So much is going on in the U.S. these days that you might have forgotten by now that the Federal Reserve announced several weeks ago it expects to hold interest rates near zero at least until 2023. Persistent low interest rates are upending common investment assumptions about savings and income during retirement.
Among the most important implications of low rates involves the standard advice that near-retirees and retirees should put a higher percentage of their portfolio into fixed-income securities for income and safety. Investments in high-quality fixed-income securities offer reliable cash flow during retirement. These fixed-income investments are less volatile than equities, too, on average.
Problem is, bonds aren’t generating much income for savers at current low rates. For example, while I am writing this column the yield on 5-year U.S. Treasury notes was 0.304% and on 10-year Treasury notes 0.731%. It takes substantial sums to generate much income at those rates. One classic way to possibly generate more income is to invest in higher yielding and, therefore, riskier fixed-income securities. (Think junk bonds.) Chasing higher yields also means greater odds the bet won’t pay off. Another option is to keep more money in stocks. How comfortable are you relying on stocks for steady, reliable income in retirement?
What options are there for filling the income void left by low-yielding bonds besides taking on more financial risk? The best choice lies in moving away from a finance-capital perspective to a human capital model. Savings and portfolio allocation are important, of course. But the finance-centric question “Do I have enough in savings?” and “How can I wring more income out of my investments” will take you only so far. The human capital model focuses on how you can keep generating an income off your knowledge and skills developed over the years.
In other words, think about entrepreneurship, self-employment, gig work, side hustles, part-time jobs and other work arrangements in retirement. Earning even a slim-to-modest income from work will dwarf what most people can ever expect to make off their fixed income investments.
The key to preparing for retirement in this environment is researching and planning your job options for later in life. The path for many won’t be easy. Age discrimination is real. Yet reimagining the retirement years to include at least some work will both boost your income and your financial security.
Chris Farrell is senior economics contributor, “Marketplace,” and Minnesota Public Radio.