Generating steady retirement income has never been harder. It’s more than hyperbole to say that. Just take a look at the graph below showing the yield on the 10 year Treasury bond dating all the way back to January 1, 1980 up through today. Recently, yields on these bonds hit all-time lows.
Today, the 10 Year Treasury yields just 1.68%. 10 years ago, it yielded 4.64%. And 20 years ago, higher still — 6.68%. Today’s low interest rate environment creates three challenges for Baby Boomers and others in retirement.
First, and most obvious, cash flows from the fixed income portion of your portfolio will be lower than ever. Second, if yields rise in the future, the value of what you bought now will decrease if you sell. Third, just because yields are lower than they have been historically, it doesn’t necessarily mean that they’ll get back to where used to be anytime soon. With many people, I’ve seen a tendency to try to ride it out in the stock market and see what happens later. But remember — yields could just as likely go lower from here as they could go higher. Just ask those people who thought yields couldn’t go lower in 2009 or 2010 (they could and did).
So what should you do? The unfortunate reality is that there’s no silver bullet. But rather than lament the present situation, it’s probably more helpful to prepare yourself and your retirement income for this new normal.
How? Below I discuss eight popular sources of retirement income, ranging from dividend stocks to bonds to real estate to annuities, what current rates are for market leading products and the pros and cons of each approach. As you analyze these options, keep the following three things in mind:
- Diversification is key. It’s prudent to protect both against yields rising and yields going lower and to diversify where possible with products that are both more and less directly tied to Fed policy. The best approach is to try to spread your portfolio across asset classes and make investments in income-generating assets over time , which is kind of like dollar-cost averaging in the stock market.
- There’s no right answer. The drawbacks of some retirement income strategies might be de minimis for you, while others are significant impediments. Analyze the tradeoffs for your particular situation.
- Understand the incentive structures of who is selling these products. If you understand them, it’s easier to avoid the principal, agent problem.