Don’t let your retirement savings portfolio stop working

By Charles E. Nye, Partner

The current debate in Congress over the future of Social Security has raised public awareness of the need for people to have an investment portfolio that supplements Social Security payments during their retirement years.

Simultaneously, TV talk shows are featuring scores of financial “experts”—each of them recom-mending a different “plan” to build a retire-ment nest egg. There are so many suggestions, it’s difficult to separate fact from “spin.”

So what’s a person to do?

Historically, many investment advisors recommended that retirement savings portfolios have a ratio of fixed-income securities (bonds) that approximates a person’s age. Thus, someone who is 70 would have 70% of their portfolio in bonds. The rationale for this formula was that the interest generated by bonds could provide retirees with an income stream that would cover their day-to-day financial needs.

Feeling “pinched”

However, that philosophy isn’t fool-proof, and in recent years many retirees who relied on bond income felt “pinched” financially. At Midwest Investment Management, we never recommend that retirees rely only on bond income because of several very clear and real facts:

• Interest rates fluctuate. In declining interest rate environments, bond income decreases. In the past year, interest rates have increased. Higher interest rates can create false expectations because they produce higher yields, resulting in an income stream that won’t be sustainable when interest rates decline again.
• In declining interest rate environments, investors who attempt to maintain income levels increase the risk to their principal by shifting into riskier investments.
• A retirement portfolio dominated by bonds significantly reduces the opportunity for capital appreciation—possibly shortening the lifespan of retirement nest eggs.

Average bond returns

Perhaps the most important reason to avoid having a retirement account that’s over-weighted in bonds is history. Over the last 30 years, average bond returns have been significantly outpaced by stocks. In addition, stocks:

• Are more likely to provide annual returns that exceed the rate of inflation;
• Have the potential for growth of capital-enabling a retirement portfolio to last longer, provide higher periodic pay-outs, or both.

Whether you are retired now or planning your retirement, we suggest that your retirement portfolio be structured to:

• Generate an annual total return in the range of 5% to 7% (after inflation).
• Meet your annual income needs, while still continuing to grow, so you will not “outlive” your assets.

We can help you build a diversified portfolio consisting primarily of high-quality, low-risk stocks that:

• Meet our standards of quality;
• Have favorable relative valuations;
• Pay growing dividends;
• Deliver sustainable growth in profits.

Even if your retirement portfolio is not a tax-advantaged account (i.e., a rollover IRA), it can be structured to help you benefit from favorable tax implications, because dividends and capital gains are taxed at lower rates than interest on bonds.

“Golden” years

Your retirement could last several decades.

Therefore, it makes sense to have a retirement portfolio that enables you to face your future with confidence, and enjoy your “golden” years to the fullest.

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I would be pleased to help you develop a retirement portfolio that’s positioned to address your retirement years with confidence. Simply contact me at (216) 830-1127 or cen@mimllc.com