The Changing Landscape for Retirement Planning In the past, many retirees were able to live on a combination of pensions plus whatever income their portfolios delivered. But that’s changing… For starters, pensions are slowly ebbing away; most employers are switching to defined contribution plans like 401(k)s and 403(b)s. 40% of workers were covered by pensions in 1980 By 2008, that number had dropped to 21% Defined-contribution plans have become the retirement vehicle of choice for most companies 2
To simulate a pension, many retirees look yield-rich securities to deliver the income they need, and it’s easy to see why. Income strategies are intuitively appealing and easy to understand (“It’s how my parents did it.”) Income-producing securities widely viewed as safe(r) in the wake of the bear market Many retirees say they’re “allergic” to invading principal; assume their portfolios will necessarily shrink with a total return approach Logistical simplicity: Income securities provide the equivalent of a “paycheck” during retirement; extracting living expenses from a total return portfolio is more cumbersome 3
The Changing Landscape for Retirement Planning Meanwhile, CD rates have plummeted. 4 Average 6-month CD rates in 1970: 9.1% Average 6-month CD rates in 1980: 13.4% Average 6-month CD rates in 1990: 8.2% Average 6-month CD rates in 2000: 6.2% Average 6-month CD rates in 2012: 0.5% This trend is clearly not a retiree’s friend… Source: Forecastchart.com.
The Changing Landscape for Retirement Planning Yields aren’t particularly encouraging for those willing to buy longer- duration bonds. 5 Yield* for Barclays Aggregate Bond Index: 2.45%** Yield* for Intermediate-Term Treasury Bonds***: 1.66% Yield* for Intermediate Municipal Bonds****: 2.71% Yield* for Barclays Aggregate U.S. Long Government/Credit Float Adjusted Index: 4.69%***** *30-day SEC yield (past month’s yield, annualized) **iShares Core Total U.S. Bond Market ETF, less expenses, used as proxy. Source: iShares. ***Vanguard Intermediate-Term Treasury, less expenses, used as proxy. Source: Vanguard. ****Vanguard Intermediate-Term Tax-Exempt, less expenses, used as proxy. Source: Vanguard. *****Vanguard Long-Term Bond Index, less expenses, used as proxy. Source: Vanguard.
The Changing Landscape for Retirement Planning Yields are somewhat better for those willing to venture further out on the risk spectrum, but the downside potential is much greater. High-Yield BondsEmerging Markets BondCurrent Yield: ~5% 2008 Return: -24%2008 Return: -26% Bank LoanMultisector Bond FundCurrent Yield: ~3.5% 2008 Return: -17%2008 Return: -15% 6 Source: Morningstar Direct, October 7 2013.
The Changing Landscape for Retirement Planning A plain-vanilla balanced portfolio doesn’t come close to generating most retirees’ desired living expenses—at least not based solely on its income distributions. 60% S&P 500/40% Barclays Aggregate Blend Current Yield: ~2% 2008 Loss: -22% 7 Source: Morningstar.com, November 8, 2013.
The Changing Landscape for Retirement Planning A higher-yielding mix comes closer on the income front, but the risk is a lot higher, too. 60% iShares High Dividend Yield Index/40% SPDR Barclays High Yield Bond Current Yield: 3.76% 2008 Loss: -35% 8 Source: Morningstar.com, November 8, 2013.