A retired reader in Painesville, Ohio, echoed what a lot of seniors are feeling when they read about historically low inflation but struggle nonetheless to keep up with the costs of real, daily living.
"My guess is that inflation is running at between 4 and 6 percent a year on most things consumers have to buy," the reader complained, scoffing at "official" estimates that fall around half that.
This year's cost-of-living adjustment for Social Security income was 3.3 percent, which is based on the reported consumer price index. But with Medicare hikes above 5 percent and gas prices continuing to soar, seniors living on those cost-of-living adjustments are feeling the squeeze.
Even if they have modest portfolios to help pay for the extras, yields on fixed-income investments remain stubbornly low.
So what's a retired investor to do? Crank up the risk on their portfolios and plow into what many are calling an overvalued stock market? Dial down the quality level of their bonds in search of yield?
"There is no silver bullet," said John Skjervem, chief investment officer for the personal financial services business at Northern Trust Corp. in Chicago. "There is no one asset class that will solve the problem" of low or negative spreads between real costs and yields on low-risk investments.
That said, here are three things that yield-hungry retirees might want to consider:
-- Diversify risk
Put to rest the notion that if you're 65, your portfolio should be invested 65 percent in bonds, experts said.
"With nominal yields so low, fixed income has not been a particularly attractive place to be for some time, particularly for people whose income needs to support their lifestyle 10 to 15 years out," Skjervem said.
Although most investors can't affordably dabble in investments that aren't necessarily correlated with stocks, like commodities and real estate, he said, they can tilt away from plain-vanilla bonds and consider corporate instruments that can be converted to stocks, high-dividend equities, preferred stocks and real estate mutual funds that can invest worldwide to avoid geographic downturns.
"There is simply no way to earn higher returns without taking some risk," said Stuart Schweitzer, global markets strategist for JPMorgan Private Bank. "So if you're going to reach for return, do so with diversification in mind."
Retirees often feel a loss of control over their investments when they are forced to draw down assets to cover expenses during a market trough.
Developing a system for managing retirement income, whether you do it yourself or with an adviser, can help mitigate that stress, experts said.
In fact, advisers who created income plans for their clients earned substantially higher client satisfaction scores in a survey last month by Fidelity Investments of 813 investors 55 to 70 years old.
Creating these individual income plans takes time, but Fidelity found that advisers make up for it by gaining more referrals and more assets to manage from existing clients.
Similar demand also helped fuel Lipper Inc.'s launch this month of a retirement portfolio monitoring tool--Lipper Retirement Insight--that allows advisers, plan sponsors and other fiduciaries to better track plans.
A key component of the push into the retirement information market is the need for evaluating retirement income streams, said Richard Malconian, global head of retirement services at Lipper.
A simple way to begin structuring your own retirement income stream that is somewhat shielded from market swings is to put funds for a year's worth of expenses into a non-risk-bearing account, then funds for a year or two more into laddered-maturity certificates of deposit, said Sheryl Garrett, a certified financial planner, author and founder of a national network of planners.
This strategy won't protect you for a long time from big market swings, but it can give you the benefit of timing withdrawals and seeing in advance that you may need to cut back spending, Garrett said.
-- Stop playing the debt spread
More retirees are keeping their home mortgages for the tax deduction rather than paying them off.
Garrett said that, depending on homeowners' other investments, this may not make sense.
Investors heavily weighted in fixed-income investments will likely see a negligible spread between what they're earning in their portfolios and what they're paying in interest, she said, and the psychological boost of paying off a mortgage can ease stress.
Garrett also recommends diversifying a portfolio to minimize risk, but worries that some older investors are going overboard with the idea, jumping into the stock market because of its recent outperformance over bonds.
"Investors look at bonds as a non-event and keep smaller percentages in fixed income today," she said. "But they're taking a lot of risk for that incremental return. A lot of retirees' portfolios are way out of whack."
E-mail Janet Kidd Stewart at firstname.lastname@example.org.
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