Five
Ways To Boost Your Retirement Income
by the Schwab Center for Investment Research
Bond
data in this article was as of Sept. 13, 2004. Please check schwab.com
for the latest information.
If
you're lucky enough to be retired—or close to retirement generating
income is probably one of your biggest concerns. It doesn't help
that interest rates remain low by historic standards. Despite Alan
Greenspan's two recent 25 basis-point increases in the fed funds
rate, long rates actually dropped after a spike earlier this year.
It almost makes one wax nostalgic for the bad old days when yields
came in double digits.
But
not to worry. Inflation is also low, which lifts real (inflation-adjusted)
interest rates. What's more, here are five savvy strategies gleaned
from Schwab's fixed income and retirement experts to help you boost
your retirement income.
Hoist
a barbell
One strategy is a so-called barbell, which pairs ultra-short bonds
with long-term bonds. The long end of the barbell taps into the
yields of long-term bonds, currently 3.3 percentage points higher
than those of short-term bonds. The barbell's short end gives you
flexibility to reinvest into higher-yielding bonds as interest rates
rise. Says Hui-Chien Chang, director of fixed income for the Schwab
Center for Investment Research (SCIR): "In the current rising-rate
environment, we expect a barbell to produce a higher total return
than investing in intermediate-term bonds alone."
Get
short
Looking for an alternative to low-yielding money market funds, without
too much volatility? If you can hold on to the investment for at
least a year, ultra-short bond funds could be a solution. Says Kim
Daifotis, senior vice president and head of fixed income portfolio
management for Charles Schwab Investment Management: "While
taxable money funds are now yielding about 0.95%, the average ultra-short
bond fund has a yield of 2.07%."1
Play
the recovery
Corporate and municipal bonds could be another timely income-boosting
play. As the economic recovery takes hold, corporate earnings grow.
Of the 495 companies in the S&P 500® that have reported
second-quarter earnings, 68% beat expectations.2 State and local
revenues also expand. And that growth typically translates into
improved credit quality for many corporate and muni bonds. (See
.)
"Improved
credit quality can partially offset the downward pressure on bond
prices as rates rise," says Chang. To take advantage of this,
consider funds focused on investment-grade corporate or muni bonds.
But beware of junk bonds, which tend to slide in value as rates
and default risk rise.
Weigh
preferreds
Preferred stocks are another high-yielding option. They pay dividends
or interest at a fixed rate that's generally higher than bonds.
When rates go up, so do yields on new preferreds, and prices fall.
Of
course, most preferreds can be called, and they tend to be more
volatile than bonds. But if you're less concerned about short-term
price moves than maximizing your income, Chang says preferreds can
give a core fixed income portfolio a nice boost in yield.
Lock
in a fixed annuity
If reliability is your primary concern, an immediate fixed annuity
could be the solution. This insurance contract guarantees your principal
and earnings, subject to the credit quality of the issuer. Typically,
you'd start getting annuity payments immediately, either for a set
period or for life.
But
the pricing and income stream offered by immediate fixed annuities
are very sensitive to interest rates. So when's the best time to
buy them? Says Rande Spiegelman, SCIR's vice president of financial
planning: "If you expect yields on high-quality, intermediate-term
bonds to average around 5% over the long haul, as we do, a generally
favorable time to consider an immediate fixed annuity would be when
the 10-year Treasury bond (now 4.15%)3 yields between 4% to 6%."
For
more information, visit the Schwab
Website
