Embarking on Retirement in a Time of Low-Interest Rates

Retirement planning can be fear evoking — the fear of not having enough resources, the fear of how you will fill your days, and the fear in your significant other’s eyes as they realize you will be together 24/7! Yet a new worry has emerged on the horizon, and that is historically low-interest rates. In early September, Federal Reserve Chairman Jerome Powell stated that interest rates would likely stay low for years as the economy fights its way back from the pandemic.

So what does this mean for both those in retirement and those on the cusp of retirement?

The traditional school of thought has been to adjust your portfolio allocation as you approach retirement by lowering your equity exposure to lessen volatility and adding bonds to provide a stream of income. That was a sound way of thinking fifteen years ago when investors could yield an estimated 5% on the 10-year Treasury note, providing a consistent method to garner income to supplement Social Security benefits. But now that the 10-year Treasury note is paying below 1%, retirees may want to take alternate steps to meet their income needs.

Consider Increasing Your Risk Appetite

Most people will spend at least twenty years in retirement. Currently, retirees need to balance their portfolios for the growth required to keep up with inflation and income for safety and volatility mitigation. When interest rates fail to provide for income purposes, you may want to think about increasing your equity exposure marginally.

We are not talking about backing up the truck and loading up on risky stocks. Instead, evaluate your risk-reward parameters and add high-quality dividend-paying stocks. Another option is to add preferred shares, which are a class of stocks that have a higher claim to assets in the event of a liquidation. When thinking about retirement planning strategies, we recommend keeping preferred exposure to no more than 10% of your portfolio allocation to fixed income.

If you are not comfortable increasing your equity exposure, your best option may be to remain on the sidelines. You will not want to invest in any vehicle that is highly sensitive to interest rates or too long in duration due to the inverse relationship of the price of these instruments and the interest rates themselves.

That may mean purchasing short-term Treasuries that pay minimal yield but provide safety and liquidity. You will then be able to take advantage of the higher-yielding opportunities when the market does move to more attractive rates. This option may come with the task of reviewing your expenses and keeping them as low as possible to keep your principal intact.

Delay Taking Your Social Security Benefits

In this low-rate environment, it may make sense for retirees meeting full retirement age to delay taking their Social Security benefits. When you review the assets you have saved for retirement, it is essential to remember that your Social Security benefits are also an asset.

Each year you delay taking your benefits, they increase by 8%. It makes sense to hold out and collect an extra 8% while you spend down other savings that are not earning close to that level of yield. Each year, you can reevaluate and decide if it makes sense to claim your Social Security benefits or delay another year.  Currently, you can defer receiving your benefit up to the age of 70.

Review All of Your Options, Including Working Longer

I know this is not the option you wanted to hear, but working longer and essentially waiting out a low-interest-rate environment may make sense. This is especially true if you can work a reduced schedule. You can take advantage of some of the free time retirement offers while still earning income.

The bottom line is that retirees have options even in this low-interest-rate environment. Retirement planning may take some creativity and research; however, it is empowering to know you have choices. Carefully assess your risk tolerance, review your budget, and discuss the next steps with your financial advisor. You may discover you are closer to financial independence than you thought!

Maggi Keating, CFP®, is a senior portfolio manager and shareholder at FBB Capital Partners in Bethesda, Maryland. She has over 20 years of experience in the financial industry. Maggi takes pride in educating her clients as she works with them toward their financial goals.