Archive for June 11th, 2013

June 11, 2013

Shaky retirement outlook for baby boomers unable to rely on bond income

by Grace

A financially uncertain retirement looms ahead for many baby boomers, even for the few who have managed to put away at least $1 million in savings.

A MILLION dollars isn’t what it used to be.

That’s the message of a New York Times piece detailing how millionaires may not be living the high life as retirees.

… $61,000 or $71,000 a year — the combined Social Security and cash flow from the $1 million portfolio — isn’t likely to be enough for most people who have grown accustomed to living on $150,000 or more a year….

Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level.

Of course, retirees from the lower end of the wealth spectrum will be the ones dealing with more serious struggles to make ends meet.

Some reasons for the pending retirement ‘crisis’:

  • Low savings rate
  • Slump in home prices
  • “Ultralow interest rates” have drastically cut  investment income from bond portfolios

This last reason has been particularly painful for investors who have long considered bonds a low-risk vehicle that would consistently offer a minimum level of income.

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Suddenly, that risk-free bond portfolio is looking risky….

Interest rates are expected to rise, and the outlook suggests ongoing volatility.

bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. On Friday, after the Labor Department reported that the unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose further, amid uncertainty about the Fed’s intentions.

Not too many good options for baby boomers facing an underfunded retirement.

  • Spend less and save more.
  • Continue working beyond typical retirement age.
  • Consider tapping into home equity.
  • Add more stocks to an investment portfolio.

Of course, this last suggestion is not without risk.

.. adding stocks to a portfolio reduces the risk of outliving your savings. But it also increases the risk of big losses.

Some traditional advice for younger people, with a new suggestion about rethinking retirement age:

  • Save more
  • Invest in stocks
  • Live below your means
  • Get used to the idea of working longer, until age 70 or beyond.

Read more about A Bond Market Plunge That Baffles the Experts.

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