How should retired investors play their low-rate hand?

As dividends and stock gains do more heavy lifting, retirees might do well to consider certain portfolio-management tactics

How should retired investors play their low-rate hand?

As COVID-19 economic weakness prompts central banks to adopt a dovish stance, investors should not expect any upheaval of the low-interest-rate regime for the foreseeable future. That means retirees racing against inflation will have to rely more on risky assets to get sufficient returns.

Given the current investment landscape, retired investors will have a tough time toeing the line. For many, safety has become top of mind, making them more inclined to park assets in high-interest savings accounts. But with Canada’s annual headline inflation at 0.5% as of September and high interest savings accounts returning between 1.30% and 2.15% according to, it’s not likely to satisfy many people’s need for return.

Speaking to the Wall Street Journal, Anthony Saglimbene, global market strategist at Ameriprise Financial Services, suggested that some retirees pursue a three-bucket strategy. One bucket would consist of cash and short-term bonds, which would cover projected spending needs for the next three years at most. While the exact proportion will vary from case to case, some advisors would recommend putting no more than 15% of one’s overall portfolio in this bucket.

Into the second bucket goes income-producing assets – for a moderate-risk investor, Saglimbene suggested putting around half of these assets in bonds and the rest in stocks, alternatives, and cash – whose interest and dividend payments can be used to maintain funding levels in bucket one. Finally, the third bucket would comprise mostly equities, which he suggested should represent around 60% of the assets in the bucket; from here, an investor might be able to raise additional cash as they prune their faster-growing stockholdings.

Some investors might not be keen to use such a total-return approach, where one taps the appreciation in some securities to augment income from other sources; aside from potentially missing out on continued acceleration of those holdings, they could also be faced with a tax liability from realizing the capital gains. But as Kathy Carey, head of research at Baird Private Wealth Management told the Journal, the practice can be beneficial especially as part of periodic rebalancing.

The spate of dividend cuts that came amid the pandemic crisis should also teach dividend investors to be strategic and cautious, said Andrew Mies, chief investment officer at 6 Meridian. Stocks touting dividend yields in the high-single digits should be regarded with caution, he told the Journal: since they move inversely to stock prices, lofty yields raise the risk of payouts being trimmed.

“Generally, there are signs in financial statements when a company is struggling to pay dividends,” Mies said. One key measure, the dividend-payout ratio, could hint at trouble if it goes above 50%.

While bond yields are at historic lows, an economic rebound in the next year or two could cause them to jump, leading to a drop in bond prices and paper losses in the principal value of bond holdings. With that in mind, Ed Perks, a senior manager at Franklin Templeton Investments, urged investors to be wary of venturing too far out on the maturity spectrum, where he said current yields are not high enough to justify a potential risk of principal losses.

Bond managers at Franklin, Perks told the Journal, are currently “much more comfortable” with maturities of two to six years than with longer maturities.


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