by Scott J Greenberg, CFP®, RICP,
ChFC, Scott J. Greenberg Private Wealth Management
A lot has changed since the last generation retired. Unfortunately,
most of these changes have made it more difficult for hardworking individuals to
retire the way they’d like. Many believe interest rates will begin to rise for
the first time in many years. Pension plans, once an expected entitlement at
the end of a long career, have mostly become a thing of the past. Americans are
living longer as medical science continually provides innovative solutions to
once fatal diagnoses-but it’s not free. Allow me to touch briefly on some of
the challenges these topics present to retirees and pre-retirees.
When talking heads or colleagues at the water cooler refer
to “interest rates” in general, many may not mention or may not know what exactly they are referring to. The most
frequently used metric to measure interest rates in the U.S. is the 10-Year
Treasury note. Put simply, this is the interest you earn for allowing the U.S.
government to hold your money for 10 years. In April of 1953, the 10-Year Treasury
note yielded 2.83%. After a not-so-steady climb over about 28 years, the
10-Year Treasury peaked in September of 1981 at 15.32%. And, after a
not-so-steady fall that followed, we’ve seen rates hover between 1.88% (January
2015) and 2.36% (June 2015) this year (https://research.stlouisfed.org/fred2/data/GS10.txt). So why do we care?
Interest rates have a significant effect on the options
available to investors and retirees. The most frequently talked-about effect
may be the relationship between interest rates and bond prices. Put simply,
most bond prices have in inverse relationship with interest rates. That is, as
rates go up, prices fall, i.e. your bond holdings lose value. Traditionally
most people tended to have more of their money in stocks when they were younger
and more of their money in bonds as they got older. So, if the plan was to be
mostly in bonds in retirement, and we know that some bond prices may fall as
interest rates rise, this will be an important consideration as you examine
your particular financial needs, goals, and time horizon.
The other challenge associated with bonds and interest rates
in retirement has to do with the folks who are using the bond coupon, or “payment”,
for income to live on. This is a relatively simple challenge to identify; with
interest rates so low you’d need a fortune to provide the income you’re looking
for. In April 1953 if you had a bond that paid interest equal to the 10-Year
Treasury, you could invest $500,000 and live on interest of $76,600 (15.2%) per
year for the duration of that bond. Today, if you have a $500,000 bond that
pays interest equal to the January 2015 10-Year Treasury (2.25%), you would receive
income of $11,250 per year, of course, as we all know, past performance is
never an indication on guarantee of future results.
Not only do folks need income, but they need it to last
longer than ever. Upper middle class
couples age 65 today have a 43% chance of one or both surviving to age 95 (http://time.com/money/3481760/longevity-life-expectancy-longer-gap/). If you have a pension with inflation growth,
you may only need to supplement it a little, or not at all, which is
great! However, fewer and fewer retirees
have or will have the pensions that our grandfathers enjoyed, which means that
retirement is mostly self-funded. Certainly, stocks can potentially provide
long term growth but they also come with an added degree of risk.
Some people have heard of the “4% rule” for taking
distributions from a retirement portfolio.
This theory projects you would be able to take 4% from a balanced
portfolio with the likelihood of not outliving your money. The problem is that this rule was created in
the 1990s when interest rates were higher and people weren’t living as long (http://www.cnbc.com/2015/04/21/the-4-percent-rule-no-longer-applies-for-most-retirees.html). Even if the rule could work, and all investor
portfolios were created equally, that may not provide sufficient protection
from inflation risk.
It takes more than stocks and bonds to be successful in
today’s environment. Luckily, there is an
entire industry that fights against the risk of outliving the money you’ve worked
your life to accumulate- with innovative strategies, platforms, and products
that may not have been necessarily available to or needed by your
grandfather. It all starts with
identifying some of the risks so that you are in a position to suitably address
them. The time value of money constantly
reminds us that the sooner we start saving, the better. And, by helping to take advantage of
tax-favored ways to save and invest, folks can effectively address their
financial and retirement goals over the long term. Those planning to retire in the next 10 years
should consider meeting with a financial professional. Those in retirement
should probably consider a “check-up” of their current retirement strategy with
a financial professional to identify any gaps that can possibly be filled.
information should not be construed as investment advice. It is not
possible to invest directly in an index. All economic and performance data is
historical and is not indicative of future results. Scott Greenberg
offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member
FINRA, SIPC, offers investment advisory products and services through AXA
Advisors, LLC, an investment advisor registered with the SEC, and offers
annuity and insurance products through AXA Network, LLC. AXA Advisors and
its affiliates and associates do not provide tax or legal advice or services.
Individuals may transact business and/or respond to inquiries only in state(s)
in which they are properly qualified. AGE-109653(12/15)(exp.12/17)