Rate Changes Don’t Have to Derail Your Retirement Plans
Careful planning and income diversification can help keep you on track.
A pandemic-stricken economy and an aging population with 10,000 baby boomers turning 65 every day are not a harmonious mix. For those nearing or living in retirement, and those careful savers with their ducks in a row, the Federal Reserve’s decision to keep interest rates lower for longer may trigger a hunt for yield.
In this environment of ultra-low interest rates, investments like Treasury bonds aren’t yielding much, with CDs and money market accounts following suit. However, there are still opportunities available for those eyeing a shift into less risky assets. Patience, calm and perspective can help you navigate the terrain.
Brush off generic advice
If you don’t yet have a financial strategy for retirement, you’re not alone. Nearly 46% of retirees surveyed amid the pandemic said they don’t have a plan, according to the Transamerica Center for Retirement Studies.
A modest 12% of retirees said they had a strategy in writing. Others may plan to rely on catchall advice such as “own your age in bonds,” swapping the growth potential and risk of stocks for relatively stable bonds as you get closer to leaving the workforce. But this tip is much less useful today – and perhaps never was.
Instead, professionals recommend a goals-based strategy that allows you to align your time horizon and your investment mix, helping you calibrate the amount of risk you’re willing to take. Such fine-tuning becomes more essential in an era of low rates and market volatility.
See the silver lining in bonds
For years, conservative investors have been challenged by low short-term interest rates. Should they begin to rise, fixed income investors will be reminded of the inverse relationship of bond values and interest rates. As interest rates start inching up, bond prices generally decline. This has some investors sitting on the sidelines waiting for that to happen.
What these investors are forgetting is that high-quality bonds, such as investment-grade bonds, still provide predictable income no matter which direction interest rates go. The “fixed” nature of individual bonds gives investors a choice to simply hold their bonds to the maturity date and receive par value should interest rates rise, Raymond James analysts state.
“As the equity markets hit record highs on a regular basis, it is important to remind yourself why you allocate a percentage of your assets to fixed income,” Doug Drabik, managing director of Raymond James fixed income research, wrote in January. “Most important is preserving the wealth you just accumulated.” The thinking goes like this: When the funds you’ve earmarked for short-term needs are invested in low-risk, low-volatility investments, you may feel more comfortable taking on risk in the rest of your portfolio.
Combine multiple income streams
During our working years, we become accustomed to relying on a single paycheck. But in retirement, creating diverse sources of money becomes key. There’s Social Security, of course, but think bigger. Rental income, part-time work and investment income from annuities, bonds and dividend stocks can play a part in funding your preferred retirement lifestyle. Hope and possibility remain.
In the Transamerica survey, retirees pointed to income sources that included savings and investments, real estate, 401(k)s and IRAs, Social Security, company-funded pensions, home equity and paid work. With multiple streams of money coming in, you can better safeguard against sequence of returns risk: the possibility that you’ll have to withdraw funds at the same time your portfolio is losing value. Adjusting your withdrawal rate during market declines can help keep your investments intact so you don’t miss out when the market rebounds.
Like a stone in a pond
“At all times, in all markets, in all parts of the world, the tiniest change in [interest] rates changes the value of every financial asset.”
Though famed investor Warren Buffett spoke these words decades ago, they have extra resonance in the current investing landscape. With a thoughtful, documented retirement strategy and smart diversification, you can be prepared for the ripple effect of rates.
Learn more about the low-interest era at RaymondJames.com/Rate-Expectations.
Sources: Raymond James Fixed Income Research; Pew Research Center; 2020 Transamerica Retirement Survey of Retirees; Fortune magazine
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