Will Low Rates Stall Income Plans?

For clients age 80+ who are drawing regular retirement income, Benante says his firm projects they will live to 100 and begin income planning prior to these clients reaching 80 using that assumption.

At a minimum, he says, clients' portfolios are examined annually, and usually quarterly, looking at withdrawal rates and the portfolio's return to decide whether the income plan is still working.

For individuals concerned about the current low rate environment, Benante offers some consolation: interest rates cannot go much lower. He also notes that for a small increase in the rate paid, it is not worth tying up money for prolonged periods and risk missing an opportunity to invest if rates start to move up again.

"We had a similar situation 2 years ago when rates were lower and then they went back up again," says Julie Welch, director of tax services with Meara Welch Browne, P.C., Kansas City, Mo.

But in the current environment, it may be necessary to reallocate the way in which a client receives income, she explains.

For instance, it could be better for a client to have income from dividends rather than interest if the client is in the 15% or lower income tax bracket. In such a case, currently there would be no tax on dividend income if the dividends were from stocks and not from a money market account, Welch continues. In order to be eligible, a married couple filing jointly would need to have taxable income under $65,000 and a single individual would need to have taxable income under $32,000, she says.

However, if an investment is held in a tax-deferred account, such as an IRA, generally all distributions will be taxed as ordinary income, as opposed to the special tax rate on dividends, Welch notes.

For those in the 80+ age group, action would depend on the size of the portfolio and factors that include how much was being received from other sources such as Social Security benefits, according to Welch. If an individual is receiving $15,000 in Social Security income annually as opposed to $5,000, then there might be sufficient income along with other income sources to help that client when interest rates drop, she says.

Brent Beene, a wealth manager with Regent Atlantic Capital, Chatham, N.J., says those individuals who have relied largely on CDs, money markets and savings accounts for retirement income "are in a lot of trouble. Interest rates don't appear to be going up anytime soon. They've painted themselves into a corner."

If they have the wherewithal and the tolerance to take some risk, then they can invest in equities, he says. But, if you don't have time or the money, one might have to consider going back to work, he concludes.

Currently interest rates are low and there is also inflation, which creates a double problem, according to Beene.

For those who will be drawing income when they retire in a few years, there is still time to move funds into the market, he says. "If you start moving into the market, you are in good shape because you will have missed a major decline," Beene notes.

But clients who are just starting to move into equities may need to be eased into it, and a diversification approach should be used, he explains.

For those in the 80+ age range, it depends on circumstance, he says. If an individual has the resources, can tolerate risk and wants to pass on wealth, then moving money into equities may be an option, he adds. But, "if they don't have the resources or can't stomach the volatility, then they're stuck in a bind," Beene says.