It Is Not Your Fault You Retired When the Stock Market is High and Interest Rates are Low
The stock market, according to the CAPE, QRatio, and Marketcap to GDP is very expensive today; making retirement planning difficult.
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 investment, this time, you cannot afford on-the-job training. You might need the income now. Plus, you have less time to recover from any mistakes.
With interest rates low, where do you go for income?
The Department of Labor’s new Fiduciary Rule might have resulted in more people keeping their 401(k)s with their former employers. However, the 5th Circuit Court of Appeals ruled on March 15, 2018, that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year.
You’re unsure now whether you can get the income you need from yours. As many employers never adapted to the new rule, and still steer their employees’ 401(k) choices toward stock funds to grow their accounts, rather than bonds funds or annuities to distribute the accounts.
Moreover, today, with the ten-year U.S. Treasury Bond yielding just 2.5%, bonds hardly seem to be the place to go for income, even though, so far this year, they have provided investors with decent total returns. (For example, the Barclays Aggregate Bond Index is up 2.7% for the year.) Total return combines the interest rate with the bond’s change in price: bonds go up in price when interest rates fall.
Diving into the stock market
Many retirees, frustrated by low rates, have put money earmarked for bonds into stocks, hoping the dividends plus growth will provide enough income.
The problem today is that the stock market, as measured by CAPE, the Q Ratio, Marketcap/GDP, is anywhere from 80-100% overvalued. This does not mean it cannot continue to go higher; 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 do present more risk than, say, in 2008, when the stock market was at fair value. High stock prices also exasperate 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 when the market rebounds.
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. However, they come with restrictions on withdrawing your principal, as well as somewhat confusing terms and conditions.
Other products offer higher yield but no guarantees of how much of the money you invested you will get back. Plus, many of them 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 stock investing, along with other transition products, can be challenging, if not confusing.
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
Find a financial advisor who:
- 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 save 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 upon as individualized investment advice.
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Expert and highly personalized financial planning, retirement planning, and independent investment solutions for individuals, couples, and businesses in Eastern Massachusetts, including Boston and surrounding cities. So when you need an independent financial advisor in Massachusetts - Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, MetroWest including Foxboro, or the Southcoast, Martha's Vineyard, Nantucket, and Newport, Rhode Island in my Dartmouth office.
There is no charge for the initial consultation, and it can be at your home, office, or favorite coffee shop.