The Good Old Days
We all remember something about the good old days…whether it was your parents turning you loose in the neighborhood to play until you were called in for dinner…or matinee movie prices before 5 P.M…or (one of my favorites) those days when a bank CD paid 13-15%.
But those days of high interest are gone...the good old days of putting retirement savings in a trusty bank CD and living on the interest are history. At the risk of sounding depressing (as Nathan just accused me of), the sobering reality is that over 65% of global government bonds are yielding less than 1%. And shockingly, over 45% of government bonds across the world are actually paying negative interest.
Japan surprised the markets in January by pushing their policy rate down to negative 0.1%, joining the European Central Banks, which later lowered its rate to minus 0.4%. Swiss, Swedish, and Danish central banks also have policy rates ranging from negative 0.5% to negative 0.75%. Amazingly, savers are willing to lend these countries money, accepting a guaranteed loss, just to be sure their investment is safe. A far cry from the good old days…
This uncharted, historically unprecedented, territory of negative interest rates brings a whole new set of challenges for savers and folks approaching retirement. For current savers, they are stuck with a wild ride in the stock market or fixed income returns of 2% or less. The days of planning for an easy annual 10% return on your portfolio are gone, meaning that savers will have to increase the amount they save to make up the shortfall.
For those folks approaching retirement, income production is elusive. With relatively safe investment options paying 1% or less, it is tempting for retirees to stretch for yield in exotic investments such as master limited partnerships, junk bonds, or other volatile investments. None of these securities are inherently bad, but they are not designed to be the cornerstone of a retirement portfolio. Each comes with its own set of unique risks.
Opportunities for return do exist--but it is increasingly critical to have (or hire) the expertise to not just construct a portfolio to balance risk and return, but to also understand the costs and risks involved!
This new and challenging landscape of investments is changing the retirement planning strategies of the good old days. No longer able to rely simply on the income stream of a portfolio, savers and retirees need to carefully plan retirement withdrawals that rely on the total return of the portfolio, not just the interest paid. And, despite the challenges faced, opportunities for return do exist--but it is increasingly critical to have (or hire) the expertise to not just construct a portfolio to balance risk and return, but to also understand the costs and risks involved!