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Retirement Income Strategies In A Low Interest Rate Environment

Rocco A. Carriero

It's no secret that generating income in retirement is not as easy as it used to be. We've experienced a dramatic decline in interest rates over the past 30 years. According to data published by the Federal Reserve Bank, a 10-year U.S. Treasury note (at constant maturity) yielded just under 11 percent in June 1983, 30 years ago. By June 1993, that same bond yielded 5.96 percent, and it kept trending lower to 3.33 percent ten years ago in June 2003.

Yet today's yield on the 10-year Treasury, in the 2 percent range, pales in comparison. In other words, an individual investing $100,000 in a U.S. Treasury note in April when interest rates were 1.76 percent would receive about $147 per month in interest income. That same investment would have earned in excess of $900 per month in 1983, more than five times the cash flow a 10-year Treasury note generates today.

Finding Higher Income

There are few signs that Federal Reserve policy or federal government actions will do much to alter the interest rate environment in any significant way in the near future. While it seems reasonable to expect interest rates to, at least gradually, move higher from today's historically low levels, the timing and severity of such a move is hard to predict.

Retirees or those entering retirement need to look at income strategies differently today. Some solutions could include:

A "Bucket" Approach

Consider setting aside 2 to 3 years' worth of income in cash or cash equivalent assets. This is money that will not earn much return (if any), but will be readily available to meet income needs over the near term without risk of loss. The rest of your assets could be invested within your risk tolerance in a well-diversified portfolio. Though no strategy is perfect, this balance can help a retiree meet short and long term expenses.

Seek Investments That Can Generate Higher Income

You likely have different goals for various investments, so while investing in some more conservative investments make sense, you may hope to generate more income in others. To generate income, there are a variety of options to consider, but investors should take great care in doing so. It's worthwhile to explore different ways to enhance yields you earn from your portfolio, but it should be accomplished by building a diversified mix of assets that are suitable for your risk tolerance. It's generally wise to avoid putting all or most of your money into a single investment to provide an income stream. A financial professional can help you understand and review all of your options and help you design an effective strategy for your circumstances and risk tolerance level.


You may want to dedicate a portion of your assets to an annuity that can provide a stable stream of income independent of market conditions. Consistent with the market as a whole, annuity payout rates are lower today than they once were, so this may not solve all of your cash flow needs, but an annuity can help make sure that you have a sufficient income stream to pay essential living costs in retirement. Note that any guarantees, including income, are subject to the claims paying ability of the issuing company.

Cutting Back On Expenses

Finding ways to generate income is usually only part of the solution for investors. Many retirees today are experiencing a reality check about their lifestyles. In today's environment, it may be necessary to determine trade-offs you're willing to make to afford the essential and lifestyle expenses you need and want.

Planning for retirement is complicated so no matter how you choose to invest, do your homework to make sure you understand all of your options and the risks and opportunities associated with current market and economic conditions. Consider meeting with a financial professional that can help you define your risk tolerance and help you prepare for retirement based on your individual goals and circumstances.

Rocco is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 20 years. Advisors is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ. Ameriprise Financial Services Inc., and its representatives do not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. www.roccocarriero.com

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