A Balanced Portfolio May Not Work for Today’s Retirees
It’s been a no-brainer since retirees first invested money to provide security in their retirement years: Balance your nest eggs between stocks, bonds and cash, because this is most likely to give you the best return on your investment dollar, while minimizing risk.
These days, however, it’s not that simple: with today’s high stock prices and low bond yields, a balanced nest egg might not be the way to go in your individual circumstances.
One option that could work for you is moving your portfolio entirely to cash in the form of money-market funds or certificates of deposit (CDs), especially if you need low-risk investments to preserve capital and provide income. Then you can wait until the market returns to more “normal” behavior to move back into it.
The downside is that these investments may not keep pace with inflation. So you may want to consider other options. One such option is annuities, where you invest a sum of money with an insurance company and receive a guaranteed income for life.
Although fixed annuities offering fixed payouts may not provide the return you could get from stocks, they may beat the yields of cash, and even bonds, but with less risk.
You might even consider allocating just a portion of your portfolio to an annuity, leaving the rest in your traditional allocation to stocks, bonds and cash.
Here’s where you need the counsel of your advisor, who can help you assess the risks and benefits of annuities, and select the option that’s right for you.
Yield Starved? Annuities May be the Answer
Over the past several months, the Dow Jones Industrial Average and the S&P 500 Index – two major stock-market indices – have been flirting with all-time highs, while the bond market appears to be on an upswing. And that’s a good thing…isn’t it?
Not necessarily. Rising stock prices come at a cost: lower dividend yields. For example, during the late summer, the S&P 500 offered a dividend yield of just over 2 percent; if you invested $100,000 in the index, you’d receive just over $2,000 a year in income.
Bonds offer similarly low yields. The 10-year U.S. Treasury note, for example, was 2.5 percent in late summer, and the Barclays U.S. Aggregate Index, which is a broad gauge of corporate bonds, just 3.2 percent. That’s certainly better than the lower bond yields seen earlier in 2013, but it’s still low by historical standards.
According to research by David Blanchett, the head of retirement research for Morningstar Investment Management, and Professors Michael Finke and Wade D. Pfau: “There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously.”
Where, then, is a yield-starved investor to turn?
Immediate annuities may offer better yields than both stocks and bonds, depending on your situation. As you may know, these insurance company contracts provide you with a guaranteed income stream for life in return for a lump sum you pay the company.
Earlier this year, the Wall Street Journal reported that a 65-year-old man, investing $100,000 in an immediate annuity as of August 2013, would receive about $535 a month in income for life. That’s $6,420 a year, or a 6.4 percent yield.
Annuities aren’t always the answer, so it’s a good idea to consult your advisor if you’re considering purchasing one. He or she can help you make the right investment choice for your individual circumstances and goals.
Recipe: Sticky Soy Glazed Turkey Legs
An exotic way to celebrate the holidays on a small scale
- 4 turkey drumsticks
- Salt and pepper to taste
- 1 medium onion, sliced 1/4-inch thick
- 3 tablespoons butter
- 1 cup brown sugar
- 1/2 cup soy sauce
Preheat oven to 400° F. Season drumsticks with salt and pepper. Place onion slices on the bottom of a roasting pan and arrange turkey legs on top. Dot the turkey legs with butter and roast for about 20 minutes.
Mix together the sugar and soy sauce. Reduce oven temperature to 300° F and brush the turkey legs with the sauce. Continue to roast, while basting the legs every 10 minutes, until meat is cooked through – about 20 minutes. (Cooking time may vary depending on the size of the turkey drumsticks.)