Patrick Nolan offers his top tips to help your money deliver.
Nobody likes the unknown, including when it comes to the future value of your money. Retirement planning used to be simple – invest in a portfolio [of bonds?] that comfortably paid a steady stream of income for life while keeping the bulk of your investments (the principle) for the next generation.
My father-in-law regularly reminds me of a time in the early ‘80s when he was able to buy municipal bonds with a 12% yield. Unfortunately, in our current reality of lower interest rates, a comfortable stream of income has become far more challenging to achieve. Many retirement investors find themselves faced with no-win choices:
- spend less
- take on more risk in their portfolio
- withdraw money from their nest egg earlier than planned
Prematurely ‘decumulating’ (withdrawing money from your nest egg) is bad for two reasons: (1) it reduces your base of money overall and (2) it reduces your future income stream earned from that money.
The chart below outlines the challenge. Today, we need to accept three to five times more volatility than we did before the 2007 credit crisis in order to generate yield targets of between three and five percent.