Investing for retirement income
Joel Dresang: Dave, for only the third time in 40 years, Social Security beneficiaries won’t be getting a raise in 2016. It’s a very low interest rate environment. Where’s a good place to invest for income these days?
Dave Sandstrom: Well, Joel, let’s take a look at where we can find that income in our portfolios. So, we typically have interest from bonds; we have dividends from dividend-paying stocks; and we also have capital gains from the appreciation of the assets in the portfolio
Joel: But dividends and interest rates aren’t as high as they used to be.
Dave: Correct, and that used to be a very popular strategy in the past – would be to load up on high-quality bonds in the portfolio along with some solid dividend-paying stocks. And that was sufficient to provide us with an income in retirement. In the environment that we’re in, as you mentioned, this low-rate environment, those opportunities don’t necessarily exist.
Joel: So you have to lean more into stocks then?
Dave: Yes. I think it’s not necessarily a change from the norm in what we would recommend. It’s still maintaining that balanced portfolio but not being afraid to take advantage of the capital gains when they occur and realizing that it isn’t just all about interest rates and dividends at this point.
Joel: What about pursuing bonds that pay higher interest rates and stocks that have higher dividends?
Dave: It’s very tempting to do that. We’ve seen that end poorly for people. You’re talking about venturing into an area of the marketplace, maybe high-yield or junk bonds or buying dividend-paying stocks that maybe have a marginal balance sheet. That’s an area of your portfolio typically reserved for your safe money and maybe your low-volatility stock side. So reaching for those higher yields typically introduces way too much risk.
Joel: So you’re talking about adding more equities to the mix.
Dave: Well, Joel, I don’t think we need, necessarily need to depart from that solid balance that we have, that 50-50, 60-40 ratio in the portfolio. When you think about the fact that longer term the stock market has yielded that 8-9% growth, if we apportion maybe 40% or 50% to the bonds, and maybe going forward we’re looking at 3%. That still puts you in that 6% or 7% total return of the portfolio. And with inflation low, 2% maybe, that still should yield us what would be a customary 4% withdrawal.
Joel: So, it’s looking at the total return of the whole portfolio rather than just relying more on the traditional interest rates and dividends.
Dave: You’re correct, Joel. And it’s that balance that’s going to provide that for us. So you’re going to have to take what you can get with the high-quality, interest-bearing, fixed-income assets that we can purchase.
Certainly take the dividends. We like value stocks. But don’t be afraid then to take some of those capital gains when they’re presented to you as a way to fund your income in retirement. And again, it’s that total return we’re looking for, and then you have the choices of where am I going to take my current income from?
Dave Sandstrom is vice president and advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik
(initially posted Nov. 16, 2015)