Not long ago, retirees or near-retirees with a conservative portfolio dominated by bonds could pretty much rest assured the investments would generate a high enough return for them to withdraw 3 to 4 percent for the rest of their lives.
But with interest rates near all-time lows and average life spans being longer, many people have had to re-think their approach to retirement investing and consider a higher exposure to stocks in order to make their money last longer.
"Longevity is presenting serious challenges for retirees, due to the generationally low interest rate environment," said Mike Maglio, an adviser at PNC Wealth Management, Downtown.
The rate on a 10-year Treasury bond stands at 2.7 percent, while the average 1-year bank CD currently pays about 0.89 percent, according to Bankrate.com.
"Retirees can no longer purchase bonds and clip coupons to cover their living expenses because rates on fixed-income securities are too low to produce a reasonable income for them," Mr. Maglio said. "Sadly, rising health care costs are a significant factor in causing retirement expenses to expand while yields have contracted."
Mr. Maglio said in the current rate environment, investors in retirement should consider a larger allocation to equities than would be necessary in a normal yield environment where the 10-year Treasury might yield 4 percent or so.
Daryl Patten, a financial adviser at Fort Pitt Capital Group in Green Tree, said people in general have become more educated and understand their portfolios will need to generate income for 20 to 25 years after they retire.
"More clients are beginning to transition closer to a 50-50 mix of bonds and stocks," he said.
The trend does not concern him. "It's not alarming, but people will adjust their mentality as the interest rate environment changes," Mr. Patten said. "However, we don't expect an adjustment in the current low interest rate environment to quickly turn around.
"Given the environment, we are avoiding long-term bonds, and advising clients to look into intermediate and short-term fixed bonds," he said. "It's not necessarily the allocation that is most important to focus on, but to create and implement plans that will get the client to meet their long-term financial goals."
Tim Grant: firstname.lastname@example.org or 412-263-1591.