July 28, 2021

Wealth Matters: Low Bond Yields Make Building a Portfolio Harder

United States Treasury bonds and other high-grade bonds used to be the safe way for older investors to generate income in their portfolios. But yields on these bonds are now so low, they are not generating much income.

The Federal Reserve’s announcement on Wednesday that short-term interest rates would remain close to zero through 2014 confirmed that there was little hope in the near term for much change in bond income.

But it is not easy to find something to replace that income. Other options are not nearly as safe. The wild gyrations in the stock market at the end of last year further unsettled investors who did not need much to remind them of their losses from 2008.

“We think the search for yield will continue for a few structural reasons,” Barbara M. Reinhard, chief investment strategist at Credit Suisse’s private bank, said.

The first, she said, is low interest rates. But the second reason is what keeps many retirees awake at night. “You have this aging population in the U.S. saying: ‘I need to supplement my retirement through income generation. My life expectancy is long. I retired at 65, but I could live another 18, 20 years,’ ” Ms. Reinhard said.

So what can investors, particularly those nearing or in retirement, do to guarantee a big enough and regular stream of income? Here is a look at three variations.

LESS RISK It may seem obvious, but low risk means lower return. Tom McNulty in Scottsdale, Ariz., who worked in the automobile and mortgage businesses before retiring six years ago, found an adviser who practiced a variation on this theme.

Mr. McNulty said he depended on income from his portfolio for about 70 percent of the living expenses for him and his wife, Peggy. His adviser keeps four years of expenses in safe but low-yielding bonds, leaving the rest of the portfolio to grow.

“It wasn’t just providing us the income but protecting the asset base we did have,” Mr. McNulty said. “We hope to live another 20 or 30 years. We learned that 70-30 in stocks and bonds in the accumulation phase and reversing it in the distribution phase is just not going to work.”

Jeremy A. Kisner, president of Sure-Vest Capital Management, which works with Mr. McNulty, said his firm wanted clients to feel as if they had a pension even if they did not. “What we’ve found is that retirees who have a pension sleep really well at night and they’re happy,” he said. “The clients who don’t have that worry about running out of money, no matter how much money they have. We try to create a pension for them.”

Mr. Kisner said his firm settled on putting aside four years of income for two reasons: If the growth part of the portfolio has a down year, money will not have to be moved into the safe assets, and the firm found that five years of safe money was too much, given the need to increase the rest of the portfolio through retirement.

“The strategy of ‘I’m just going to live off this interest’ was never the right strategy,” Mr. Kisner said. “This low-interest environment has laid that bare.”

MORE INCOME Henry Fleischer, a retired engineer who lives outside Detroit, has opted for a strategy that will provide more income now, require him to dip less into the principal of his retirement account and still have little exposure to equities.

His sizable nest egg is divided among investments in three income-producing assets: real estate investment trusts, master limited partnerships — most commonly companies involved in the transportation of natural resources — and annuities.

“We don’t need to be superaggressive,” said David B. White, his adviser, who runs David B. White Financial. “We don’t want the volatility of the stock market.”

Last year, REITs had yields of 4.5 percent, according to the FTSE Nareit index, and master limited partnerships had 5.6 percent yields, according to the Alerian MLP index. But neither is risk-free. Another downturn and collapse in the rental market could hurt REITs, and master limited partnerships can be volatile; they fell as much as the equity markets in 2008.

What is telling about these nervous times is that Mr. Fleischer should not have to worry. He is 89, and while he wants to make sure his wife has enough money if he dies first, he is less concerned about his two sons, who are successful and self-sufficient. Still, his portfolio lets him sleep well.

Article source: http://feeds.nytimes.com/click.phdo?i=2b8f19506a148fb0868ec4bcd3f1ffcd

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