Putting Retirement Portfolios to Work to Produce Income

With over 10,000 people turning 65 each day in the United States, generating a dependable retirement income stream is a top priority for financial advisors and their clients. At the recent Morningstar Investment Conference, held for the first time at Chicago’s Navy Pier, one of the sessions was a panel discussion on retirement savings needs and income strategies.

The conversation was moderated by Jason Kephart, director of multi-asset ratings for Morningstar Research Services. Panelists included Christine Benz, director of personal finance and retirement planning for Morningstar; Erin Browne, managing director and portfolio manager for PIMCO; and Andrew Jacobs van Merlen, portfolio manager for T. Rowe Price.

The panelists discussed a number of things that retirees and their financial advisors need to consider in building a portfolio that has a chance to last for the length of their retirement. Here are some highlights and key points from the session. 

Magic Number for Retirement

Kephart’s first topic centered on whether there is a magic number needed for retirement and how people should think about that part of the equation.

For Benz, that is not a back-of-the-envelope calculation. Rather, she advocates that investors and advisors get granular about their retirement income needs. For example, she cited situations in which retirees might be planning a major family trip in year three of their retirement or anticipating the replacement of their roof in year five.

PIMCO’s research has found, Browne added, that the current level of interest rate yields is the best indicator of retirees’ needs for retirement. In terms of numbers, 6% based on today’s yields is closer to what retirees can spend in their retirement than the traditional 4% rule, she said, noting that there is about a 96% correlation between retirees’ starting yield and what they can expect to earn from the fixed income portion of their portfolio over the next 25 years.

Target Date Funds and Inflation

During retirement decumulation, Benz noted, investors holding target date funds are forced to take a pro rata share of equities and fixed income when they sell. There are many market environments where investors would prefer to be able to pick and choose the amount of equity or fixed income they are selling. 

Target date funds don’t do well in providing those nearing retirement with inflation protection, Browne said. Aside from a sharp market correction when approaching retirement, she believes that inflation is the greatest risk to those nearing retirement and that plan sponsors need to evaluate the level of inflation protection that target date funds offer for those nearing retirement. 

For Jacobs van Merlen, short Treasury inflation-protected securities can help mitigate the effect of inflation on the bond portion. He added that duration can be obtained in other ways. 

The asset side of the equation is key for these retirees, according to Jacobs van Merlen. Liabilities in terms of future purchasing-power needs are going up while assets are going down through their withdrawing money to fund retirement, with proper diversification a key tool to counteract the impact of inflation.

Fixed Income Quality

Browne offered that this might be the best time in decades for high-quality fixed income. Investors should look at such holdings as municipal bonds, agency debt or high-quality corporates.