Retiring Zero Interest Rate


Not long ago, the prescription for investing for retirement was simple. Save as much as possible while working, and gradually become more conservative with your investments as retirement approaches. This strategy was frequently implemented in the past by converting growth oriented portfolios, which were comprised mainly of stocks, into income oriented portfolios, which focused more on fixed income or bonds.

Earn Now, Collect Later May Fall Short Due To Low Interest Rates

Ideally, a portion of every dollar earned would be set aside for later in life, when your ability to generate income slows or comes to an end. Savings generate earnings of their own, which, when reinvested, gain the benefit of compounding over the years. During retirement, the portfolio would be allocated more towards bonds for safety and the ability to generate dependable income to pay bills and cover other post-work endeavors. Unfortunately, investors are now faced with a low interest environment, where historically safe investments are not capable of providing the income they need.

 Even for investors who have made all the right decisions during their accumulation phase, transitioning to retirement is often a major challenge. Converting your portfolio from a savings vehicle into one that can generate a consistent cash flow for living expenses presents a major hurdle.

The First Step To Retirement - Know How Much Money You Need

The critical step for anyone approaching retirement is to develop a realistic estimate of how much income they will need their portfolio to generate to support their intended lifestyle. The math is fairly simple, but the results can be heartbreaking for those who have had a difficult time saving or who have acquired unsustainable consumption levels. The reality of what it takes to live comfortably must be addressed, well before retirement.

Retirement Portfolio Adjustments To Offset Low Interest Rates

In today’s interest rate environment, the source of post retirement income distributions will not be coupon payments on bonds. In addition, due to varied circumstances, bonds, which were once considered the safest investment, now carry a significant risk for the retiree. The primary risk is loss of purchasing power.

We are not advocating abandoning bonds. They will always play an important role in a retiree’s portfolio. Bonds are the ballast that prevents shifts in value during turbulent markets. However, bond investors today are being seduced to stretch normal credit and maturity parameters in the hopes of generating more income. Reaching for yield is where bond investors can get hurt.

Retirees must consider holding additional productive assets capable of protecting their future purchasing power and generating needed cash flow. In the current rate environment, post retirement portfolios should include a larger portion of stocks, real estate and other assets capable of generating cash and protecting purchasing power. While such investments do carry the risk of value fluctuation, selecting a diversified portfolio of securities, trading at reasonable prices and sharing income via dividends and capital distributions is a better strategy than the alternatives available in fixed income markets.

Stay Focused On What Matters. Forget About The Index

Investors in retirement need to focus on their portfolio’s ability to generate the cash they need to live. Forget about the index, what the S&P 500 is doing. What any index does from period-to-period is of little relevance to the retiree looking for dependable cash flow. An investor should ask themselves, is my portfolio doing what I need it to do for me today?