management
strategies and has been in practice for 25 years. To contact him visit whitlockwealth.com, call
877-WHITLOCK or email bennett.c.whitlock@ampf.com. Offices are located at 12848 Harbor Dr.,
Suite 101, Lake Ridge, VA 22192 and in Historic Downtown Manassas at 9073 Center
St., Manassas VA 20110.
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