As you design your retirement income plan, you might think that the Fed's cut in interest rates will force you to switch gears. But remember: Whether it's dividends, interest or annuity payments, don't try to time the market.
By JERRY GOLDEN, INVESTMENT ADVISER REPRESENTATIVE, President | Golden Retirement Advisors Inc. August 9, 2019
News from the financial world has been confusing lately. Is the economy strong or about to bust? Is the inevitable recession close or still years off?
At the end of July, the Fed lowered its key interest rate by 0.25% to just below 2.25% — the first time it has cut rates since 2008. But what does that mean for your retirement, particularly for new retirees who are ready to set up their retirement income plan and make other lifestyle decisions?
These new retirees for the most part have seen 401(k) and IRA balances grow. But now they must convert retirement savings to income. For them, the question they often ask is, “Do I set up my plan now or wait until interest rates go back up?”
My answer:
When it comes to retirement income planning, don’t try to time the market. Set up your plan with the flexibility to change, and in turn gain the peace of mind to stay the course.
My planning method is based on Income Allocation and includes annuity payments in the mix. I often have conversations with advisory clients who are attracted to annuity payments as a source of secure lifetime income; most, however, want to buy when 10-year Treasuries are peaking. Sure, it’s nice to imagine earning the top rates on everything, but as you will see, that doesn’t usually work. And it’s not necessary.
At the end of November 2018, 10-year Treasuries were at 3.24%. As of Aug. 2, 2019, they sat at 1.86% — or more than a 40% drop. People who were thinking last fall that they would use up to 30% of their savings to purchase annuity payments are disappointed. Because they waited, they’re going to have to revise their plans or reduce their budget. Or so they think.
They may not be worse off. Here’s why.
A typical couple adopting my Income Allocation plan would be looking at income coming from a combination of dividends, interest, annuity payments, withdrawals and Social Security payments. So, is the income from their plan now higher or lower than the plan they would have adopted in November? It’s higher, for the following reasons:
1. The value of the newly retired couple’s balanced (50/50) portfolio of stock and bond indices increased by over 7% during the period, giving them more savings to apply to the annuity purchase and other sources of income.
2. Payout rates for income annuities do not follow interest rates directly. In fact, while 10-year Treasury rates went down more than 40%, Payout rates went down only 4% to 5% (we explain why in the next section). Also, the taxable portion of annuity payments in the newly retired couple’s portfolio fell by up to 50% during the period, reducing their overall projected tax bill.
3. Since under my Income Allocation plan they are not as dependent on the interest on low-risk, fixed-income investments (which they would be if they held only Treasuries) they are less affected by the lower interest rates.
Putting all those elements together, an Income Allocation plan could support more income than back in November, despite lower interest rates.