Six months of aggressive interest-rate cuts by the Federal Reserve may be good for the economy, but it's bad news for many seniors who rely on fixed-income investments.
As costs for such things as heat and health care have continued to rise, the income you can get on safe, fixed-rate instruments has been slashed in half. That can leave you feeling poor and worried about the ability of your nest egg to last as long as you.
But don't panic. Financial planners say that today's investment landscape, though dreary, has some bright spots. Moreover, with wise planning, you can put yourself in a position to weather any environment.
"You look at what you can control," said Stuart Ritter, certified financial planner with mutual fund giant T. Rowe Price. "You can't control the stock market. You can't control interest rates. What you can control is how much you save, how much you spend and how you invest."
Here are some strategies:
Keep working -- If you're at or near retirement age but haven't retired, you might want to consider waiting a while. Or if you don't like your job, Ritter suggests, you might consider a paid part-time position.
This would boost your retirement prospects in three ways. You don't deplete your assets right away, leaving them to (presumably) grow. By working, you may also be able to add to savings, increasing the size of your nest egg regardless of what happens to investment returns. And by working longer, you retire later, shortening the number of years that you'll need to finance retirement on savings and pensions alone.
Insure some income -- You might want to convert part of your portfolio into a regular stream of income by buying an immediate annuity, said Brad Levin, a certified financial planner with Legacy Wealth Advisors in Encino.
An immediate annuity works like this: You give a financial company, say, $100,000. The company, often an insurance firm, promises to give you a fixed monthly payment in return. The payments start immediately and are guaranteed by the company to last as long as you do.
The size of the monthly payment depends on your age and the prevailing interest rates at the time you buy the annuity. As of last week, a 65-year-old man buying a $100,000 immediate annuity could lock in a $650 monthly payment for the rest of his life, Levin said. A woman would get a little less -- about $621 a month -- because women on average live longer.
A 75-year-old man would receive $783 a month; a 75-year-old woman would get $754 a month. (Older people get higher payments than younger people because older folks, well, are likely to collect those monthly payments for fewer months.)
If this sounds too good, there is a catch: Although the 65-year-old man's payments add up to $7,800 a year, he's not really getting a 7.8 percent yield on his $100,000 investment.
Unlike a bond, which returns your principal when the bond matures, an immediate annuity doesn't give you back your principal when you die.
The benefit of an immediate annuity is that it gives you a steady income stream that can't run out during your lifetime. But there also will be nothing left for your heirs.
The monthly payments are generally not adjusted for inflation. That's why Levin doesn't recommend putting all your assets in immediate annuities. He suggests buying an annuity that will generate just enough income to pay for some of your necessities during retirement and investing the rest of your assets more aggressively to generate the growth you'll need to finance your later retirement years.
An important note: Immediate annuities shouldn't be confused with variable annuities, a complicated investment that many financial planners don't recommend because of high fees and other problems.
Reconsider risk -- You might be tempted to pull all your money out of stocks when you retire because you don't want to risk your principal. But that could be defining risk too narrowly. Levin likes to tell his clients who are retiring that, assuming they withdraw 4 percent to 5 percent of their portfolio each year, a diversified fixed-income portfolio has only about a 25 percent chance of lasting as long as they will. But if you put 60 percent of your assets in stocks and 40 percent in bonds, the chance that the portfolio grows enough to support you for the rest of your life jumps to 85 percent to 90 percent.
Diversify your income -- Bank certificates of deposit are popular with seniors, but they are only one of many ways to generate income from a portfolio. Investors would be wise to also look at other income-generating investments that are somewhat riskier but tend to provide higher returns. Examples include corporate bonds and dividend-paying stocks, including real estate investment trusts, which invest in commercial real estate and pay out the bulk of their rental and investment income to investors each year in the form of dividends.
Expect turbulence -- Risk and reward go hand in hand in the financial markets. If you want a return on your investments that will keep up with the rate of inflation, you need to learn to deal calmly with market turbulence, Ritter said. That means maintaining a diversified portfolio of stocks and bonds and not selling investments in response to a market decline.
"I am not denying that it is uncomfortable to watch the market go down and watch the value of your portfolio go down," Ritter said.
"But you are on a long-term journey. If you are on a plane on a long journey, you are going to hit turbulence. If your response to that turbulence is land the plane and get out, you are never going to get where you want to go."
Los Angeles Times columnist Kathy Kristof welcomes your comments and suggestions but cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. First St., Los Angeles 90012, or e-mail email@example.com.
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