by Michael Tarsala
The Fed’s QE3 announcement is welcome by a lot of people on the Street, but not many retirees on Main Street.
Interest rates are already low, and more economic stimulus could help to push them down even lower . For the foreseeable future, it could make the hunt for decent investment yields for retirement even more difficult to attain.
The other bad news about stimulus is that it tends to punish savers. The past two rounds of Q3 helped to push down the value of the dollar. That helped to stimulate the economy, but it also made retirement savings less valuable.
Jim Wright manages the Domestic Dividend investment model at Covestor. It seeks to invest in large-cap companies that pay dividends with low valuations. Following is an explanation of how he seeks to generate yields for retirement-age clients:
This is certainly a tough time for retirees as low interest rates and volatile markets make things very difficult. I am not sure that there is a magic bullet, but what we focus on is providing a mix of stability from bonds, income from dividend paying stocks and growth from equities.
We structure a portfolio so that we have one to two years of funds in cash or very short term instruments. We then ladder out a bond portfolio for about seven years to provide the cash flow that the retirees will need. We recognize that income from fixed income is not great, but with this part of the portfolio we are seeking safety, not maximization of return. We will typically use corporates or munis. As the bonds mature, if we need the for spending needs, it is available. If it is not needed, we will look to add it to the end of the bond ladder (and hopefully at a higher interest rate).
On the equity side and in the Domestic Dividend model, we use a mix of dividend paying stocks. Right now our common stock portfolios are yielding about 2.8 to 2.9%. This provides a nice income when compared with many competing investments. We stress discipline and valuation in buying and selling the stocks. We will also use mutual funds to provide exposure to small/mid cap, international and emerging market stocks.
Finally, on the non-traditional side, we are investigating the use of delayed fixed annuities. These will begin paying out when someone reaches 75,80,85 or some other age in the future. For a small investment today for someone in their early 60s (even in today’s low rate environment), we can see an attractive payout when a client gets into their 80s. This payout, along with social security, may be enough for an individual to live on, so it allows us to focus on investing the remaining assets for a fixed period of time.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. We believe that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
Photo: Nick Gray
