Political arguments aside, it is hard to argue that the Federal Reserves ‘rescue’ of the American, and indeed possibly the worlds’ financial life has left us with many challenges. Near the top of the list is how do people, particularly retirees, invest for income in a near zero interest rate world?
It wasn’t that long ago that you could find many financial vehicles that paid interest or dividends in the 6% to 8% range. Someone retiring with an IRA or 401(k) balance in the $500,000 range could receive as much as $30,000 to $40,000 per year in interest or dividends. Add that to Social Security and a pension, and you could be quite comfortable in your Golden Years. Fast forward 10 years….
While you could find relatively conservative investments in the 6% to 8% range before, we are now looking at 2%. Your portion of income derived from interest or dividends may have dropped 75% or more. For some, this means a shift in lifestyle. New York strip steak instead of Filet Mignon…. For others it may mean real hardship. To combat falling rates, many people have been forced to reach for higher yields, and this by definition translates into higher risk. Even with multiple rounds of Quantitative Easing, or as many call it, ‘Money Printing’, by the US Federal Reserve Bank, there still is no such thing as a free lunch.
To illustrate, the Janus Henderson Group studied how much portfolios designed for yield, or income, declined during the 2008 – 2009 financial crisis. They found that the portfolios hit hardest were those yielding in the 6% to 8% range, which declined on average 22% to 25%. Not only is this a significant loss for someone in retirement, but remember this was in a ‘normal’ world. I would argue that the risk levels associated with investments in that same range today are much higher. This could translate into even higher losses should we experience another financial event.
In order to maintain your standard of living, you might have invested in things that you wouldn’t have considered touching ten years ago. In many cases this was out of necessity. But you can’t be ignorant of the elevated risks. There may be more conservative alternatives available, but it requires thinking outside the box. Unfortunately, most people and many advisors, even after seeing two horrendous market declines in the past 20 years, have failed to learn anything new. What’s the definition of insanity?
If you have any questions you’d like me to address, email me at CJohnson@GuardianPlanners.com.
Chuck Johnson and his wife Beth have lived in the DuBois area most of their lives and have lived at Treasure Lake since 2009. Chuck holds the ChFC and CASL designations from the American College and is the owner and principle advisor of Guardian Planners, working in the financial services industry since 1988.
Charles W. Johnson is a registered with and securities are offered through Kovack Securities, Inc. Member FINRA / SIPC. 6451 N. Federal Hwy., Ste. 1201, Ft. Lauderdale, FL 33308 Tel: (954) 782-4771. Advisory services offered through Kovack Advisors Inc. Guardian Planners is Not Affiliated with Kovack Securities, Inc./Kovack Advisors, Inc.