Behind the Money

Boomer Dilemma: Delay Retiring Or Take On More Risk?

The lack of income-generating investments these days may force aging Baby Boomers to either put off retirement or adopt riskier strategies to generate higher yields.

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Traditional financial planning calls for older workers to move their money into so-called safer investments like bond funds that throw off annual income that they can live on without capital appreciation.

But right now the two-year Treasury yields less than 0.2 percent, while the 10-year Treasury will currently provide an annual yield of a little more than 2 percent. The average annual rate on a three-year bank CD is 0.91 percent, according to

Equities may seem just too risky to baby boomers after a decade of two bear markets, a ‘Flash Crash’ and then the unprecedented volatility this month. The S&P 500 has had zero capital appreciation over the last 10 years and just 75 percent of the benchmark’s members pay a dividend, down from 90 percent in the 1980s, according to Bank of America/Merrill Lynch.

“People will be working cradle to grave as this low return environment is expected to be around for awhile,” said Stephen Weiss of Short Hills Capital.

Many blame fellow baby boomer Ben Bernanke, the Federal Reserve chief, for the current state of investment choices. The Fed last week pledged to keep short-term rates near zero until mid-2013.

Bernanke’s intention with this low-yield pledge is to smoke other investors out of short, safe investments. But the opposite is happening, investors of all ages just continue to crowd into these assets on the fear of a global recession, lowering the returns for everybody.

Considering the demographics, this low yield environment couldn’t be coming at a worst time. The percentage of the U.S. population over 65 is expected to double to more than 20 percent between now and 2034, according to the U.S. Census Bureau. For financial planners, the old rule of thumb used to be that a client should put their age in bonds. So those turning 65 years old should be 65 percent invested in bonds.

But Bank of America Merrill Lynch is turning this model on its head a bit. The firm’s quantitative strategist presented this demographic data as a positive for the equity market and for the boomers that stick with the stock market. The combination of cash-rich balance sheets and demand from these retirees will drive more and more companies to pay a dividend, hike payouts and repurchase shares and subsequently, cause their shares to appreciate as well.

“With corporate cash balances at near record levels, cash deployment may be one of the most bullish themes around for equities,” said Savita Subramanian, the firm’s quantitative strategist, in a note Tuesday.

Subramanian points out that this is already happening. More companies are hiking payouts and repurchasing shares this year. By his count, the companies in the S&P 500 following this strategy have returned 5.6 percent or greater this year, outperforming by far the overall index.

If the low rates have pushed investors into anything, it’s been gold , an investment that has long been shunned by financial planners because of its volatile nature and the fact that it provides zero income. For better or worse, this low-return environment may drive investors into more exotic investments.

“You can expect a lot more money to pour into the MLP space as investors look for alternative yield,” said Joshua Brown, money manager and author of ‘The Reformed Broker’ blog.

MLPs, or Master Limited Partnerships, distributes the bulk of its cash flow to shareholders. The partnerships tend to be linked to natural resources like an oil pipeline or real estate.

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