By Timothy L. Dameron
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. But that's a far cry from today's market.
Interest rates on the 10-year Treasury now are less than 1 percent. That doesn't even keep up with the past year's inflation rate of 1.3 percent. 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:
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.
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.
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.
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.
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 portfolios ... 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.
Timothy L. Dameron MBA is a financial advisor with Six5 Financial Planning Group, a financial advisory practice of Ameriprise Financial Services Inc. in Rocky Mount.