New York Times columnist Jeff Sommer makes a case that investors who play it too safe with their market portfolios may end up feeling sorry.

Finding the Right Investment Mix for Your Retirement

By Jeff Sommer, December 8, 2023

“All investments involve taking on risk.” That’s a standard Securities and Exchange Commission warning.

Be careful. But be aware that unless you take on some risk, you won’t get much of a return. This risk-return trade-off is an essential part of investing, even if you have a low threshold for risk.

Perhaps you can’t afford to lose money, don’t have enough time to recover from a temporary loss or just can’t stand the very idea of putting your money at risk.

If any of this sounds like you, there is some good news. Interest rates are far higher than they were just a couple of years ago, though they have fallen a bit lately. For risk-averse investors, the terms of the classic trade-off have shifted in your favor. Without taking on more short-term risk, you can get better returns.

Still, fixed-income investments aren’t a panacea. Over the long run, they have returned less than the overall stock market and are likely to do so in the future. Paradoxically, if you overemphasize safety by loading up too heavily on fixed income, you may be giving up a degree of prosperity later. Balancing these issues is what the risk-return trade-off is all about.

Lower interest rates tend to stimulate the economy. They are better for borrowers — including people who want to take out a mortgage or pay down a credit card, or finance a business. Lower rates also benefit risk-taking investors because the stock market tends to flourish when money is cheap.

But higher rates are better for people who are saving money, including risk-averse investors who have managed to build a nest egg and want to convert it into a safe, rich stream for retirement. To their chagrin, interest rates — also known as yields — began dropping in 2007 in the early days of the financial crisis. This meant that if you bought a newly issued security and held it to maturity, you would have received little income in return. It’s only this year, and thanks to the Federal Reserve’s long battle against inflation, that long-term interest rates have risen back to levels that prevailed before the financial crisis.

The effects of shifting yields can be stark for anyone hoping to live off the income stream produced by bonds or annuities.

Consider this. A retiree who bought a 10-year Treasury note in January 2000 was able to lock in a yield of 6.68 percent — generating $6,680 annually on a $100,000 investment for the next decade. But by January 2009, deep into the financial crisis, the yield on a newly purchased 10-year Treasury was only 2.87 percent — producing a mere $2,870 annually on the same size of an investment.

The implications of these low yields for risk-averse investors weren’t widely reported at first, probably because for bond traders — who are looking for profit, not years of guaranteed income — falling yields were a good thing.

Remember, as part of bond math, yields and prices move in opposite directions. When market yields dropped, people who already owned bonds and sold them benefited from higher prices. Falling yields were also generally helpful for those who owned bond mutual funds and exchange-traded funds. Bond fund returns are determined both by yields — which were dropping — and by prices, which rose. For longer-term securities held by funds, the price gains typically outweighed the losses.

But for risk-averse investors seeking stable long-term returns, it’s precisely when yields are low that problems arise. That began to happen more than a decade ago. In a 2013 column, I pointed out that a risk-averse newly retired couple with a $1 million nest egg invested in fixed-income holdings at the time could easily exhaust their holdings within one decade, because their stream of income would be quite low. They would probably improve their prospects, I suggested, if they shifted some investments into the stock market.

And, indeed, market returns over the last decade show that assessment was on the mark. The S&P 500, a benchmark for the U.S. stock market, returned nearly 12 percent, annualized, while the investment-grade bond market returned only 1.5 percent.

But investing in stocks entails risk. Retirees would have had to have enough resources — both financial and emotional — to withstand gut-wrenching declines.

Another safe option existed. The couple in 2013 could also have increased their retirement income reasonably safely by buying a cheap, simple annuity — a single premium immediate annuity (often denoted by its acronym, SPIA) — to supplement their retirement savings and Social Security payments. In 2013, a $100,000 investment in such an annuity by a 65-year-old would have generated an average $6,348 annual lifetime payout for a man and $5,904 for a woman, the archive of the website shows.

Both income streams were far higher than the couple would have received from 10-year Treasuries when the 2013 column was written, but lower than the stock market produced.

Today, for the risk-averse, the situation is more favorable.

A newly purchased 10-year Treasury will produce around $4,250 in annual income on a $100,000 investment — compared with a mere $640 on a new Treasury note purchased in April 2020.

Income from single premium immediate annuities is also much better. In April 2020, when interest rates were low, the annual lifetime payout on a $100,000 investment for a 65-year-old was $5,676 for man and $5,352 for a woman. In November, the payouts had risen to $7,380 for a 65-year-old man and $7,068 for a woman.

As a practical matter, bonds offer much more flexibility than annuities, through either buying a series of individual bonds with maturities tailored to your needs or holding an investment-grade bond fund, said Kathy Jones, chief fixed-income strategist for the Schwab Center for Financial Research.

“Higher rates are, of course, better for people who want the income that bonds provide,” she said.

But investing only in fixed income isn’t ideal, even for retirees, with the possible exception of those with an expected life span of only a few more years and limited resources. For one thing, even when interest rates are high, inflation will eat away at least some of the income.

“You want to be careful that you don’t succumb to ‘money illusion,’” said Joel Dickson, global head of advice methodology at Vanguard. “You can think that you’re doing fine,” he said, but your spending power will decline as prices rise.

The stock market tends to outpace inflation over extended periods, and Mr. Dickson and Ms. Jones both said a “total return” approach probably made sense for most people, even retirees. This means keeping a well-diversified portfolio of stocks in addition to bonds.

Remember there are trade-offs in investing. There’s no one perfect answer for everyone. Yes, higher rates are a boon if you need to lock in income. But the total return from holdings that include stocks is likely to outperform pure fixed-income investments, if you have the time and the stomach to withstand major market downturns.


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