Generating Income in a Low Interest Rate Environment
If you’re getting ready to retire or are currently retired I’m sure you are well aware that we are in an environment with record low interest rates. You have probably been to a bank or credit union and have asked them what type of investments they have that can provide you an income now that you aren’t working, I’m guessing you were a bit disappointed. Savings accounts, CDs and money market accounts that have been used as a means for a reliable source of income are now providing very low returns. Typically the returns aren’t anywhere near high enough to even keep up with inflation.
In the past retirees or investors may have reacted to this situation by gearing their portfolios towards capital appreciation. That idea seems to have gone out the window due to the two major bear markets since 2000. Investors are now more risk averse than ever. The next thing an investor may consider is bonds. Often investors believe that there isn’t any risk with bonds, rule #1 with bonds: they are inversely related to interest rates. That means as interest rates rise the price of a bond declines. Also, the longer a bond’s maturity the more sensitive its price is to changes in interest rates.
So, what does one do? First step is to take a look at your own situation and identify your own income sources. Social Security, pensions, annuities, part-time work and rental properties are some examples of income one may be receiving. Next is to identify your needs and wants to determine your monthly financial outlay. Perhaps your income sources you identify will be enough to cover both your needs and wants. If that isn’t the case, take a look at your retirement assets, these could include IRA’s, 401k’s, savings accounts, brokerage accounts etc. The idea with your assets is to align how they are invested to provide an additional income stream to help bridge the gap between your reliable income and needs/wants.
To generate an income to bridge that gap an investor may consider both the stock market and the bond market. Within the stock market it may make sense to invest in larger companies that are known for paying a dividend to its shareholders. Although the dividend isn’t guaranteed you can look for companies with a long history of not only paying a dividend, but in some cases consistently increasing it every year. Another advantage to dividends is their favorable tax treatment, currently 15% for top tax brackets. Within the bond market taking a look at bonds that have a shorter maturity and are less sensitive to rising rates might be a good idea.
There is no right or wrong answer when trying to plan for an income during retirement. Everyone’s needs, risk tolerance and investment return expectations are different. I would recommend you take time to visit with your financial advisor to help you build a personalized plan for retirement.
Any information is not a complete summary or statement of all available data necessary for making an investment
decision and does not constitute a recommendation. Any opinions are those of Shaun Peterson and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional. CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. There is an inverse relationship between interestrate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.