Bad Timing for Today's Soon-to-Be Retirees

Interest rates are low, the economy is slow, unemployment is high and the nation's fiscal situation is pretty bad.

Makes you want to hang it up, doesn't it? Well, if you're nearing retirement, maybe a rethink is in order.

Is this the worst time ever to retire? has the bad news on retiring these days:

"With interest rates stuck at historically low levels for most of the past 5 years, it’s certainly been hard for recent retirees to generate income from their nest eggs. But Chris Kahn, an analyst for the financial-information website Bankrate.com, thinks the trouble won’t stop any time soon for retiring boomers. Thanks to those low yields and the disappearance of corporate pensions, Kahn writes in a piece this week, “baby boomers may be leaving [the workforce] at the worst time in a generation or more.”. . .

 

Much of his discussion focuses on the way that some of the risks of retirement have been shifted away from third parties and on to retirees. The fact that the 401(k) has replaced the pension, of course, means retirees are essentially responsible for generating much more of their own income, and assuming all of the investment risks involved. Out-of-pocket health-care costs have risen, Kahn notes, and Medicare is under continual budget pressure; the housing crash hurt boomers’ wealth, too.

The heart of Kahn’s critique, though, is the fact that both bond yields and dividend yields are so low today. Working with Research Affiliates, an investment-management company, he looks at likely investment outcomes for people who retire with $355,000 in a portfolio with a 60-to-40 ratio of stocks to bonds. Someone who retired in 1980, he notes, would have been able to withdraw 4% a year from such a portfolio and would still have had plenty of savings left 30 years later; someone with that profile now, however, “would run out of money in 25 years.” And good luck backstopping your retirement with an annuity, since, as Kahn explains, a 65-year-old man today would need to invest $15 to earn $1 of guaranteed annual income, compared with a ratio of about $9 to $1 in 1990.

That’s all true, as far as it goes, but the analysis has one significant flaw: It assumes that today’s dividend yields and bond interest rates will stay low, or, at least, that retirees’ portfolio returns will be locked in at today’s rates. One key slide in Kahn’s report notes that Research Affiliates is “using current market rates to estimate future returns.” That’s a rather bold expression of faith in an unchanging financial world. The Bankrate report also seems to assume that if inflation revives, retirees won’t be able to adjust their portfolios to keep up with it.

All that said, low rates do make retirement more challenging, and Kahn’s report has set other finance columnists buzzing about how to make the best of the current situation. Linda Stern of Reuters notes that a 25-year retirement will almost inevitably include cycles of higher yields; she also points out that retirees can “invest like a young person” by owning more stocks, in a bid to capture growth in market’s like today’s where yields are pokey. . . .

Last but not least, for those who really do think it’s a crummy time to retire, Fast Company contributing writer Anya Kamenetz writes today about how boomers can extend their working lives without resenting the extra time on the job."

Summing Up

Retiring anytime soon with lots of fixed income investments, including annuities, is a loser.

Rates will rise over time so those locked into today's low yields are headed for trouble.

It's just math.

That's why deferring retirement or owning dividend paying blue chip stocks, or both, is preferable and much "safer" than owning bonds or buying an annuity these days.

That's my take.

Thanks. Bob.