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July 20, 2017

Options to Maximize Retirement Income


One of the most difficult conversations I have with my clients nearing retirement age is how much fixed income investments will pay them during the course of their retirement years. The most common question these clients ask me is: “What can I expect to earn on my money without risking too much?”

I proceed to tell them: Low-risk fixed income investment options range from FDIC-insured Certificates of Deposit (CD), which currently average 1.75 percent, to U.S. Treasury Bonds (T-Bonds), which currently pay between 1.34 percent for a two-year bond and 2.68 percent for a 30-year bond. By historical measures, these yields are very low, and many professional fixed income traders believe these low yields may be here for the foreseeable future.

Given the historically-low interest rate environment, which may limit the earnings potential of fixed income assets like CDs and T-Bonds, some retirees may wish to pursue additional options to provide greater return on their investments and maximize their retirement income, while maintaining a relatively low-risk portfolio.



First, a bit on corporate bonds. In order to fund short- and long-term financial obligations, or to invest for growth, a corporation will issue debt to investors. These corporate bonds, which grow over time like a corporate stock, will typically offer an investor a greater yield than T-Bonds. They are issued at a fixed rate of return and generally have a date of maturity, at which point the corporation will return the original principal to the investor. Household names like Proctor and Gamble, General Electric, Microsoft and Apple all have corporate bonds available for investment.

While corporate bonds carry more risk than their government counterparts, and are subject to interest rate risks, they are generally considered safer than stocks and may have less principal fluctuations. To further dilute risk, an investor can buy a mutual or index fund containing hundreds of corporate bonds, such as the iShares Investment Grade Corporate Bond Fund (LQD), which has high liquidity and diversification. Over the last year, LQD has averaged a yield of 3.16 percent, far superior to short-term CDs and T-Bonds.



Not all types of stock ownership are created equal. Preferred stocks represent a corporate ownership structure that, while lower in class than senior investment grade bonds, is higher than the interests of common stock holders. These types of stocks usually pay a fixed rate of interest, and preferred stock holders must be paid a dividend before common stock holders. The majority of preferred stocks are issued by financial institutions and utility companies.

Preferred stock dividends have been historically secure, and provided interest rates and economies remain relatively stable, they should continue to provide low-default options for retirement portfolios. Additionally, with increasing federal regulations and financial institutions becoming increasingly well-capitalized, many professional investors are gravitating toward preferred stocks.

Just as with corporate bonds, individuals can invest in a basket of preferred stocks, too. One common index fund is the iShares Preferred Stock Index Fund (PFF), which holds nearly 300 preferred stocks and has rewarded investors with a 5.6 percent return over the past 12 months.



These types of securities are considered a hybrid between fixed and floating interest rate dividend investments. While corporations do not issue them as much as investment grade bonds or preferred stocks, variable corporate bonds have been around for decades. These types of investments generally perform better in rising rate environments, because as interest rates rise, so does the yield.

Here’s how they work. A corporate issue may offer the investor a “floor” on the dividend. For example, a corporation issues a bond promising to pay the investor no less than 4 percent per year; however, should interest rates rise relative to some established benchmark (such as the Federal Funds Rate or LIBOR), the corporation promises to pay the investor additional interest. Some investors consider variable corporate bonds to be a protection or “hedge” against fixed-rate bonds and investments, which decline in value as interest rates rise.

One of the more widely available variable corporate bond funds is the PowerShares Variable Rate Preferred Portfolio Fund (VRP), an index fund that represents over 110 securities and has paid the investor a 4.79 percent yield over the past year.



Finally, let’s look at master limited partnerships (MLPs). MLPs have historically been listed as common stocks that pay out a minimum dividend to the investor, and are traditionally popular among commodity-producing corporations in the oil and gas industry. While MLPs have generally been more volatile than investment grade corporate bonds and preferred stocks, they have also paid much higher dividends. The Alerian MLP Infrastructure Index Fund (AMLP) holds over 25 different corporations and has paid its investors 7.92 percent on average over the past 12 months.

Understandably, most retirees prefer to minimize risks in their investment portfolios, which gravitates them toward fixed income options such as CDs and T-Bonds. While these fixed income investments provide the intended security, it may make sense for them to diversify their mix of investments to hedge against the fluctuating and unpredictable interest rate environment, helping them help maximize their income during their retirement years.

You spent your life saving up for retirement, make sure your money continues to work for you. Western Growers Financial Services (WGFS) can provide you with a personal retirement assessment and help you craft a diversified retirement portfolio that both protects and grows your hard-earned dollars. For more information, contact Matt Lewis, WGFS President, at (949) 885-2379 or [email protected].