4 Steps Retirees Can Take In Response To The U.S. Fed’s New Policy

Forbes - August 31, 2020


This past week, the U.S. Federal Reserve made a significant change to its policy on interest rates and inflation. While this change has significant implications for all investors, the policy shift is particularly important for those in retirement.

Before the new policy, the Fed set an inflation rate target of 2%. This meant, in part, that as the economy picked up and employment increased, the Fed would increase the federal funds rate. Under the new policy, however, the Fed will seek to "achieve inflation that averages 2 percent over time." That may not seem like a big change, but it is.

It means, among other things, that the Fed could allow inflation to rise by about 2%. It would take this action, for example, after a prolonged period of inflation well below 2%. The decision has several implications for our economy. Perhaps most significantly for retirees, it could mean an even longer period of interest rates near zero.

Given this change in Fed policy, here are four things those in retirement should consider. 1. Retirees Should Focus on Total Return Investing

Among retirees and even retirement experts, income investing is a popular strategy. This approach has an initial appeal. By living off of dividends and interest, a retiree can avoid selling stocks and bonds to fund retirement. This approach feels safe.

Even under a normal economic environment, however, it has significant shortcomings. Chief among them is that the overall return of such a portfolio almost always underperforms a total return portfolio.

And by total return, I simply mean a portfolio that does not seek out investments that pay higher than average dividends or interest. An example of a total return portfolio would be a portfolio consisting of a diversified group of index mutual funds that mirrors the overall market. Such a portfolio will certainly pay dividends and interest. It will not, however, pay a higher than average rate of dividends and interest.

I believe this is the best approach for most retirees in all economic conditions. In fact, the studies supporting the 4% rule of retirement spending use a total return approach to investing. Using an income approach, if it yielded a lower total return, could jeopardize a retiree's use of the 4% rule.

Total return investing is even more important with interest rates near zero. It's impossible for most retirees to live on dividends and interest alone where dividend yields are around 2% and bond yields near zero. By focusing on a total return investment approach, retirees can benefit from the capital appreciation of their investments, while also enjoying some level of dividends and interest.

2. Retirees Should Hold At Least 50% In Equities

For most retirees, an equity allocation of somewhere between 50 and 75% is ideal. This is what virtually every study concludes that looks at the 4% rule and its many variations. Even under normal economic conditions, a portfolio with less than 50% in stocks or more than 75% has a significant risk of depletion during retirement.

Given the low interest rate environment, a 50 to 75% stock allocation is even more important. Holding more than 50% in bonds, given their low yields, would present significant risks to a retiree. The low rate of inflation is certainly helpful, but bonds still have negative real yields.

Of course, this shouldn't be taken to the extreme. Studies find that a 100% equity portfolio, for example, could easily be depleted in a retiree's lifetime. But one should not go to the extreme the other way. Some mutual funds designed to produce income for retirees have far less than 50% in equities. That is a very dangerous approach, particularly given our current interest rate environment.

3. Retirees Should Use Online Banks

For cash reserves to handle spending over the next year or two, retirees would do better with an online bank than a short term bond fund.

4. Retirees Should Hold Some TIPS

Finally, consider holding a portion of your bond portfolio in Treasury Inflation-Protected Securities. TIPS protect investors against an unexpected rise in inflation. While rising inflation doesn't seem like much of a risk today, the Fed's policy signals that it will tolerate some level of additional inflation. More importantly, the country's growing debt and monetary policy could result in rising prices that are not so easily controlled.

I'm not one to predict gloom and doom. But it seems reasonable to hold a portion of a bond portfolio in TIPS just in case.




By Rob Berger, Senior Contributor


© 2020 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.


Copyright 2020 Dow Jones & Company, Inc. All Rights Reserved.


The information in this communication or any information within the Asset Strategy Advisors, LLC domain, and or any attachments to any AdvisorStream communication is strictly confidential and intended solely for the attention and use of the named recipient(s). If you are not the intended recipient, or person responsible for delivering this e-mail to the intended recipient, please immediately notify AdvisorStream at privacyofficer@advisorstream.com and destroy all copies of this e-mail. Any distribution, use or copying of this e-mail or the information it contains by other than an intended recipient is unauthorized. This information must not be disclosed to any person without the permission of AdvisorStream LTD. Please be aware that internet communications are subject to the risk of data corruption and other transmission errors. For information of extraordinary sensitivity, we recommend that our clients use an encrypted method when they communicate with us.

  • LinkedIn Social Icon
  • Facebook Social Icon
  • Twitter Social Icon
  • YouTube Social  Icon

To view a copy of our Customer Relationship Summary (CRS), please Click Here

Advisory services offered through Asset Strategy Advisors, LLC. (ASA), Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC, Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS. To access Concorde’s Form Customer Relationship Summary (CRS), please click here.

Asset Strategy does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.

This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every advisor listed. For additional information, please contact Asset Strategy at info@assetstrategy.com. 

© 2020 Asset Strategy, LLC 

 Privacy & Use Policies  |  Broker Check  | Tax & Legal Discloure