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Retirement Planning > Retirement Investing > Income Investing

The ‘Most Important’ Strategy for Retirees Now

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What You Need to Know

  • Worries about inflation, banking sector instability and surges in market volatility have put a lot of investors on the back foot.
  • For retirement-focused investors, however, there are attractive pockets of opportunity, especially in long-duration bonds.
  • More important than predicting a recession is preparing for ongoing portfolio stress, experts say.

Investors who are in or near retirement have a lot to consider in the present moment.

On the one hand, worries about inflation, banking sector instability and surges in market volatility have put a lot of investors on the back foot — especially retirees who do not have long time horizons to allow depreciated assets to recover.

At the same time, though, investors focused on meeting retirement income goals can now lean on much higher yields in both the government and corporate bond sectors, and there are hopes that cooling inflation data could allow for the U.S. and global economies to achieve the illusive but much-desired “soft landing” and avoid a serious recession.

According to Brett Wander, chief investment officer for fixed income strategies at Schwab Asset Management, 2023 represents a crucial time for retirement-oriented investors. In fact, for Wander, the current moment in the markets makes it easy to point to the “single most important investment consideration” for retirees today.

“The most important thing for a near-retiree or a retired investor to do today is to pause and truly rethink your asset allocation and to be humble about the amount of risk you can take,” Wander says.

“This is hard for some people to do in the wake of a multi-decade bull run for stocks, during which investors have been rewarded for carrying arguably excessive risk in the portfolio,” he adds.

A Special Time

Wander offered this perspective on a wide-ranging webinar hosted by T. Rowe Price, during which he shared the digital floor with Andrew McCormick, T. Rowe Price’s head of global fixed income and chief investment officer.

According to bond experts, retired investors cannot assume that the current bout of market volatility and economic uncertainty will yield to another historic bull run that lasts 10 or 20 years. It’s just not very likely from a historical perspective, they agreed, and as such, retirement investors have some serious soul-searching to do with respect to risk-taking in their portfolios.

Simply put, Wander and McCormick agree, retired investors should focus on the tried-and-true fundamentals for generating stable returns to fund income needs, through approaches such as bond laddering and by strategically taking advantage of higher yields in long-term, safe government Treasurys and private market bonds.

A New Sense of Risk

“It’s obvious, but as you get older, your investment time horizon shrinks, and that means it is important to become cognizant of risk in a bit of a different way,” Wander suggests.

“When you are in your 20s and 30s, fixed income probably isn’t playing a major role, because your portfolio’s time horizon is so long and you have a real ability to withstand even big ups and downs in the markets,” he explains.

For most retirees, that’s just not the case, and sequence of returns risk becomes a dominant factor in financial planning.

As McCormick points out, confronting sequence risk and dialing back market risk overall does not imply a 100% pivot away from equities, but it does raise the question of whether a traditional 60/40 portfolio of stocks and bonds is the most sensible approach.

“Even as a bond guy, I would be hesitant to say many retirees should pivot to a portfolio that is all bonds,” McCormick says. “That kind of thinking has evolved, especially as people benefit from greater longevity. Some proportion of equities, and especially dividend-paying equities, are likely going to be useful.”

The key to success, both agree, is to avoid a greedy or reckless perspective — and to set realistic expectations for lifestyle and income needs that prevent the need to stretch for yield.

Prepare Now for Stress Later

According to McCormick and Wander, many investors in 2023 are focused too much on the narrow question of whether the U.S. and global economies are heading into a recession.

“We are constantly asked this question about whether we are entering a recession or not, and if so, when?” Wander says. “In my opinion, that’s too narrow a question. I think it’s wiser for long-term investors to not view this as a binary thing. It’s wiser to think in terms of a range of possible outcomes in terms of economic growth or depreciation.”

While McCormick and Wander agree the U.S. and global economies are clearly slowing, it’s tough to say today whether a recession will occur or whether a soft landing is possible. A shallow recession could occur, or there could be a surprise turnaround that sees growth reinvigorated in the months ahead, though that outcome is less likely.

“The more important thing for retirement investors to do, rather than focus on the technical occurrence of recession, is to prepare their portfolios for ongoing stressors,” McCormick advises. “It takes poise and often a great deal of patience to invest in a moment like this, but there are attractive opportunities, especially in the Treasury markets.”

Don’t Forgo Duration

During the webinar, the two bond market experts echoed calls from other investment professionals for retired investors to consider locking in higher yields for longer — even as the yield curve remains slightly inverted.

“Another question I often get is why people would want to buy longer duration Treasurys while yields on the two-year are higher today,” McCormick says. “They assume it’s better to get the higher rate on the shorter bond, and then they will just buy more bonds later once the short-duration bonds mature.”

According to McCormick and Wander, there are a few mistakes in this style of thinking. First, there is no guarantee at all that rates will remain this high in two years’ time, and second, investors who shun duration are ignoring the potential price appreciation of long-dated bonds that comes about if and when yields start to come down.

“To put it simply, if you are only on the short part of the yield curve today, you are actually missing a lot of return opportunity,” McCormick says. “So, advisors and their retiree clients should also keep a focus on longer-term maturities, even if the yields are a bit lower.”

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