Bernanke to Income-Starved Retirees: Tough Luck

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Ben Bernanke recently announced that the Federal Reserve would hold short-term interest rates near zero.

If it wasn’t clear already, it is now: securing decent retirement income in a low-yield environment is going to be a problem for a long time. Seniors who have been eking by through temporary measures like drawing down an emergency fund or selling assets need to find a permanent solution.

That’s the unmistakable message in Federal Reserve Chairman Ben Bernanke’s latest pledge to hold short-term interest rates near zero. In August, Bernanke said the Fed would keep rates down through the middle of 2013. Now, in his most recent remarks he has extended that pledge to late 2014.

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Low rates from the Fed means low rates on Bank CDs, money market funds and most any interest-bearing accounts, as well as on most ultra-safe bonds—exactly the kind of securities that retirees have counted on for eons to provide secure lifetime income without eroding their principle. The Wall Street Journal notes:

“In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003. A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.”

Making do this way and waiting for the higher yields that are certain to come with an economic rebound might have sounded practical when this mess began five years ago and no one knew how long it would last. But not anymore; not when the rate master is promising to keep yields on many kinds of fixed income below the inflation rate for at least three more years.

Reaching for higher yield means taking on market risk. There is no getting around that. But market risk is manageable through diversification and sticking to reasonably safe securities. Besides, inertia has its own set of risks. If you sit in low yielding bank CDs and draw down more than 4% of your assets each year you may run out of money in your lifetime.

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You can secure an average yield of around 5% with a mix of investment grade and high-yield corporate bonds, along with Treasuries and international bond funds. That’s not bad in this environment. But if long-term rates rise (they can do that even if short-term rates remain low) your bonds will decline in value. So be prepared to hold to maturity or, with bond funds, to stick with those with an average maturity around five years.

You may want to venture into dividend paying stocks. For ideas on which stocks to consider, look here and here. My TIME Moneyland colleague Michael Sivy recommended some additional options hereBarron’s notes that with dividend-paying stocks currently in favor more CEOs will be boosting their payouts to help push up the stock price. The publication offers some likely candidates here.

Only you can decide how much risk to take—and what kind of risk to take. Just don’t count on rising yields anytime soon to make your decision easier.