Putting Retirement Portfolios to Work to Produce Income

She noted that investors don’t have to go far out on the credit spectrum to secure some very solid yields. 

Credit and Diversification

Kephart said that one issue making him and his colleagues on the Morningstar manager research team nervous was loading up on credit risk at the expense of diversification in target and other types of balanced funds. 

Jacobs van Merlen said that many U.S. investors are under-invested on a global basis. Agreeing, Browne said that this is also a time for investors to start moving out of cash and investing in more intermediate-duration fixed income. It is incumbent upon investors and plan sponsors to position assets in anticipation of when the Federal Reserve begins to cut rates, she added.

From Benz’s perspective, research at Morningstar has pointed to a significant allocation to high-quality fixed income to sustain a stable rate of income in retirement. 

Place for Equities

Investors should have a significant portion, perhaps up to 40%, of their retirement portfolio allocated to equities, Browne offered, to help ensure a proper level of balance between growth and income. In today’s interest rate environment, she said, investors want a sizable allocation to stable income-producing assets. 

Jacobs van Merlen indicated that equities still have a significant role in retirement portfolios, particularly for those investors who may not have saved enough to ensure that they don’t run out of money in retirement. While dividend stocks can have a place in the portfolios of some retirees who have accumulated a sufficient amount for retirement, growth-oriented equities may be appropriate during the early stages of retirement for those with smaller portfolios. 

Role of Annuities

Browne indicated that annuities can play a role for retirees whether in a target date fund or by themselves. One concern she expressed was that there is a level of ambiguity with annuities, and a number of investors and plan sponsors may not understand what they are buying. Another concern is that an annuity locks up retirees’ money with little or no excess in exchange for a relatively small payment each month. 

Benz said there is a place both inside and outside of retirement plans for annuities. She likes that the guaranteed payment helps negate the longevity risk that retirees face and also supports the basic simplicity that annuities can provide. On the other hand, she cited the lack of inflation protection as the biggest drawback of annuities in retirement.

Jacobs van Merlen commented that while he likes annuities as a retirement income vehicle, they are not the right choice for investors in all cases. One issue is that if an annuity is made to be part of a target date fund, the amount of the annuity and the monthly income that it throws off could be inconsequential for some investors.

Investors and Their Asset Allocation

In response to an audience question, Browne indicated that investors should be more allocated to growth assets at the beginning of retirement. As they move into retirement, she added, they should consider moving a greater percentage of their portfolio into fixed income investments that provide a decent amount of income in retirement. 

Benz noted that the bucket approach she often recommends for retirees includes a bucket with low-risk spendable income that protects against a lost-decade scenario in the event of a severe market downturn. Even if an advisor is not using the bucket approach, she added, the strategy is still a good way to illustrate the need for a defensive portion of a retirement portfolio.