The Fed and its central bank cronies are outright dangerous.
Bill Gross of Janus Capital may have said it best when he told Barron’s in April, “Today’s ultra-low interest rates are destroying savers who are the bedrock of capitalism.”
Forget capitalism. These low interest rates are destroying the retirement dreams of many who worked hard their entire lives for their now not-so-golden years.
And the devil, as they say, is in the details.
The Death of the 4% Withdrawal Rule
When I was working in the investment business, there was a maximum with regard to retirement.
If a person’s portfolio was set up properly, they could safely withdraw 4% from their retirement account for living expenses, annually. The odds were 90% to 95% in the investor’s favor.
The most common allocation was 60% stocks, 40% fixed income.
Thanks to today’s low interest rates, that maxim is out the window. Follow it, and you’ll run out of money.
With the near-zero interest rates, the safe withdrawal rate is more like 2% to 2.25% in order for an investor to avoid outliving their retirement money with that 60/40 allocation.
Keep on Punching the Clock
This means that anyone near or in retirement had better do lots of planning.
If a person approaching retirement is in good health, it’s increasingly economically smart to continue working for as long as possible. This way, a person can stave off tapping into Social Security and, thus, when they do retire and begin collecting, the monthly checks will be more substantial.
This is exactly what many Americans are doing. In fact, according to the Bureau of Labor Statistics, about 20% of Americans 65 and older are still working – an increase from years past when citizens were more comfortable retiring earlier.
And, as surveyed by the Transamerica Center for Retirement Studies, for approximately half of those people staying in the workforce past 65, the reasons were strictly financial.
Revamping Retirement Allocation
But what about those who can’t continue working for any extra years or who are already in retirement with looming financial issues?
Again, it all comes back to planning. It’s crucial to think not only about allocation, but also about what’s actually in a portfolio.
As I detailed in an earlier article, for those people within two years of retirement – or two years into retirement – the allocation towards stocks should be very low.
Keeping money parked in something boring but stable – like Treasuries – is the safest option in the years just before and after retirement. These are usually guaranteed to be a reliable return of capital.
The financial crisis of 2008 left countless households devastated by the sudden implosion of investments. I aim to help avoid repeating the mass destruction of innumerable nest eggs with my advice for more reliable investment choices in prepping for retirement.
It’s more crucial than ever to maintain the capital necessary to preserve quality of life in retirement.
Once sound investments for the years just before and after retirement have been chosen, retirees must decide what to have in their portfolios after those years have passed.
But this is where the decision-making becomes challenging. The makeup of a portfolio depends on an individual’s macro view of the global economy – not to mention individual risk tolerance.
The advice I have to offer regarding the fixed income portion of a retiree’s portfolio is based on my own experience and my personal macro view.
Regardless, I believe that central banks will continue their Alice in Wonderland policies – that is, interest rates will continue to fall. Keep in mind that even if the Fed raises short-term interest rates, long-term interest rates are still controlled by the markets.
The harsh fact remains: There are now $10 trillion worth of foreign sovereign bonds with a negative yield. So where will overseas institutions, like pension plans and insurance companies, come looking for a positive yield?
The answer is – the United States bond markets.
So no matter what the Fed does, long-term interest rates will continue falling. Perhaps to 1% on the 10-year bond within a year. In which case, an exchange-traded fund (ETF) like the iShares 20+Year Treasury ETF (TLT) looks like a sure-fire winner and a promising move for someone several years into retirement.
Foreign interest should also put a bid under long-term investment-grade U.S. corporate bonds. Two ETFs in that category are the Vanguard Long-Term Corporate Bond ETF (VCLT) and the SPDR Barclays Capital Long-Term Corporate Bond ETF (LWC).
Remember: When it comes to securing the finances needed in order to ride off into the retirement sunset, caution is essential. They’re not the years to be playing fast and loose with high-risk investments that could lose it all, especially when one’s earning years have come to an end.
P.S. Stay tuned. I will be discussing the stock portion of a portfolio in an upcoming article!