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Old 04-20-2013, 05:33 AM
 
Location: Central Massachusetts
6,533 posts, read 7,029,306 times
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Another aspect of retirement is how much we earn in our accounts that help to sustain income. In this artical found on Fox Business and also Money-Rate.com explains some of the trouble.

Your Retirement vs. Low Interest Rates | Fox Business

They have 5 points here and these should be talked about.

Quote:
[LEFT]1. Take a total return approach
Use a combination of income and investment gains when you start withdrawing from your portfolio, rather than counting solely on income. This is necessary because interest rates will no longer give you very much income, and because bank rates and even many bond yields are running below the rate of inflation. If you are going to keep up with rising prices, you will need to have a growth component to your portfolio.

2. Expect a lower withdrawal percentage
CD rates of 5 or 6% are gone, and this means it may not be sustainable to withdraw that much of your portfolio every year. A total return approach will allow you to withdraw more than your portfolio generates in income, but try to keep it less than 4% a year. There's no easy way to approach living with a lower withdrawal percentage. It either means saving more, or living on less in retirement.

3. Shorten bond durations
Duration is a measure of the effective length of the debt obligations you own. It's partly determined by a bond's maturity, but the income stream is also a factor. Now might be a good time to shorten bond durations in your portfolio. For one thing, the steady drop in bond yields in recent years has effectively lengthened the durations of bonds in general, so shortening up is one way to adjust for that. For another thing, the extreme low level of yields leaves bonds very vulnerable to price declines due to rising interest rates

4. Limit volatility
Even though income-oriented investments may play a smaller role in your portfolio, don't be tempted to go overboard into riskier investments. Withdrawing money can compound the damage from portfolio declines, so you will want to limit the volatility of your portfolio once you start taking money out.

5. Be prepared to adjust on the fly
This is no time for an auto-pilot approach. Since there is less certainty to total return than to income, be prepared to adjust your income target and asset allocation from one year to the next.
With even high-yield savings accounts yielding less than 1%, the deck is stacked against American savers today. But with some common sense and flexibility, you can adapt your retirement approach to this more challenging situation.

Read more: Adjusting Your Retirement Plan for Low Bank Rates
[/LEFT]
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Old 04-20-2013, 05:49 AM
 
Location: Near a river
16,042 posts, read 21,927,960 times
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My late mother used to refer constantly to the conditions before the Great Depression. She maintained in the last five years in her life that "pretty soon we will be paying the banks to hold our money." We used to laugh at her. Huh.
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Old 04-20-2013, 06:52 AM
 
Location: NC
1,873 posts, read 2,395,292 times
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I had always assumed that interest rates would at least keep up with inflation, as they have for most of my life. This stretch of negative real interest rates has been largely new territory and tough for all of us to navigate. We're all forced to take on more risk and/or plan for lower real returns. And it ain't over yet IMO...

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Old 04-20-2013, 06:56 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
34,647 posts, read 57,721,648 times
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Allocation is now a full time job... no time to 'retire'
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Old 04-20-2013, 07:00 AM
 
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for the most part rates have been negative after taxes and inflation.

according to an article in the journal of financial planning:


"Over the long run Treasury bill yields have generally moved with inflation. Most of the time, Treasury bill yields have been higher than inflation, providing investors with a positive average real return. For the 1954–2007 period used in this study, the average real return was a positive 1.20 percent. However, on an estimated after-tax basis, the average real returns became negative and thus did not preserve an investor’s capital. "



Treasury Bills and Inflation
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Old 04-20-2013, 02:06 PM
 
Location: Ponte Vedra Beach FL
14,617 posts, read 21,423,044 times
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Official CPI is now running 1.47% YOY. So the goal is to get at least 2-2.5% or so after taxes. My favorite "fixed income" investment today is long intermediate high quality tax-free munis (yielding 3% or more).* Note that the yields on munis are somewhat distorted - because they're one of the few things that Bernanke hasn't been buying hand over fist.

If you have a tax-deferred account - I like brokered CDs (3%+). Some people might prefer STRIPS. With perhaps some high yield ETFs (JNK/HYG) - and/or some dividend oriented ETFs (HDY/DVY/XLU/etc.). Or some dividend oriented stocks (if you're comfortable being a "stock picker" - I'm not). Note that I currently hold all of the things I've mentioned.

FWIW - I don't mind volatility in fixed income prices - as long as I'm holding individual fixed income instruments with fixed maturity dates. And I do trade the higher yielding ETFs (although not on a short term basis).

