Not too long ago I talked about the magical notion that $1,000,000 in retirement money isn’t what it used to be. In fact, a great majority of the news and analysis you read today paints a picture of investors woefully under water for their retirement years.
The biggest difficulty in planning for retirement today is actually a double-edged sword: While the Federal Reserve is keeping inflation at bay (normally a good thing) by managing interest rates, those low rates translate to terrible returns on shorter-term Treasury securities and CDs, even adjusting for low (under 3%) inflation. Even long-term Treasury rates are barely hovering above the 2% level despite a recent surge; that 6.5% average rate earned on Treasuries by investors since 1962 is nowhere on the horizon.
Thus, generating anything out of your fixed-income investments is difficult, which could be a particularly prickly situation for those schooled on (and practicing) two pillars of retirement planning:
- The “rule-of-thumb” 4% annual draw-down to supplement pensions and Social Security.
- The “100-minus-your age” rule governing stock/bond allocation to maximize income and reduce risk as you advance in years.
This two-tiered strategy depends on a level of fixed income that will, over time, exceed inflation levels and living expenses. The problem is that with fixed-income yields so low, those pillars are starting to sport cracks.
Combined with a rise in life expectancy for both men and women, this spells future trouble. Alicia Munnell, director of the Center for Retirement Research at Boston College, provided some pretty straightforward advice in a recent New York Times article: save more, spend less, work longer and perhaps tap home equity if its available. Those are good tips, though I’d also suggest these more specific tactics:
Buy Individual Treasury Securities: Treasury securities are backed by the U.S. Government, and you can easily fashion a laddered maturity plan from, literally, a seven-day Treasury bill through a 20-year Treasury bond. Expenses are extremely low since you can buy the securities directly via the aptly named U.S. Treasury Direct site. But rather than buying individual Treasuries, I would go a different route. Namely …
Look to Corporate Debt: I think solid (AA-rated or above) corporate bonds, preferably with terms of five years or lower, are a great place to park your money. You take advantage of credit rating strength — Exxon Mobil (XOM), Microsoft (MSFT), Johnson and Johnson (JNJ) and ADP (ADP) actually have better credit than the U.S. government — plus you have a higher level of bankruptcy protection than stocks since you are a “secured” creditor. Expenses are low here too, since all you’ll pay is a brokerage fee to buy (or sell) the security.
Adapt Your Portfolio Mix: Right now, S&P 500 stocks on average are yielding a bit more than 2% mark, but again, that’s on average — which means there’s a number of great dividend-paying stocks in the index that yield much better than that. The old model of 60% stocks against 40% fixed income won’t work right now, even if you’re on the latter half of life. Consider skewing that as far as 75/25 (though you don’t want to go much further, as it’s never safe to put all your eggs in one basket). Naturally, you can tweak that mix back as the investment landscape changes.
Adjust Your Spending: This is the worst-case adjustment. The conventional wisdom on 4% withdrawals is based on spending assumptions. If you’re averse to changing up your stock/bond mix, you might instead have to consider adjusting your expense levels to make it work on, say, 3% distributions instead.
Unfortunately, there are no easy answers about how to assure anyone of a “comfortable” retirement. The best news is that forewarned is forearmed.
Marc Bastow is an Assistant Editor at InvestorPlace.com.