Robert Warner

The Retirement Income Challenge: Investing for Retirement in a Low Yield Environment

In an ideal situation, retirees seeking to live off of the income generated by their portfolios never have to tap principal. Historically, this has meant an income-oriented portfolio filled with bonds, dividend paying stocks, or annuities.

Unfortunately, in today’s environment it’s hard to generate the kind of income retirees need from this type of portfolio. Not too long ago, an investor could expect income of more than 5% on an income-oriented portfolio. Today, that return is likely less than 2%. Two percent of a $2 million portfolio is just $40,000 annually.

There’s also another problem with an income-heavy portfolio in today’s environment: portfolios may be too concentrated in an effort to seek income. If a portfolio is not diversified it may expose retirees to more risk in higher yielding or longer-duration bonds than they realize.

In recent markets, investors have either had to adjust expectations or make changes to their investing approach. We encourage maintaining diversified portfolios and working to generate income with the help of these strategies:

Tilt bond portfolios toward credit – A prolonged near-zero interest rate policy has driven down yields on U.S Treasuries. U.S. government bonds are considered among the safest in the world. With global uncertainty and investors’ flight to quality, the price of U.S. Treasury bonds has been driven up and the yield, conversely, remains low. We’re tilting portfolios away from Treasuries and toward high-quality corporate bonds that offer higher yields.

Consider annuities – Some people decide to set a portion of their savings into purchasing an annuity. Annuities are insurance products that can create guaranteed income, pay a fixed monthly payout throughout your entire life and may ease your risk of outliving your funds. However, they are not without drawbacks. Annuities can have relatively high fees and long holding periods. Long holding periods not only take away immediate access to your funds, they also have a greater inflation risk – especially in the current low interest rate environment.

Add dividend paying stocks – Utilities and blue chip stocks are known for their dividend payouts. Unfortunately, increased demand for these stable dividend paying companies has driven prices up and dividend yields down. Some dividend-oriented stock funds can generate dividend income of as much as 2% while also offering the potential benefit of capital appreciation of the underlying stocks.

Seek an alternative route – Alternative allocations that are non-traditional, higher-yielding investments such as REITS (real estate investment trusts), MLPs (master limited partnerships) or closed-end funds (CEFs) may add additional diversification and income. These should be considered within your risk profile and limited to the appropriate percentage of your overall portfolio.

Keep a portion of your investments in equities – Given expanding life expectancies, your portfolio may need to last 20 to 30 years or more. Based on risk tolerance and age, it is not uncommon for retirees to continue to keep a percentage of their total assets invested in a well-diversified portfolio of U.S. and international equities that can generate higher returns than bonds or more conservative investments. Stock portfolios can provide capital growth, and if need be, you can sell shares to generate additional income.

Continue to work part time in retirement – More and more retirees find a part-time position where they can remain engaged professionally while earning a paycheck. This can help postpone drawing Social Security benefits until as late as age 70 (every year you delay can raise your yearly benefits by 8 percentage points.)

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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.