Active investor: Achieving income as you move into retirement
With declining interest rates, it has become increasingly challenging for investors to achieve the income levels they need. Over a decade ago, fixed-income holdings could provide a comfortable level of income during retirement. However, both market conditions and investor confidence have changed retirement portfolio strategies considerably.
Despite lower rates, fixedincome investments will continue to play a role in retire- ment portfolios for two key reasons, says Pat Chiefalo, managing director and head of product for BlackRock Canada.
“First, bonds help to keep tighter risk controls which is an important focus during retirement. Bonds also are a goto asset class for income which becomes an increasingly important need in retirement.”
He acknowledges that today’s low-rate environment makes it more challenging to generate acceptable income levels from fixed-income investments. “Optimizing asset allocation for a retirement portfolio, however, requires a different approach today than in the past.”
To that end, fixed-income exchange-traded funds (ETFs) may play a prominent role in retirement portfolios. “ETFs offer some key advantages on the fixed-income side, including pricing transparency, increased liquidity and diversification. Investors can not only increase their fixed-income assets at a lower cost, they can diversify fixed-income holdings with a single trade versus purchasing individual underlying bonds.”
In terms of determining the right allocation of fixed income for your retirement portfolio, Chiefalo breaks it down into three factors. “First you need to manage the overall risk profile of your portfolio to ensure it’s suitable for retirement.”
The second consideration is incremental income needs in retirement. “Retirees increasingly depend on their portfolios for a certain level of income over time,” he says.
The final consideration is capital management controls. “Your portfolio health matters, as it needs to be able to keep up with you and your lifestyle needs in retirement and ensure you have the economic resources to sustain your desired standard of living.”
Targeting an ideal level of return varies depending in the financial condition of the investor and their underlying needs.
“Market conditions will drive what’s possible given their specific risk tolerances. When assessing dividend-paying stocks or ETFs, for example, it is essential to look at both the prevailing yield as well as the underlying volatility.”
In a climate where shortterm rates are expected to remain exceptionally low, creating higher income levels is particularly challenging for retirees, he says.
“Understanding how equity versus fixed income works together in today’s markets has become a very complex undertaking. Equity income provides a return profile that offers the opportunity for some growth, which most will need. But it comes with added risk. Fixed income has traditionally been a lower risk asset class offering yield, and for its part can serve as a portfolio stabilizer that helps to insulate investors from market volatility. At the same time, there is a risk of monetary loss when rates lag behind inflation.”
Given all the moving parts, professional customized advice can make a huge difference in terms of balancing level of income and access needs with market rates and volatility, Chiefalo notes. “In retirement especially, fixed income plays an essential and critical role in portfolios. It’s all about finding the best balance between risk, income and capital management.”
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