Personal Finances - 2018


Retirees, Break Free from Low Yields

By Mo Vidwans

Since the past few years, beginning 2009 to be exact, most of us feel hamstrung by the bond market or low interest CDs or any fixed interest instruments, for that matter, that we may depend on for our monthly income. Those who have been living through it know that it has not been easy. Even the Social Security payments were not going up that much because there was no sizeable inflation, which can raise the SSA payments. It becomes doubly hard if we are of a mindset where we do not wish to take due risks for higher yields. I have heard many people say how absolutely ridiculous it was to generate income.

Many baby boomers and older retirees were caught in this dilemma. They have spent a better part of a decade waiting for higher return rates, yet high quality bond rates or interests paid on CDs remained stubbornly low. The recent Federal Reserve interest rate increases have spurred a modest rise in short-term bond yields, but longer-term yields have barely budged. Besides, those rate changes have been slow to affect any changes to the CD interest rates. With the tax reforms and impending need for servicing the new budget debt and Federal Reserve's massive bond holding being unleashed slowly, many analysts have concluded that bond yields would not surge higher any time soon. So what's an income-focused retiree to do?

There are many things that are not under our control but we need to control what we can control. You can't vote on Fed's next rate move (even though you can write to the President of your local Federal Reserve office) but for a starter, you can minimize your fund fees which take a bite directly out of your fund yield. You can avoid risks that you are not paid to take and get real about Bonds' role in your portfolio – reducing overall volatility and producing some predictable income.

While government bonds and mortgages remain key parts of a bond portfolio, funds that blend these bonds with high-quality corporate debt and other holdings may form a solid core for your bond allocation. Corporate profits have been healthy and many companies have ample cash on their balance sheets. To safeguard against long-term risks, I would suggest staying with short and intermediate-term bond funds.

The maturities you focus on, however, will depend partly or greatly on your time horizon. Obviously, money you would need in the next year or two should be in cash like vehicles such as money market funds or short or intermediate term CDs. If you have a two to five-year time horizon consider low cost, high quality ultra short and short-term bond funds. One option is Vanguard Short term Corporate Bond exchange traded fund (VCSH) which yields 2.2% and charges fees of just 0.07%.

If your time horizon is five years or more then there are many other options. There are callable bonds, just like Goldman Sachs had offered a few months ago, that can earn up to 3.5 percent interest. There are long term CDs which will earn near 3 percent interest today. Even Government 10-year treasuries have exceeded that just recently. And of course, the preferred stock option is available which can give up to 4 percent return with very little downside since it is considered a hybrid between stocks and bonds.

Low-Cost Mutual Funds and ETFs

There are plenty of “not so healthy" ways to boost your yield including taking on outsize interest rates risks and snapping up low quality debts. But here is a better way: choose lower cost funds. Mutual fund fees come straight out of your returns and with high quality bond funds yielding about 3 percent you can't afford to cough up fees of over 1 percent to the fund company. Many times, to maintain a competitive yield a higher cost fund is forced to take on more risks than its peers.

Tax-free Income is Still Possible

Our first thought might be that with the new tax laws and its reduced income tax rates is it still worth considering the tax-free income from, say, Muni bonds. The tax rates have not really changed that much and because much of itemized deductions taken away from us (as well as personal exemptions) our taxable income may not change that much for most of us. Tax-free income is still a viable option for many middle-income families.

High Quality Corporate Bonds, REITS, Utility Stocks

Since we don't quite have the case of too much money chasing too few issues any longer, it is easier now to get what we are looking for in corporate or treasury bonds. Also they are giving reasonable returns for medium to short period. Loomis Sayles Bond (LSBRX), Pimco corporate & income strategy (PCN) and Magellan Midstream Partners (MMP) are some of the ones to look at.

Preferred Stock Funds

With much less volatility but still good returns, preferred stocks are a good way to go. There is much less variability but they give good returns. iShares S&P's US Preferred stock (PFF) yields close to 6 percent.

High Dividend Stock Funds

If you can stand a little more volatility then high dividend stock funds are something to look at. They vary as the market varies, but probably not as much, and give good dividends.

Good Old Bank CDs

While we can always bank on CDs from our local banks, it is better if you feel comfortable banking online where you do get much better returns.

Warning: the mutual funds, ETFs and other instruments mentioned in this article are just suggestions. Readers should do their own research to determine what is best for their situation considering their own risk tolerance and other variables.

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Mo Vidwans is an independent, board certified financial planner. For details visit www.vidwansfinancial.com, call 984-888-0355 or write to mpvidwans@yahoo.com.