Are Low Yields the New Normal?

Low Rates = Low Yields

We may now be entering a “new normal” with regard to low interest rates and investment yields. When interest rates are low, the yields (or returns) on fixed-income investments like money market accounts, certificates of deposit (CDs) and bonds usually go down.

In July, the yield on the benchmark 10-year Treasury note fell to a record low of 1.38 percent after averaging 3.73 percent over the past decade. On August 30, the 10-year Treasury note yield stood at 1.62 percent.

It appears that low interest rates will be the norm for at least the near-term future. On September 13, the Federal Reserve Open Market Committee (FOMC) announced that it planned to keep the Federal Funds interest rate low at least through the middle of 2015 in an effort to help jump-start the struggling economy.

This may not be good news for some retirees, who may have invested most of their portfolios in fixed-income investments, which tend to feature less volatility and offer more safety. Retirees could potentially obtain a higher yield on their investments, but doing so could require moving further out on the risk spectrum or sacrificing liquidity. Neither of these options tends to be ideal for most retirees.

Options to Consider

Given this scenario, what are your options if you are retired and live primarily on income from fixed-income investments? Here are four possible options:

1. Lower your lifestyle expectations.Many people have retired with certain expectations about how they will enjoy their “golden years.” However, the Great Recession, subsequent stock market downturn and drop in investment yields have had a negative impact on many retirees’ investment portfolios, forcing them to re-examine these expectations.

If your retirement expectations included traveling the world, for example, you might have to scale this back to traveling the country, or maybe traveling your region of the country or your state. Or if your expectations included lots of expensive entertaining and eating out, you might have to scale this back to more casual and informal get-togethers and more meals at home.

2. Adjust your spending and budget.Lowered lifestyle expectations are the first step to adjusting your retirement budget. First, project what your income is realistically going to be in the coming months and years, given the current interest rate and yield scenarios. Then determine how you will adjust your expenses to match this level of income. As noted above, this may require less travel, less eating out and entertaining, and less shopping and recreation.

3. Strive for higher yield.There are some options for increasing yield that may not necessarily require assuming excessive risk or sacrificing too much liquidity.

4. Return to work.If you are physically able to work and can find employment, returning to work is one way to increase your retirement income. The labor force participation rate for older workers has been rising since the late 1990s, reports the Bureau of Labor Statistics (BLS), with a larger share of people 65 and over staying in or returning to the labor force.

Perhaps you could return to work part-time in order to earn enough money to supplement your fixed retirement income. According to the BLS, 44 percent of Americans over age 65 who are still in the workforce are working part-time. Returning to work could provide the added benefit of helping you stay busy and keep your body healthy and your mind sharp.