The question of how to safely generate income from a retirement portfolio is one of the most challenging in financial planning. In the days when people had traditional pensions, their employers simply promised them a constant inflation-adjusted income for the duration of their retirements. As we have moved away from traditional pensions and into self-directed savings plans such as 401(k)’s and IRA’s, investors and advisors must create their own customized income plans. New research from Morningstar highlights what appears to be a better approach to creating a stable income stream from an investment portfolio. Continue reading
In Part I of this article, I explained why I have issues with the traditional idea that individuals should provide for their required level of retirement income (beyond what is provided by Social Security and any pensions) entirely with assets with zero risk of loss of principal (e.g. Treasury bonds). In Part II, I discuss the alternative approaches.
There are two investments that have zero loss of principal: traditional Treasury bonds and Treasury Inflation-Protected Securities (TIPS), which are Treasury bonds with embedded protection against inflation.
I agree with the notion that people need to save and invest so as to be able to provide a very reliable and consistent income stream in retirement. Zvi Bodie has presented a compelling argument that investments in stocks do not become less risky as you hold them for longer periods, so that investors cannot rely on stocks as part of their required income stream. I have performed detailed analysis of Bodie’s argument and I agree with his argument: the magnitude of loss that you can face with an equity-heavy portfolio increases the longer you hold the portfolio. As I noted in Part I, William Bernstein has recently advocated for a portfolio in which all of your required income is provided by Treasuries and annuities, largely consistent with Bodie. Continue reading
The financial services industry is in a period of substantial change. Low interest rates, new regulations and additional scrutiny are changing the landscape. Perhaps the biggest change is the transition of the first wave of Baby Boomers from working to retirement. Not only is this generation huge, but its also the first “401(k)” generation. The introduction of self-directed retirement accounts, such as 401(k) plans, coincided with the “Baby Boomer Generation” (people born between 1946 and 1964) entering their peak saving years.
Beyond the 401(k)
The 401(k) plan was first introduced in 1980. In 1980, the oldest Boomers were 34 years old and entering the age range at which people really start to save. Not surprisingly, the financial services industry created a multitude of new financial products to pitch to these people. Thus began the era of the mutual fund. Continue reading
The recently-published book by Zvi Bodie and Rachelle Taqqu, Risk Less and Prosper: Your Guide to Safer Investing, provides a unique perspective on how to meet the challenge of long-term financial planning. The book is well-organized into a number of steps required for identifying and organizing long-term goals and thinking through how to meet these goals. The presentation is built around a narrative in which a group of people meet to try to figure out how to meet their long-term goals and how to deal with the uncertainty associated with both their lives and their investments. Continue reading