The Retirement Investor Squeeze

Christopher Mizer  |

Investors saving for retirement are typically advised to balance risk and return based on their risk tolerance (conservative, moderate or aggressive) or the amount of time until they reach retirement. Often, the method for achieving this balance comes down to their asset allocation – the specific way an investor combines the percentage of stocks, bonds and cash in their portfolio to maximize returns and minimize risk.

The idea that the average investor can figure out the right mix of investments using simple, generic labels such as “conservative”, “moderate” or “aggressive” or using a “time to retirement” calculator has been used and promoted by the retirement industry since the 1980’s. Since then, defined contribution plans, especially 401(k) plans, popularized the idea that individuals could take over the responsibility of investing their own retirement funds. Retirement industry experts assumed that, with some education and samples of asset allocation models in the form of pie charts, investors could successfully manage their retirement accounts.

This may have worked throughout the 1980’s and 1990’s, as investors were generally rewarded for almost any asset allocation model they picked that included some exposure to stocks and bonds. Average returns for stocks were almost 12% per year and interest rates on almost any fixed income investment were 3 to 6 times higher than today. Money market funds were yielding 3% to 6%.

These returns might seem incredibly high compared to today’s rates, as anyone whose asset allocation these days is heavily weighted towards fixed income and money market investments is painfully aware.

In addition to what we earn on our retirement investments, a dramatic change has occurred as to how we invest our retirement accounts. Investors are avoiding the stock market. They have suffered through two stock market corrections of 45% or more in the last 12 years: the tech crash of 2000 and the financial crisis of 2008-2009. For example, in a survey released by Wells Fargo in October, 70% of middle class Americans say they are not confident in the stock market as a place to invest for retirement. It seems that today’s investors, as Mark twain might say, are a lot more concerned with the return of  their money rather than the return on their money.

As a result, retirement plans are experiencing massive inflows into money market, stable value and bond funds. Investors in retirement plans seeking higher returns than money market funds without the risk of a bond fund have flooded stable value funds with cash. The effect has been a rash of stable value funds either closing to new investors or, in some cases, just closing and going away for good. This has forced billions of dollars to move into money market funds where the returns are often barely above 0%.

An investor with 20 or more years to retirement or someone who has placed themselves in the “aggressive” investor category may still have the bulk of their retirement account invested in stocks. However, for “conservative” investors or those that are in or near retirement, a heavy concentration in money market or bond funds has left them in the middle of investment squeeze.

On one side, interest rates are stuck at historically low levels, with yields on bonds and money market funds providing practically no return. On the other side is the fear of losing principal that comes along with investing in stocks – magnified by the volatility of the last 12 years.

This squeeze is bad enough. But when the cost of everything from healthcare to food and every day living expenses keeps going up, real returns are actually negative. living is inflation is factored in, it’s

The ability to meet your investment goals without taking some risk is almost impossible these days, especially if you are already in retirement and depend heavily on interest income from your portfolio.

So, how does an investor escape the squeeze? What can investors do?  In our next installment, we will outline a strategy that combines some familiar ideas with some new ones.

By Chris Mizer

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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