When Fed Chief Ben Bernanke said he would hold short-term interest rates near zero for at least two more years, the stock market whooped it up — at least for a day. In the middle of the celebration, though, millions of retirees about keeled over.
The prospect of even lower yields on money market funds, bank CDs, Treasury securities and longer-term government and corporate bonds – where many retirees dutifully keep their savings – is crushing news for anyone on a fixed income. Folks who have saved diligently and put their money in safe, short-term investments to secure an income stream for their later years probably deserve a better fate.
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Think about it: A one-year bank CD yields 1.2%. That’s a whopping $1,200 a year of income on $100,000. For someone playing it really safe and sticking to 3-month CDs, the income would be half that. Treasuries are an even worse deal. A one-year T-bill kicks off, get this, 0.11%. That’s $110 a year on $100,000. Read that again. Still standing?
And these rates are going down.
Falling yields shouldn’t take anyone by surprise. The Fed has held rates low since the financial crisis three years ago. But we were supposed to be coming out of this mess by now. Retirees who have managed to get by should, by now, be seeing some relief in the form of higher yields. Instead, they are getting another punch to the gut.
Many have now depleted their cash accounts and emergency reserves and face the prospect of selling stocks or a house or other assets while those assets are deeply depressed — only to reinvest the proceeds in something that will provide them with a paltry income stream. They have few good choices.
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Which is why a lot of planners today are breaking the mold and advising retirees, especially younger ones, to keep a good chunk of wealth in the stock market, damn the torpedoes. The key consideration here is to remain broadly diversified and centered on quality big-cap companies whose slumping share prices have created some generous dividend yields. Some examples are Johnson & Johnson (yield: 3.7%), Con Edison (4.6%) and International Paper (4.2%). You can get a similar yield with a balanced mutual fund. (And my Moneyland colleague Michael Sivy recommended some additional options here.)
Yes, dividends can be cut and shares can fall. That’s why diversification and quality companies are so important. But the added risk might be worth it because these yields blow away any income options with short-term Treasuries and the like. And, importantly, the last time we had a major stock market decline (2008) it was the dividend payers that bounced back first. If the dividend income is sufficient and you don’t have to worry about being forced to sell shares, you should be fine.
You may not like hunting for income in the stock market. But for most retirees the sure-things just won’t do anymore.