Low Interest Rates and Retirement

Low interest rates can be great when locking in historically low mortgage rates. However, they can be a potential threat for those nearing or currently in retirement.

Here are some things to remember if you’re retired or approaching retirement when it comes to your portfolio:

  • Diversification is key
  • Balance your risk exposure
  • Understand the purpose of bonds

 

Full Transcript:

Authors: Anthony Saffer CFP®, CKA® and Alex Okugawa CFP®, CKA®, CEPA®

Anthony: Hello and welcome to One Degree advisors where we help families cut through the noise to make confident financial decisions, you know, Alex a lot of retiree clients of ours they bring up this idea of interest rates being at historic lows, great for borrowers because you know, if you have a mortgage you’re getting a really good deal.

 

Alex: A lot of people were recommending refinancing.

 

Anthony: Yes.

 

Alex: Yes. The borrowing is very cheap right now.

 

Anthony: But the other side of it is for savers. It’s not such a good deal. If you have money in the bank and then a lot of our retiree clients are concerned and just people that are out there with bonds. So talk about the problem that we may experience with bonds or at least the potential for it.

 

Alex: Yeah. So again interest rates have an impact, especially when we’re talking about retirement planning and let’s think specifically about retirees, you know, they’re older they’re probably gearing up with more conservative Investments because they’re preparing for retirement and drawing down that money. So an increase in interest rates can be a concern, right. Let’s just take an example right, the current 10-year treasury is paying less than 1%. It’s the lowest it’s been in the past 20 years.

And again, I think in the in the early 80s, the 10-year treasury is paying a hair over 15% So this is quite a swing going from a hair over 15 to now sub 1%.

 

Anthony: You had decades of interest rates coming down which was great for bonds and now we’re on the other side of that.

 

Alex: Exactly, So now it means okay intuitively. What does this mean? If Bond rates continue to come down where is the only other direction they can go? I mean they might be able to go down a little bit more. We’ve been saying this for a while. They’re going to go up but they haven’t, but intuitively the thought processes is they will come up and when interest rates do come up. That’s not very good for bonds.

 

Anthony: Yeah now to pick up on your point there too. We have been talking about hey interest rates are going to rise for the last 10 years and they really haven’t, so bonds have still met that objective of helping to reduce risk in an investment portfolio and providing some return there

 

Alex: Yeah.

 

Anthony: So how do we address in an Investment Portfolio We have some concerns around bonds. What are some things that we can do?

 

Alex:

Absolutely. So I’ll bring up one thing. I know that we talked about quite frequently folks which is just diversification of strategies. It’s that age-old concept of don’t put all your eggs into one basket. So, you know, you can invest in things that aren’t so closely tied to traditional stocks and bonds, you know, you can invest in, you know more real assets like real estate or commodities right that provides a diversification benefit that you can’t just get out of traditional stocks and bonds.

The other thing that you can do is you can overlay maybe like more of like a tactical risk management strategy. So it allows you, again the goal is to take on maybe a little bit more risk than you traditionally would but because you’ve overlaid more like a tactical and flexible strategy on it the goal to avoid major draw downs. So again having a bit you still want your core portfolio to be stocks and bonds but adding on a little bit of diversification can help in these really uncertain times when we’re going, you know, what are interest rates going to do there. They keep heading lower low and lower at some point they should come up.

 

Anthony: Yeah, that’s one thing. Well, let’s talk about because we’re not advocating in most situations everybody’s unique that you know, you totally get rid of bonds. But what are the Bond characteristics that we should look at.

 

Alex: Yeah, so really two things right if I summarize it is short-term tilt towards a short-term bonds and tilt towards higher quality bonds. So not like junk bonds or things like that. And if I had to summarize it it’s in essence the shorter the maturity it lowers your interest rate risk. So as a shorter term bond matures, it will reinvest into the current interest rates, which again should help decrease that interest rate risk. But we have to think about this within the context of the overall portfolio construction and philosophy, which is bonds are designed to help take risk off the table, help lower that risk, and we get our long-term growth out of stocks. Okay. So when we think about it within that context it helps give us a perspective to say I want to look at my bonds maybe short-term high-quality. Really provide that stability that I’m looking for and in the long term my stocks are going to give me the growth that I need to preserve my purchasing power, make sure you know, I quote don’t run out of money.

 

Anthony:  Yeah, and I’ll just add on to that the other wise thing can be to have a cash reserve for savings. Ok. So the number three in this we have to be careful though is increasing stock exposure.

 

Alex: Exactly, just like you said you have to be careful with this and I know it’s kind of funny because we just came out of March where everyone was getting conservative and now we’re saying, you know long-term folks might have to take on a little bit more risk than they traditionally would and this is just simply because bonds may not produce the same level of returns as they have in the past, especially if we head into a rising interest rate environment. So this is why we’re just huge advocates for financial planning. It’s why we do financial planning for our clients because each person is different, you know, you can’t look at someone say oh, you know, you’re in your 60s you get a 60/40 portfolio.

There is a lot of talk about the 60/40 portfolio is dead, now whether that’s actually true that’s a different story. But the point is that you cannot just look at someone’s age and some basic risk metrics and go. There you go that is what you get. Each person must be looked at within the unique context of their plan. What do they need? What are their goals and priorities? And then how do we build a customized investment structure around those things.

 

Anthony: Yeah, so that uniqueness really can’t be understated. There’s a lot of factors to consider in putting a retirement investment plan together. And this is not really meant to be investment advice its just considerations. So these are the types of things that we do help families with we help retirees with if you’d like to talk with us more about aligning your retirement Investment Portfolio with your financial plan go to our website. You can schedule a call we would love to talk with you.

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