I don't agree with some parts of the article quoted in the original post. It makes no sense to depend on or realize capital gains as a "planning technique" - especially in a taxable account. Especially because no asset class "guarantees" a capital gain over any particular period of time (unless you're buying a bond at a discount and planning to hold it until maturity). It makes more sense IMO to keep a reasonable amount of cash on hand to meet living expenses for a reasonable period of time.

A few commentators have suggested recently that a 4% annual draw down on principal isn't sustainable today and I agree. I try to draw down no principal unless absolutely necessary.

The explanation of duration is substantially correct. But - I don't understand why shorter durations would always be preferable. To me - it depends on what a yield curve in a particular asset looks like (if I can get 1% for 4 years and 3% for 18 years and 3.2% for 30 years - I'm going with the 18 years). Also - what one's risk tolerance for volatility is during the life of a bond. If one wants shorter durations with higher yields - the best way to do it IMO is with cushion bonds (bonds selling at premiums). ASSUMING YOU UNDERSTAND THE CALL PROVISIONS 100% AND ARE WILLING TO ACCEPT THE WORST YIELD TO CALL/SINKING FUND (a yield to call/sinking fund at certain market prices can even be negative!).

FWIW - I find it very unfortunate that so many people for so many years relied on very short term fixed income investments. When yields were higher. And that they didn't "lock in" higher rates for longer periods of time. I've always tried to "lock in" yields when I thought they were high. OTOH - after years of low rates - well I have money rolling over from things I bought a long time ago - and have to do something with some of it. And everyone has to work with today's markets today - not yesterday's or tomorrow's. Robyn

*I would stay away from taxable Build America Bond munis. There are no new issues (the program was terminated). And the older bonds that are around on the secondary market generally sell for very large premiums. All BABs provide for extraordinary redemption at par if the federal subsidy for them ends. Which I consider to be a possibility (anything is possible when it comes to Congress these days). I don't mind holding on to the bonds that I bought at par or lower - but I would mind buying one at 115 today and winding up having it called a year from now.
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Old 04-20-2013, 02:23 PM
 
14,249 posts, read 17,876,117 times
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Last year our retirement money did 7.8% invested in a moderately conservative mix of bonds and stocks.

The income we derive is around 2.8%. The rest was capital appreciation.
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Old 04-20-2013, 02:26 PM
 
Location: Ponte Vedra Beach FL
14,617 posts, read 21,423,044 times
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Quote:
Originally Posted by mathjak107 View Post
for the most part rates have been negative after taxes and inflation.

according to an article in the journal of financial planning:

"Over the long run Treasury bill yields have generally moved with inflation. Most of the time, Treasury bill yields have been higher than inflation, providing investors with a positive average real return. For the 1954–2007 period used in this study, the average real return was a positive 1.20 percent. However, on an estimated after-tax basis, the average real returns became negative and thus did not preserve an investor’s capital. "

Treasury Bills and Inflation
The spread that I follow (it's more useful for my planning purposes) is the 10 year note minus the YOY CPI. It went negative in about May 2011 - stayed negative for about a year - and has gone between somewhat negative and somewhat positive since then. It's now at .23% positive. If you go to the 10 year STRIP - it's somewhat more positive at .43%.

Now compare this to historical norms and conventional thinking about these norms. The real rate of return varied a lot. But was traditionally thought to be neutral at 2% - low at 1% (don't buy) - and high at 3% (buy). The last time there there was a screaming buy using these parameters was in 2009 - when the real rate of return was 5%+ (4% on the 10 year + negative CPI). Robyn
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Old 04-20-2013, 02:44 PM
 
48,505 posts, read 96,629,449 times
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I think its goig to be interesting just whathappens to investment once interest rates start to rise.Some see the same happening as after the 70's recssion when a whole genratio retil investors left the markets. One only has to look at FED actions and results to see its not driving markets like expected. Add the investment needs of boomers retiring just startign and many thigns can change.
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Old 04-20-2013, 02:52 PM
 
106,122 posts, read 108,118,136 times
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Rising rates don't cause inflation they tame inflation.

What will happen to investments when rates rise all depends on the part of the cycle we are in.

Rates rising now would be an indicator unemployment and the economy are doing better. That is a good thing for investments.

We are so far away from high rates trying to tame a hot economy as well as boughts of high inflation as to not be an issue in the near term.
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