Do you wish you had more money these days? You aren’t alone. Many retirees find that their income streams are insufficient.
Right now, interest rates are at rock bottom – and it appears they will stay there for the near future. With the federal funds rate near 0%, some of the classic conservative retirement investments – such as money market funds and CDs – aren’t even earning returns to keep up with 2%-3% inflation.1,2
Today, a little adjustment to your portfolio might lead to a better yield.
Growth investing is important even when you are retired. It makes sense to be conservative with your hard-earned retirement money. The dilemma is that you can be too conservative when investing it.
Some retirees adopt an extremely risk-averse investment approach. A trade-off comes with that decision: if your goal is to minimize risk, you may also risk minimizing your portfolio returns. If you owned a longer-term CD when the recession began in December 2007, the income from that CD has dropped by two-thirds since then.1
The goal is to find the middle ground – a level of risk that you can comfortably assume in pursuit of a return that translates to a better income stream.
While some retirees would like to bail out of equity investing, that may pose a risk in itself. As stocks and funds may return 10-15% (or better) in a good year, it is pretty hard to walk away from their potential. If you want improved cash flow, fixed-rate investments may not have the ability to provide it.
This is why you don’t want to abandon growth investing – the kind of investing with a foot in the equities markets, the kind you used to build your retirement savings. Many people in their 50s, 60s and even 70s are still in the accumulation phase – they still need to build up their retirement fund even as they need to withdraw income from it.
Remember the “Rule of 72”. You may have heard of this financial rule of thumb, often used to project inflation. At 4% inflation, the cost of living will double in 18 years, at 8% inflation it will double in 9 years, and so forth – whatever multiplies to 72. Inflation is about 3% right now, but there’s no guarantee it will stay there for the balance of your retirement. It wasn’t so long ago when consumer prices would rise by 5%, 8%, even 12% or 15% a year.
Your retirement income has to keep pace with this inflationary advance. If it doesn’t, you will be left with less and less purchasing power as the years proceed.
Imagine trying to live today on the amount of income you earned 15 or 20 years ago. Wouldn’t that be depressing? Wouldn’t your lifestyle suffer? Well, that is the outcome you risk having if your retirement income doesn’t increase with the times.
Factor in medical costs and life’s little emergencies, and the message is clear – you need more income for the future, not the same or less.
Where might a conservative investor find a better yield? The classic bearish move is to shift money from stocks into bonds, but bonds aren’t providing great yields today and their value will fall when interest rates eventually start to rise. There are other yield sources that may be worth a look.
*Real estate investment trusts (REITs) allow you to enter the commercial real estate sector without the hassles of property management. They give you a fractional ownership share of a major-league real estate portfolio, with potential for dividend payments and excellent returns. Private REITs are not publicly traded.
*Dividend stocks stood out during the recession, as investors turned to them for cash flow. Commonly, they are issued by established corporations in essential industries.
*Utilities. Investors often look to the utilities sector for a hedge as utilities stocks have the potential for nice dividends in good and bad market climates.
*Commodity futures. These include precious metals, oil and gas investments, green energy resources, crops and necessities such as timber and livestock.
*Currencies. When the dollar is weak, funds investing in foreign currencies get a boost as most funds out there are dollar-denominated.
You can invest in many of these asset classes not only via stocks and futures contracts, but via managed funds and exchange-traded funds (ETFs). ETFs are nice, as they don’t cost an arm and a leg to enter. They are tax-efficient, and as they trade on exchanges during the market day, they offer great liquidity and flexibility.
Ask about your options. In fact, ask me. I have helped other retirees assess and revise their portfolios, with the goal of rebuilding and/or growing their incomes and savings. Call me or email me today with your questions, or to arrange a time to meet. What you learn might make you feel better about your financial future.
Robert J Cryts may be reached at 978-256-1820 or firstname.lastname@example.org
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2 - www.forbes.com/sites/investor/2012/03/13/what-to-do-about-low-interest-rates/ [3/5/12]