How are low interest rates effecting retirees? This is the question Chris Kissell, reporter for Fox Business, recently asked me.
Should retirees be putting their low (or no) interest yielding cash into stocks or bonds in order to generate some return? Absolutely not.
Even getting a sad-sack 1% return is better than exposing all your savings to higher levels of risk, says Alan Moore, founder of Serenity Financial Consulting in Milwaukee.
“I look at cash as market insurance,” he says. “When the stock market takes a dive, (retirees) don’t want to be in the position of having to sell stocks to fund their lifestyle.”
So if stocks and bonds aren’t the answer, what about annuities?
Many retirees buy an annuity in hopes of getting a safe stream of income. Low rates undercut that strategy, Moore says.
“The problem is that the monthly income a client receives from their fixed annuity is based on interest rates at the time they purchase the annuity,” he says. “With interest rates at all-time lows, annuity payouts are also at all-time lows.”
Meanwhile, Moore urges investors to avoid purchasing annuities until rates climb.
“Another option is to buy a smaller annuity today, such as 25% of what (investors) would normally buy,” he says.
Doing this several times from different companies over a few years allows you to buy at various interest rates, he says. Plus, buying from separate companies protects you if one of the companies goes bankrupt.
While many retirees still have pensions, they may not be the safe bet we all thought they were at one time.
“It is hard to know if clients can depend on them for their retirement income,” he says. Workers who are worried about their company’s pension plan must take action now. “They need to save more or work longer, as well as delay Social Security, to maximize the benefit they will receive.”
When markets take a turn for the worse, investors look at previous downturns to see what investments fared well. The issue is, rarely do the same asset classes do well in successive bad markets.
Moore believes the danger lurking in today’s supposed safe havens presents a lesson that investors should remember in all markets.
“Safe-haven investments have never truly been safe,” he says. “Investments that did well during one market downturn may do awful in another.”
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