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News that the Federal Reserve is poised to continue raising interest rates should be good news for retirees.
But financial experts say you may want to hold off on celebrating just yet.
That is because those rate hikes might not be enough to help create a source of reliable income that retirees really need.
“Rates are starting to tick up, but they’re ticking up at a very low level,” said Marta Norton, a portfolio manager at Morningstar Investment Management, at the firm’s investment conference in Chicago on Tuesday.
That puts the burden on individuals entering their golden years to figure out how to make their money last for 20 or even 30 years.
“The worst thing you can possibly do to affect your situation is to retire early,” said David Blanchett, head of retirement research at Morningstar.
But many people retire sooner than they expect, signing off from the workforce at age 62 or 63 instead of 65, for example, Blanchett said.
That comes as investment returns are projected to be less over the next decade.
“What we find is if 4 percent was that safe initial withdrawal rate historically, it’s 3 percent today,” Blanchett said.
While 3 percent is not the recommended withdrawal rate for everyone, Blanchett said, all retirees can stand to improve their financial picture by looking for strategic ways to make their money last.
Wyatt Lee, a portfolio manager at T. Rowe Price, said he came to one conclusion after looking at the record-keeping data from his firm’s 401(k) plan business: “Investors just don’t use bonds.”
“They tend to toggle between cash and equities,” Lee said. “They don’t understand how they work. That’s a really big problem, because they’re not taking into account all the levers.”
While looking for opportunities in this area, it is important for investors to understand that not all funds are created equally.
Investors tend to be most familiar with core bond funds that provide access to investment-grade areas of the bond market, Lee said.
But individuals should also study up on other funds that can be “great from a portfolio context,” Lee said.
Non-core options, such as junk bonds or emerging markets debt, can work well as long-term options in a portfolio where an investor has at least a 10-year time horizon, said Christine Benz, director of personal finance at Morningstar.
If you want a steady amount of income to come in throughout your retirement, you can access that by buying an annuity.
The key for investors is to understand what you’re buying, said Benz, who has had to inform some unaware individuals that they actually own annuities after reviewing their balance sheets.
Not knowing you’re invested in an annuity can be a problem, because there are often high costs to get out of these products.
While annuities have a reputation for being expensive, not all of them — such as immediate annuities — are costly, according to Benz.
“It can make a lot of sense to take a portion of your portfolio and get a guarantee to it,” Lee said. “If individuals don’t think they’re getting a good deal out of it and they don’t understand it, they’re going to be reluctant to take the medicine even if it’s the best thing for them.”
Holding a certain amount of cash, such as two years’ worth of living expenses, can be a helpful permanent retirement portfolio holding that gives you some wiggle room if the markets decline and you need income, Benz said.
“In your dividend-paying basket of stocks, if all of those companies cut their dividends at once, or if we see a lot of volatility in the bond market, you have a chance to regroup,” Benz said.