Since 2008, the Federal Reserve has kept short-term interest rates near zero, and it remains uncertain when or if the Fed will raise interest rates in 2015. Low interest rates have plagued fixed-income investors and retirees for years, and although experts keep predicting that rates will go up, they continue to remain relentlessly low or in decline. Baby Boomers must decide how to invest at a time when interest rates sit at historic lows but could rise quickly, slowly, or not at all. —
For retirees, it is a catch-22 since every investment has some level of risk. Today, short-term fixed instruments such as CDs, Treasury bills, or short-term bonds will actually lose money. For example, earnings of 1.05 percent on a one-year CD, with inflation running at 1.6 percent brings the real rate of return down to negative 0.55 percent. In effect, the investor is losing money on a one-year CD.
On the other hand, investing in a 10-year U.S. Treasury bond will earn 2.25 percent unless rates rise, in which case the value of the bond will decline.
Since no one single investment can alleviate all risks that can arise when investing for retirement, decisions must be made regarding which risks to manage, and how.
According to retirement planner Matt Klaess of the Denver-based Paradigm Group, seniors face three main risks in retirement: sequence risk, the risk that their nest egg will decline in value while money is being withdrawn; inflation risk, the risk that investments will not keep pace with the cost of living; and longevity risk, the risk that the retiree will outlive their assets.
“Any one of these risks can prevent a person from enjoying a secure retirement,” Klaess says. “We recommend developing a plan to keep costs low, maintain a truly diversified portfolio, and establish risk management strategies in order to ensure a reliable income for life.”
For Baby Boomers nearing retirement, it is never too soon to meet with a financial planner to review existing investments and develop a solid retirement plan that establishes how much income they will need to withdraw from their retirement savings each year to live comfortably.
This means establishing a clear understanding of one’s annual expenses and how much income will be provided through Social Security, part-time employment, pensions, investment interest (if any exists) and other sources of income. If the income is less than projected expenses, the shortfall will have to be covered from the retiree’s personal savings.
Today’s retirees can probably rest assured that this period of low interest rates will not last forever. For now, focusing on building a diversified, low-cost portfolio that will meet their long-term needs should take precedence over investments that achieve only short-term cash flow.
Source URL: http://councilofeliteadvisors.com/liftmedia
Release ID: 81636