Is It A Bad Time To Buy Bonds Or Income Annuities?
Now we can return to the initial question: Should clients wait for interest rates to increase before buying individual bonds or income annuities? A proper strategy will most likely involve laddering purchases of bonds or annuities over time. This will help reduce any exposure to interest rates at one particular date. But I do not otherwise think that holding assets in a diversified portfolio is a better choice only for the reason that interest rates are low.
While waiting for rates to rise, if and when that happens, retirees will be spending their principal when spending exceeds interest, dividends and capital gains. Because of the current market environment, there is an increasing likelihood that dipping into principal will be necessary. Even if rates do rise, clients may not be able to purchase more income, because at that stage they are multiplying a higher rate by a smaller pool of assets. Waiting entails risk.
Today’s retirees face a difficult situation. The traditional 4% rule of thumb is closer to being a best guess for a new retiree’s sustainable withdrawal rate, rather than serving as what is meant to be a conservative or “safe” withdrawal rate. The decision about whether to use a probability-based strategy or a safety-first strategy should depend on the comfort level and goals of the client. A realistic assessment about today’s market environment does not suggest a unique reason to favor one strategy or the other.
Wade D. Pfau, Ph.D., CFA, is a professor of retirement income in the Ph.D. program in financial services and retirement planning at the American College in Bryn Mawr, Pa. He is also the director of retirement research for McLean Asset Management and inStream Solutions. He actively blogs about retirement research. See his Google+ profile for more information.
Now Is A Tough Time To Retire
September 2, 2014
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Comments
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For those clients who qualify and can afford it, put them in a LTC contract to cover high, end-of-life costs. Then they can withdraw 6-8% annually from the remainder of their portfolio. I've been recommending that for nearly 20 years and no one has run out of money. Nor does it appear that they ever will. Also being debt free, which is my #1 advice, gives lots of flexibility should something go wrong (2000/2008).
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A participating lifetime income annuity would solve for today's low interest rate and future inflation risk concerns. It just so happens that a quiet giant mutual insurance company has now addressed those concerns with its participating lifetime income annuity. The annuity is eligible for annual dividends which can be taken in cash to increase current year income, or, be deferred to purchase guaranteed income additions. And, it actually pays a portfolio 2014 dividend rate of 5.50%, on top of it's guaranteed 2% income floor. Dr Pfau would be pleased to learn of this unique and exciting advancement in lifetime income planning.