Where to access retirement income now

With Treasury bills no longer doing the trick, here are some other options

May 14, 2014 @ 9:31 am

By Darla Mercado

+ Zoom

Take it from the pros: annuities, individual municipal bonds and equities in the pharmaceutical sector hold good prospects for clients seeking retirement income.

Fund managers Daniel J. Fuss, vice chairman and portfolio manager at Loomis Sayles & Co., and Robert Shearer, portfolio manager for BlackRock Inc.'s Equity Dividend Fund, discussed the issue on a panel at InvestmentNews' annual Retirement Income Summit in Chicago on Tuesday. The two managers were joined by Mark Cortazzo, senior partner at MACRO Consulting Group.

Retirement has changed, with retirees leaving the workplace in a very different environment from what their parents had previously experienced. “Many people used to sell the house, buy CDs and use some of the proceeds from the sale of the home to pay for continuing care,” said Mr. Fuss. These days “reducing risk by writing 90-day Treasury bills is getting you no income,” he added. “If you need income, you have a problem.”

Meanwhile, on the stock side, the question with dividend-paying equities – a staple of retirement income portfolios – is whether stocks are becoming too expensive. Advisers ought to take a closer look at the fundamentals of these companies to determine their worth.

“You have to be selective,” said Mr. Shearer. “Consumer staples and electric utilities have been bid up. You have to focus on the valuation support of the sectors you go into.” Advisers will need to take a closer look at the companies they invest in to ensure they have sound valuation and balance sheets, as well as the ability to survive financial market difficulties.

Going forward, clients can survive today's low interest rates and choppy market when they seek retirement income. It's just a matter of where they look.

On the bond side, Mr. Fuss pointed out individual municipal bonds, particularly as the discussion turns more toward tax savings. “As long as you have good input on the credit side as yields go up, the municipal curve is the best of any bond curve to ride by far,” he said. “You can run a [bond] ladder right now on municipals, but the client must be willing to take a lower level of income. That's the hard part.”

As for stocks, Mr. Shearer noted that large cap pharmaceutical companies are on the upswing because they're sharpening their research efforts. “As major pharmaceutical companies restructure their operations under research and development, they're becoming more focused,” he said. On the other hand, new technology has become “an overcrowded trade,” he added.

Mr. Shearer also pointed out that the industrial sector is another area for dividend growth. “It's in the second and third quintiles of dividend yield where you find your best combination of dividend yield and capital appreciation of the stock,” he said.

On the annuities side, Mr. Cortazzo pointed out that existing variable annuities are especially valuable at a time when many carriers have pulled back their most attractive living benefits. “The gold mine is in some of these contracts that were written in a different world when hedging costs were lower and advisers were telling [clients] every day to get out of them,” said Mr. Cortazzo.

A new product that's worth discussing is the deferred income annuity, or longevity insurance, as Mr. Cortazzo calls it. These annuities are purchased in the present and provide a stream of income years later. In a hypothetical example, a client with a $1 million portfolio could set aside 25% to about 33% of that money to purchase longevity insurance that begins at age 80, according to Mr. Cortazzo.

Think of the longevity insurance or deferred income annuity as a hedge against tail risk. Clients who face a market downturn early in their retirement stand a significant risk of running out of money sooner than anticipated. The annuity buffers them from that risk. Bouncing back from such a loss is much more difficult when a client is at an advanced age and too old to go back to work, Mr. Cortazzo noted.

“If you're 70 years old, you have options,” he said. “At age 80, you don't.”


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