|Donald Jay Korn|
Conventional wisdom has it that today’s low investment yields tend to harm low-income retirees, who receive little or nothing from the bank accounts and bonds they had counted on for spending money. That’s certainly the case, but a recent study from the
The EBRI study compared a world with historic investment returns, including a 2.6% real (after inflation) return from bonds, with a world where sustained low yields dropped the real bond return to -1.4% a year, as was the case early in 2013. Counting all assets—investments,
What’s more, “the lower interest-rate scenario had a progressively larger impact on simulated retirement readiness as income rises,” EBRI reported. For the highest income quartile, the percentage of life paths projected to run short of money rose from 14.5% (historic returns) to 31.8% (sustained low yields). Similarly, the more years workers had to build a retirement fund, the greater the impact of low yields. For those with 20 or more years until retirement, negative projections rose from 13.9% of those simulated life paths to 36.4%.
“From our perspective,” Close said, “the possible problem comes from the fact that investment returns depend so much on dividends and interest income.” In the accumulation mode, that income is reinvested, while retirees rely on dividends and income for spending money. “When yields come down, total returns come down,” he added.
Consequently, Close has become more tactical in his approach to investing. “Now we look for current cash flow before growth of cash flow and value.” He said the search for cash flow has led to more emphasis on assets such as REITs, MLPs, high-yield bonds, and foreign bonds.
Dealing with a low-yield environment is a concern for both retired clients and for those still building a retirement fund,
As for those clients still building their retirement fund, Thoma said that his firm had recommended reducing longer-term fixed income holdings while adding to short- and intermediate-term issues. “This is likely to provide more preservation of principal and increase the amount that can be reinvested in the future, perhaps at higher rates. For all of our clients, we urge regular meetings with their advisors to see if they’re still on track to reach their goals, or if changes need to be made. That’s the purpose of working with a financial advisor.”
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