Low Yields Snare The Young and The Affluent

Conventional wisdom has it that today’s low investment yields tend to harm low-income retirees, who receive little or nothing from the bank accounts and bonds they had counted on for spending money. That’s certainly the case, but a recent study from the Employee Benefit Research Institute (EBRI) found that low yields have even more impact on younger workers as well as on people with high incomes. Agreeing with those conclusions, Barton Close, vice president of investments, in the Chattanooga office of Raymond James & Associates said “Those low yields have turned around my strategies 180 degrees. Now I put more focus on current cash flow.”

The EBRI study compared a world with historic investment returns, including a 2.6% real (after inflation) return from bonds, with a world where sustained low yields dropped the real bond return to -1.4% a year, as was the case early in 2013. Counting all assets—investments, Social Security, pensions, home equity—the change in bond returns raised the probability of running short of money over a long retirement.

What’s more, “the lower interest-rate scenario had a progressively larger impact on simulated retirement readiness as income rises,” EBRI reported. For the highest income quartile, the percentage of life paths projected to run short of money rose from 14.5% (historic returns) to 31.8% (sustained low yields). Similarly, the more years workers had to build a retirement fund, the greater the impact of low yields. For those with 20 or more years until retirement, negative projections rose from 13.9% of those simulated life paths to 36.4%.

“From our perspective,” Close said, “the possible problem comes from the fact that investment returns depend so much on dividends and interest income.” In the accumulation mode, that income is reinvested, while retirees rely on dividends and income for spending money. “When yields come down, total returns come down,” he added.

Consequently, Close has become more tactical in his approach to investing. “Now we look for current cash flow before growth of cash flow and value.” He said the search for cash flow has led to more emphasis on assets such as REITs, MLPs, high-yield bonds, and foreign bonds.

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