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Why Retirees Need Equities

Interest rates have been declining since 1981.  Long-term U.S. Treasury bond yields peaked at 15.21% in October of 1981 and reached a record low of 2.11% in July 2016.

In 1960, 41% of private-sector workers were covered by pension plans, but by 2008 only 20% were covered by a defined-benefit pension plan.  Most retirees now need to produce income from tax-deferred accounts or taxable investments in addition to Social Security benefits in order to meet retirement income needs.  Social Security was introduced in 1935 as a program to provide some continuing income after retirement.   However, the estimated average monthly benefit for all retired workers in January 2016 was only $1,341 per month ($16,092 annually).  The Federal poverty level for a family of two for 2017 is $16,240.

Retirees are faced with several risks in their retirement years.   The first is longevity risk, the risk of outliving your assets.   Associated to longevity risk is sequence of returns risk.  If your investments take a big hit in the first few years of retirement, your money will run out earlier than if you had good returns early and a market downturn later.  Other risks are interest rate risk, which can affect the market value of retirement assets and income from those assets and purchasing power risk, also known as inflation.  A retiree with annual spending needs of $50,000 in 2017 will need $105,000 per year to cover these expenses in 30 years at 2.5% inflation.

With interest rates at thirty-five year lows, income during retirement solely from the safest fixed income investments like U.S. Treasury bills, notes and bonds will not provide sufficient retirement income.    While professionally managed fixed income investments can provide a somewhat higher rate of return than Treasuries (with increased risk), historically only equity investments have stood the test of time against the compounding effects of inflation.   From 1928-2016, the geometric return on 10-year Treasury bonds was 4.91% while the return on the S&P 500 index has been 9.53%. *

Many studies have been conducted on the survival rate of portfolios from 100% fixed income to 100% equities, to combinations of equities, fixed income and alternative asset classes.

A recent study (Israelsen) demonstrated that a diversified, balanced portfolio of approximately 65% equities and 35% fixed income had a superior survival rate (money left at the end) to a more conservative portfolio consisting of 25% equities and 75% fixed income.  Another study by Pfau and Kitces indicated that retirees starting with a conservative balanced portfolio allocation may in fact benefit from a slowly increasing allocation to equities over their retirement time horizon.

Depending on income needs, a diversified portfolio using a total return approach may provide retirees the best likelihood of a successful retirement investment outcome.   Equities not only have higher expected returns over the long-term, but capital gains have favorable tax treatment over interest and dividends.

Each person has unique circumstances.  The professionals at Treybourne Wealth Planners will analyze your specific needs and goals and provide guidance on how to manage your investments for a successful retirement.


*Past performance is no guarantee of future results.  Equity investments may not be suitable for all investors.  All investing involves risk, including the potential for loss of principal.  There is no guarantee that any investment plan or strategy will be successful.  

The Tough Job of Continuous Accumulation
Welcoming Timothy Voegele, CFA®, CFP®

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