The first time I reviewed and worked with a nice bond retirement portfolio it was my grandparents investment account. In the mid to late 90’s I found myself driving down to Temple Texas once a week to help them out with medical and financial stuff. They were in the end stage of their lives and suddenly needed assistance in these matters.
It was a beautiful portfolio. Neatly organized in a way that rang true with the German heritage of my grandfather. The bonds were laddered out over several years with maturities coming due each year in succession. Regularly scheduled dividend payments were equally well-timed to provide a steady stream of retirement income for my grandparents to live on. As I recall, the average yield was somewhere around 6%. With inflation hovering around the 2.5% mark, I thought this to be an impressive return, considering the safety of the instruments.
Back then, this was the way a retirement income portfolio was constructed. A reasonable amount of money invested in this manner would provide a nice, safe and steady stream of predictable income for a very long period of time.
Not anymore.
Today, yields are a third of what they were. Granted, inflation is lower but the real return differential between inflation and yield is terrible. So are bonds dead? I don’t think so. We still use bonds in portfolios for safety and diversification purposes, but they are not the reliable income producer they used to be by any stretch.
Low yields combined with the fact that people live so much longer in retirement means our money has to work harder in retirement than it used to. Don’t get me wrong, bonds are still a very important piece of any retirement portfolio, mainly because they provide us with a place to draw from in down market conditions. However; stocks are the real driver of long term sustainability now and probably well into the future if rates and yields continue to remain low.
This means retirement income portfolios are much more complicated now, and not nearly as neat and orderly as an old-fashioned bond ladder. It also means we must learn to accept short term fluctuations in values and have a solid understanding of the importance of long term growth even during retirement.
What concerns come to mind when we talk about investing in stocks during retirement? We’d love to know what you think.
Take care,
Rob
