It's a common theme in the new retirement landscape these days: the hunt for yield.
With the Federal Reservepromising low rates at least through 2014, many retirees and conservative investors are naturally concerned.
They're in the midst of what McLean, Virginia-based financial planner Barry Glassman calls a "yield drought." As a result, many baby boomers and retirees may be forced to either: live on less, erode their portfolio's principal, take on more risk, or depend on gains from the stock market. Many of them are relying a combination of these strategies.
"As long as yields stay low and retirees income is low, they have to plan accordingly," Glassman says. "What Ben Bernanke is telling us this week is that that's going to happen for longer than they expect."
But piling into the stock market and hoping for returns that aren't too volatile simply isn't realistic. Boomers and retirees need conservative investment strategies that can help them generate income and avoid a cash crunch:
Glassman suggests conservative investors:
- Ladder bonds and CDs at different maturity dates so that they can capture potential higher rates and yields.
- Buy global bonds, not only treasuries, to maximize total return.
- Invest in dividend-paying stocks, again paying attention to the total return...
- Finally, look for alternative investments. Glassman suggest merger arbitrage funds, which invest long and short in companies involved in a merger or acquisition.
And when it comes to protecting your retirement portfolio against low investment yields, choosing the right investment isn't the only safeguard.
You also need to consider where the investments are held: taxable accounts or IRAs? Also, think about how you plan to access the money.
Generally, the amount of money that you withdraw from your retirement savings each year should be 4 percent or less of the total portfolio. If it has to be less in order to make sure you don't run out of money, then that will require cutting back on expenses for a while.
Also hold income-producing assets in an IRA. Otherwise the income generated will be subject to short term capital gains that will be taxed.
Finally, retirees should tap taxable accounts first and take only the required minimum distributions from Traditional IRAs for now, Glassman says.
It's important to postpone withdrawals from Traditional IRAs for as long as possible because that money will be taxed at your ordinary income rate when you take it out.