Interest rates remain historically low, and the Federal Reserve plans to keep them low for the next two years. If you want to grow your retirement savings without taking on too much risk, how do you do it?
You might have to reconsider how much cash you need and how much risk you can tolerate, says Mike Mussio, a certified financial planner with FBB Capital Partners in Bethesda, Md. Low interest rates mean less interest income for bond investors. "It may be disheartening for those who were expecting to ratchet down the risk in their portfolio toward safer, fixed-income-like investments," he says.
"Low interest rates are only good for borrowers, not savers," adds Pete D'Arruda, president of Capital Financial Advisory Group in Cary, N.C. "People who are nearing retirement need the money they save to grow. By keeping rates low, the Fed is essentially telling savers, 'Your money is not going to grow.'"
Don't let the current climate govern your long-term plans and goals, D'Arruda says. Instead, sit down with a trusted advisor and review all of your options. "Get with a financial planner with access to both risk and safe assets, and never take risks with money you cannot afford to lose."
Here are four strategies that may help you defy the ongoing low interest rates:
Rather than avoiding risk at all costs, Mussio recommends building a diversified portfolio with exposure across many asset classes, with an emphasis on income and cash flow. Those asset classes include stocks, bonds, cash and commodities. "There are no risk-free investments," Mussio says. "Even [treasury bonds] can lose money on a total-return basis. Cash and FDIC-insured accounts have lost money in real terms, adjusted for inflation, every year for the last three years at least."
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D'Arruda says his favorite strategy for keeping money safe while still providing retirement income is to purchase several annuities that will provide the income you need at different times. This strategy works best for people who are retired or nearing retirement. D'Arruda advises clients to start with an immediate annuity or a CD ladder to cover the first five years of desired income in retirement. Similar to an annuity ladder, a CD ladder involves spreading your money over a number of CDs that mature at different times, so that you have one maturing each year or every few months to provide interest income.
After relying on an immediate annuity or a CD ladder for the first five years of retirement income, D'Arruda recommends purchasing a deferred fixed annuity, which offers a higher payout. "Long-term CDs could be used here, but the rates are too low in most cases," he says. "This step is designed to meet income for years five through 10 in retirement."
For further along, D'Arruda recommends purchasing a fixed indexed annuity (FIA) and deferring it for 10 years or more. As with a pension, you could receive a lump sum payout at the end of the deferral period, which could provide income for 10 more years of retirement and beyond.
[Related: Could Annuities Fill the Pension Gap?]
If you have money that is not needed to meet current expenses, D'Arruda recommends investing it in the stock market. Focus on stocks that pay dividends, which are distributions of earnings paid to the shareholder, usually on a quarterly basis, in order to increase your cash flow during retirement.
According to Bankrate, some industries pay higher dividends than others. For instance, cigarette companies and master limited partnerships in the energy sector (partnerships that own natural gas pipelines) are currently paying 6 percent to 7 percent in dividends. Companies in higher-risk industries such as mortgage real estate investment trusts (REITs) are paying up to 20 percent in dividends. However, when stocks pay dividends of up to 20 percent, that often means they carry an extreme level of risk.
If you're more comfortable allowing financial experts to choose your stocks, consider a dividend-weighted stock index fund, which specializes in stocks that pay dividends.
Low interest rates encourage borrowing, but if your focus is on saving for retirement, extra borrowing can threaten your plans. "You cannot borrow yourself out of debt," D'Arruda says. "Folks who see low interest rates might be persuaded to borrow simply because they can. This can lead to trapping yourself into long-term debt if you're borrowing just because rates are low."
More resources: Browse SecondAct's Retirement Savings Center.
SecondAct contributor Nancy Mann Jackson writes regularly about personal finance, workplace issues and sustainability. She is based in Huntsville, Alabama.