Don’t Give Up the Yacht: Finding Income in a Low-Rate World
Three questions and answers about retirement income in a low-rate world.
The following is inspired by the questions and answers from Thornburg’s September 2019 webinar on retirement income, “The Road of Retirement: the Process of Managing Retirement Income.” Financial professionals—view the full webinar here.
1. With interest rates dropping lower to possibly negative, will dividend-paying stocks be a major income generator for retirees?
Dividend-paying stocks have been and continue to be a good source of income and total return for investors seeking income. While the importance of dividends as a component of total return hasn’t been as obvious over the last decade because stocks have dramatically appreciated in price, historically the significance of their contribution to equity returns cannot be overlooked.
And while there are many domestic dividend-paying stocks, at Thornburg, we believe multinational companies domiciled outside the U.S. can be more attractive. Not only are dividend-paying companies one of the only options for investors needing income in countries abroad with low-to-negative rates, but the dividend-paying culture tends to be better outside the U.S.
2. Is a 5% initial withdrawal rate during retirement still appropriate given interest rate levels?
Within the financial services industry, the concept of an “ideal” withdrawal rate is often the subject of much debate. While this and other investment-related topics will continue to be debated, it is always best to consider your client’s needs to define what is “ideal” for them. To do this, determine how much they should withdraw from their investment and retirement accounts to close the gap between the amount of income they are receiving from Social Security, retirement accounts and defined benefit plans and how much they need on a monthly basis. One way to close that gap is by structuring a client’s portfolio to help ensure they do not outlive their savings.
Thornburg’s Road of Retirement guide (for financial professionals) provides direction on how you can effectively structure a longevity-oriented investment portfolio, choose an appropriate spending approach and show the power of a dividend strategy as an equity allocation. These solutions may improve investment outcomes and can help clients avoid dipping into their investment portfolios during challenging markets.
3. There are many equity income solutions for retirees. What does an equity income solution need to give clients an edge?
Every investor is in search of the perfect investment, specifically one that:
- Generates current income
- Appreciates in value over time
- Increases the amount of income it generates over time, and
- Never declines in price
Although advisors have many investments to offer, none can meet all those criteria—but dividend-paying investments can potentially come close. Given attractive dividend yields abroad and the sector diversification overseas dividend-payers can provide, it’s important to think globally about dividend-paying stocks. That may give income investors the edge moving forward.
Advisors: If you are interested in obtaining a copy of Thornburg’s Road of Retirement, visit our advisors-only site to order a printed copy of the guide or download your guide. You can also view a webinar presentation of the material.
Neither the payment of, or increase in, dividends is guaranteed.