At the time of writing this post, it appears that interest rates are going to stay low for some time. Developing Retirement Tactics is getting harder all of the time. Canada has tightened the mortgage rules even more than previously to prevent a US style real estate bubble. The opportunity to earn reasonable investment income is getting tougher all of the time. Retirees are going to need even more money set aside in order to earn the money they need during retirement. So what can investors do and specifically what can retiree’s do to ensure that they are comfortable during retirement and have enough to live on?
The chart above shows the interest rates for the past 40 years. There was a huge spike in the early 80’s which we never want to go back to again. Inflation and high mortgage rates of 21% even for the best customers with the best credit rating were the norm. Investors loved it because yields were very high.
Today, interest rates are very low. Mortgage applicants love it since their costs for a mortgage are at the lowest they have been in the past 40 years. However for investors, it is a tough time. Corporate and government bonds are paying yields less than 4%, GICs are even lower and money markets are paying so low that it is not worth it to put the money in them other than to protect your capital! Governments around the world have telegraph that they are going to keep interest rates low to continue stimulating the economy. If you are in the Euro zone, some countries are paying high interest rates that reflect the high risk that are attached to their bonds. In other words they might not meet their interest payments and they may not repay the capital. Investors should be very careful if you are going to invest in this area.
Retirement Tactics – So what should an investor do?
There are a number of things to do that will allow you to manage your investments and balance your risk vs. yield, however it looks like yields will remain low for some time.
Analyze Your Risks and Prioritize
This is something you should do on a regular basis and now is a really good time given the volatility in the markets to look at all of your investments, analyze the risks and then prioritize any actions that you may decide to take. Higher yields tend to have higher risk and that is certainly true for investment in Greek and Spanish bonds. But what about closer to home? Some corporate dividends pay quite well, over 5%, however investors are encouraged to look at any potential risks associated with these corporations and exposure based on the volatility associated with the economy and the Euro crisis.
Retiree’s tend to focus more in income generation as well and that is why many people are moving to dividend producing stocks that have a history of increasing their dividends over time. This is one of the best ways to give yourself a raise over time while retired.
Assess your Expenses
All corporations do this and investors should be no different. Review all of your expenses and make decisions regarding were you can cut back and reduce your expenses. This is a very individual decision, however most people have money that they spend every day or every month that can be reduced or eliminated. This is a great way to make your money go further.
Seek Higher Yields vs. Safety
Balance yield and safety as we mentioned earlier. High yield bonds are inherently risky. Low yield bonds and GIC’s are very low risk, but your yield is going to be much less. Either increase your capital and save more to generate the income you feel you need or take more risk to generate the yield that you require to meet your income requirements.
Focus on Income
Speculation is a great thing and sometimes pays very well. Can you afford to take that kind of risk? Will you need to sell some of your equity at a time when stocks are low to give you the money you need? Most retirees will gradually shift from growth oriented portfolios to income oriented portfolios as they age and need the income to live on. Even if you go for low yield bonds with government or blue chip corporations, the income will be more secure and the capital will also be more secure.
Go Back to Work
After you have completed all of this analysis you may find that you cannot generate the income you need. You may also not be able to reduce the expenses enough to balance income vs. lifestyle. You might decide that even if you can find that balance you need there are other things you want to do. Maybe you would like to have some extra money to go on a trip, fix up the house or buy a new car. Whatever the reason, consider looking for a job that is fun and rewarding. Find something that you enjoy and pays you what you need to meet your objectives.
In your personal life, there may be other options that are specific to your situation. Evaluate these as well and make a decision regarding whether they should be pursued or not. They might make sense for you in your situation. Whatever you do, avoid procrastination. Get going now to assess your situation to maximize your income and minimize your expenses! Do it today.