Building a retirement portfolio for low-interest-rate times

Retirees must look beyond cash and other relatively safe sources of investment income

Building a retirement portfolio for low-interest-rate times

The gradual interest-rate increases by the Federal Reserve and the Bank of Canada might have provided much-needed support for retirees who need steady, low-risk investment income. But with Canadian borrowers feeling the pinch and the central banks hitting pause on hikes, it’s probably safe to expect interest rates to remain relatively low over the near term.

That means retirees should spread their portfolios to include a combination of non-cash assets that would not just ensure cash flow, but also offer capital appreciation to decrease their risk of outliving their assets.

“Retirees in particular should make sure they are using some conservative income strategies … that will provide a dependable source of cash flow regardless of how the economy fares during the next phase of the market cycle,” noted Wall Street Journal contributor Michael Pollock.

Citing Tom Stringfellow, president of Frost Investment Advisors, Pollock said investors should look for cash holdings that provide better yield. An allocation of 15% or slightly more in cash, Stringfellow said, would help counter gyrations from equity markets and make it easier for investors to stick to their investment plan.

Many high-yielding accounts offer less than 2.5% yield — less than what bonds or some stock dividends would provide. Those with cash that they don’t need immediately might want to consider creating laddered portfolios of bank certificates of deposit, which Pollock said pay more than most money-market accounts but charge a penalty for savers who withdraw funds before maturity.

Jim Barnes, director of fixed income at Bryn Mawr Trust, expects that short-maturity corporate bonds will probably continue generating decent yields. With many offering yields north of 3%, those with investment-grade credit ratings of at least triple-B can offer a relatively conservative play. High-yield corporate bonds, meanwhile, can see their prices tank in case of a mass selloff by investors trying to get away from risk.

Another option is to invest in preferred shares, which offer regular payouts at potentially attractive rates and give the holders preference over common shareholders when the issuing company makes payouts. But Doug Cohen, a managing director at Athena Capital Advisors in Boston, warns that a surge in long-term yields would cause principal values to drop.

And while equities are not expected to offer as big a lift as they have in recent years, only they offer investors a reasonable cushion over inflation, which could be even higher for older individuals who have to worry about pharmaceuticals and other retirement costs that tend to balloon quickly.

“It’s important to get returns that clear the inflation rate so people aren’t being robbed of purchasing power,” says Hans Olsen, chief investment officer at Fiduciary Trust in Boston.

To that end, retirees will want to consider including dividend ETFs in their portfolio, since dividend stocks have historically contributed significantly to equity returns and are less vulnerable than equities in general during times of volatility.


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