The Retirees’ Challenge: Fixed Income Assets Become a Less Attractive Alternative to Stocks

The classic investment advice for retirees is to increase their portfolio allocation to fixed income assets while reducing exposure to the risk inherent in stocks. The rationale is retirees have a shorter investment horizon, and therefore less time to overcome a possible plunge in stocks, which are far more volatile than bonds. From an income perspective, the strategy usually makes sense as well. Retirees, after all, want to have a consistent flow of income from their investments to help replace their lack of salary. But in today’s environment, this classic investment strategy is frustrating retirees because interest rates are at historic lows. 

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U.S. Treasuries offer less than 2 percent interest on two and five-year notes, and a flat 2 percent for ten- year notes. Triple-A rated ten-year corporate bonds yield less than 2.5 percent, while tax-exempt triple-A rated ten-year municipal bonds yield only about 1.5 percent. Many banks pay less than 1 percent on certificates of deposit, and the absolute best rate in the nation for a 1 year CD is no more than 2.5 percent. Moreover, yields may fall further, as the Federal Reserve and central banks around the globe are positioning to cut interest rates. 

In such a low interest rate environment, gold historically performs well. An analysis of gold’s performance since 1971 finds gold returns 1 percent-a-month when real interest rates are below 2.5 percent. When real rates have fallen into negative territory, gold has returned 1.2 percent on a monthly basis, according to the analysis by the World Gold Council. The real interest rate, currently 0.4 percent, is defined as the difference between the 1-year T-bill rate and the Consumer Price Index for the past 12 months.

The bottom line: in an environment where fixed income assets have become a less attractive alternative to stocks, gold has become more appealing.

By adding to gold positions, retirees may now be able to offset some of the likely decline in return from fixed income investments, while diversifying their portfolios with an asset that is not correlated to the stock market’s ups and downs.

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