Over the last several years, the landscape for yield in retirement has changed drastically with a sharp decrease in rates in the last year. Just to give you an idea, the widely followed 10-year Treasury note was around 1.729 percent a year ago vs. (at the time of this writing) .670 percent. This has had a dramatic impact on everything from certificates of deposit and mortgages to bonds.
Pair this data with projections from the Congressional Budget Office in a recent article in The Wall Street Journal, which cited weaker growth and significantly more red ink over the next 30 years than what had been previously forecasted, and you have a situation that seems to align with the most recent statement from The Fed regarding rates being low for a while. Another fact cited in this WSJ article was that debt, as a share of gross domestic product, is forecasted to hit 195 percent by 2050, which is 45 percent higher than the CBO projected just one year ago.
Obviously, a lot of this has to do with COVID-19 and the measures our government has taken to keep credit markets functioning properly; however, with COVID-19 spending, along with projected rising interest costs and higher spending on Social Security and Medicare for our aging population, you can see how this number becomes daunting.
This increased government debt load only adds to the already depressing future for rising yields. The CBO is also projecting slower economic growth. Typically, in slow growth environments rates are lowered to spur economic activity, increasing gross domestic product, and as this heats up, rates are raised to keep the economy from overheating. If the CBO is correct in all their forecasting or even somewhat correct, all of this means this as a retiree or someone looking for more yield: Don’t bet on it anytime soon.
You may be asking. ‘What does all this mean for me if I’m retired or about to retire other than my fixed income yields and savings at the bank will most likely yield lower for longer?’
Another consequence of this low-yield environment has sparked a big debate over whether or not the traditional 60/40 portfolio is now obsolete. Traditionally, retirement savers may place 60 percent of their portfolio into a mix of growth and dividend-paying equities with the remaining 40 percent going into safer fixed income assets, which could act as ballast in times of stress and give enough yield to give an investor a positive inflation-adjusted return.
According to an article in Financial Times, Vincent Deluard of StoneX Group was quoted as saying that inflation-adjusted returns could be just a fraction of the 8.1 percent enjoyed in the past decade from a 60/40 portfolio.
In the same article from Financial Times, the writers go on to say that since 1980 a 60/40 portfolio has returned a compounded annual growth rate of 10.2 percent. Now, with bonds as a whole yielding so little, asset managers are looking at ways to restructure this time-tested model.
We are beginning to see a shift into more asset classes inside portfolios, as private equity, emerging market debt, preferred stock and a higher concentration to high dividend paying stocks. Obviously, the reason for this shift is to help generate more yield for income, especially with people living longer in retirement.
Another conversation that is going on at this time is learning how to live off less. The fact is that some people aren’t comfortable with these other asset classes or a higher concentration into stocks, and for them, a lower withdrawal rate is a given.
I recently read a Consumer News and Business Channel article citing Warren Buffett’s advice that investors should not reach for yield beyond their risk tolerance, even with interest rates so low and stocks seemingly the only place to get a return.
Buffett went on to say, “If you need to get 3 percent and you can only get 1 percent, the answer is ... you should always adapt your consumption to your income.”
The bottom line is that today is a very tough environment that could be here to stay for some time. Some people will be comfortable going down in credit or upping their allocation to dividend paying stocks, etc., while others may have to get comfortable living off less yield.
Now, as much as any time in the past, having these conversations with your advisor is prudent and will be well worth it.
Information from The Wall Street Journal at wsj.com/articles/new-cbo-projections-show-weaker-economic-growth-11600711886 and Financial Times www.ft.com/content/fdb793a4-712e-477f-9a81-7f67aefda21a was used in this article.
~ Lee Williams offers products and services using the following business names: Nowlin & Associates – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Nowlin & Associates or another entity herein.
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