Finally, a Solution to the Income Investing Dilemma

In our 2012 Client Survey, the quest for income from investments was the number one concern of those who responded. In this week’s E-Letter, I’m going to address the changing trends in retirement income and the difficulties of living on a nest egg without touching principal.

There’s an endangered species in the investment industry today and it goes by the name of “yield.” With continued downward pressure from the Federal Reserve, both short-term and long-term interest rates have been held to artificially low levels. And each new announcement from the Fed seems to extend the outlook for low interest rates farther into the future.

Of course, these low interest rates may be nice if you are refinancing your home or needing to borrow money for your business, but it is wreaking havoc among those at or near retirement. A growing number of investors are seeking a way to earn income on their nest eggs without having to invade the principal.

Many Boomers thought that they could hold on when the assumption was that the Fed’s easing policies would come to an end in 2013. Now, however, the Fed’s easy money policy is open-ended, tied to a significant drop in the unemployment rate. Those at or near retirement now have no idea how long interest rates may stay low. Bernanke says that easing could stop by 2015 but that’s over two years away, and we know that he can change his mind in mid-stream, so that’s no comfort.

It might not be so bad if bonds and CDs were the only income resources affected by the current economic and monetary situation. Unfortunately, other traditional retirement income strategies such as fixed annuities, dividend-paying stocks and even working longer have been threatened by the economy, politics or both.

Boomers Now Facing Additional Headwinds

I have written many times about the plight of Baby Boomers as they begin to retire into what can only be described as an economic malaise. Unfortunately, many Baby Boomers are facing more headwinds than just low yields when seeking retirement income. Consider the following:

  • Numerous surveys and studies over the years have documented that many Boomers have not saved enough for retirement. However, Boomers are now faced with expenditures such as caring for elderly parents and/or kids that move back home because they can’t find employment. Add to that the number of unemployed Boomers and those whose income is shrinking and you have a retirement crisis in the making;

  • Healthcare costs are also a factor related to retirement income. A 2012 study by Fidelity Investments®estimated that a 65-year-old couple retiring in 2012 would need $240,000 to cover medical costs alone throughout retirement. While this figure does assume Medicare coverage, it’s probably a bit low because it leaves out other medical costs such as over-the-counter medicines, most dental services and long-term care expenses, which can be considerable;

  • Prior to 2008, many seniors planned to supplement low savings with part-time or even full-time employment. Yet with today’s high unemployment rates, dreams of additional earnings from employment may be just wishful thinking;

  • Many older investors are also wary of the stock market after having the value of their investments decimated by two major bear markets within the span of a decade. While many Boomers need the growth potential that equities provide, they are all too familiar with the downside risk that has become a hard reality during past bear markets;

  • Changes in tax laws may also affect those seeking income, in that dividends are likely to be taxed at a higher rate than currently in place. Since dividends are already tax inefficient in that they are taxed twice, corporations may find more tax-wise ways to reward shareholders in the future, leaving those seeking dividend income out in the cold. In fact, some companies accelerated the payment of dividends in 2012 in fear of higher tax rates in 2013; and

  • As noted above, low interest rates on “safe” investments are having a major effect on retirement income. For example, one method of providing income in the past has been through bond “laddering,” where bonds of different maturities are combined in a portfolio. In today’s low-rate environment, bond ladders are not producing the kind of income they used to. Worse than that, if interest rates go higher, liquidating low-rate bonds before maturity to access higher rates could subject retirees to major losses.

Of course, the above list is not exhaustive of the many headwinds that income investors may encounter in this “new normal” environment, but they do illustrate the many concerns facing those who are now seeking to enter the distribution phase of their investment lifecycle.

The Tactical Solution to Income Investing

The bottom line for many Boomers at or near retirement is that they may have to seek out higher-risk investments in order to attain the income they need. However, buying and holding higher-risk investments could subject retirees to the kinds of losses incurred in the two bear markets we’ve endured since the year 2000. How can you balance the need for higher potential returns while also keeping risk manageable?

Fortunately, there is a way and it’s through tactical” investing. Unlike buy-and-hold, tactical asset management involves moving assets from one asset class to another, or to cash, when conditions become unfavorable for the higher-risk investments. Of course, having the goal of moving to lower-risk investments during volatile markets and having an actual track record of doing so are two different things.

With the increased attention on income investments today, there is no shortage of new mutual funds and other investments featuring tactical strategies intended to produce income and to manage risks. However, many of these strategies have little or no actual track record proving the manager’s ability to actually deliver on the promise of both meaningful income and managed risk.


    After two major equity bear markets in less than a decade, many income investors are wary of stocks since they don’t have the luxury of time to regain lost ground. Hanlon’s Managed Income Strategy has distinguished itself by performing well even during two bear markets, as well as during the uncertainty of the subprime meltdown and subsequent government intervention in the markets.

    While the potential for the bond bubble bursting has been the object of much speculation recently, Hanlon’s Managed Income is not a passive buy-and-hold strategy where you have to worry about whether or not there’s a bond bubble. Instead, Hanlon’s tactical approach is designed to move out of the market should signs of potential downward volatility become apparent.

    One of the most impressive things about Hanlon is the strong team orientation and dedication to customer service. The firm has a well-organized vision and is prepared to grow larger without compromising their standards. If you are seeking a conservative growth investment option or an income solution, the Managed Income Strategy may be just what the doctor ordered.

© Halbert Wealth Management

© Halbert Wealth Management

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