Retiring When the Stock Market Is High, and Interest Rates Are Low
Tim Hayes, CRPS®, AIF®, AWMA®, CFS™, CTS™, CES™, APMA®, CAS®
You just retired. Along with a great career, you have built up a substantial 401(k) balance. It took a while, but you got the hang of investing in equities, never comfortable with the ups and downs, but always focusing on long-term growth.
However, now you need income, not growth. Over the years, you owned some bonds with mixed success. Moreover, unlike your foray into equity investments, this time, you cannot afford on-the-job training. You need the income now. Plus, you have less time to recover from any mistakes.
Read More: Do You Have After-Tax Money in Your 401k?
With interest rates low, where do you go for income?
The Department of Labor’s fiduciary rule might have resulted in more people keeping 401(k)s with former employers. However, on March 15, 2018, the Fifth Circuit Court of Appeals ruled that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year.
The 2019 retirement SECURE Act makes it easier for employers to offer annuities in their 401(k) plans. But with the economic recession brought on by the pandemic, most employers have probably yet to adjust their plans.
So, the question remains—can you get the income you need from your plan?
Many employers still steer their employees’ 401(k) choices toward stock funds to grow their accounts, rather than bond funds or annuities to distribute the accounts.
Even if your plan offers sufficient bond funds, today, with the ten-year U.S. Treasury Bond yielding just .5%, bonds hardly seem to be the place to go for income, even though, government bonds have provided investors with an excellent total return so far this year.
For example, the Barclays Aggregate Bond Index is up 5.4% for the year. Total return combines the interest rate with the bond’s change in price: bonds go up in value when interest rates fall.
Diving into the Stock Market
Many retirees who are frustrated by low rates have put money that was earmarked for bonds into stocks, hoping the dividends plus the growth will provide sufficient income.
Even with the coronavirus-induced recession, the stock market, as measured by CAPE or the Q Ratio, is still anywhere from 80–100% overvalued. This does not mean it cannot continue to increase; it can, and it has. (It was more overpriced during the late ’90s Internet boom and the Roaring ’20s than it is today.)
High stock prices can exacerbate the problem with a stock-centric retirement portfolio. If the market drops and you withdraw principal as income, that money is no longer in your portfolio if the market rebounds.
Read More: Are We In Another Financial Bubble?
The financial services industry has adapted to this low-interest-rate environment
It has done so by building products for it, some of which provide you with income guarantees. But, they come with restrictions on withdrawing your principal, as well as somewhat confusing terms and conditions.
Other products offer a higher yield, but no guarantees of how much of your investment will be returned. Many of them also lack daily pricing, making it impossible to know the value of your account on any given day.
In this turbulent and unfocused market, going it alone can be unnerving
Those with questions should be wary of talk-show advice, whether it be on television or the radio.
Understanding interest rates, bonds, and dividend stock investing along with other transition products can be challenging, if not confusing.
With an upcoming election, talk of a second wave of the coronavirus, and so much uncertainty worldwide, now may be the best time to take control of your financial future.
As with most things in life, the first step is often difficult, but securing sound financial advice shouldn’t be left until it’s too late.
Finding a licensed and knowledgeable resource: It’s the best financial advice you’ll ever receive.
An income-friendly financial advisor
- has a keen understanding of interest rates and the bond market:
- has the knowledge that is imperative when one talks about income;
- has access to the products necessary to help you transition from growth to income;
- will check your account and let you know if leaving it with your 401(k) is a good option;
- will work to keep your costs low—because, in a low yield world, the less you pay to someone else, the more you keep for income.
These are the opinions of Tim Hayes, and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted on as individualized investment advice.