The Challenges Of Retiring In A Low/Zero Interest Environment

Over the past few days, I have been looking at retirement and different problems and solutions involved. One of the major problems for recent or near future retirees is the fact that interest rates have been at record lows. In fact, you can barely call them interest rates I guess because they have been near 0% for months now.

The Typical Retirement Portfolio

Traditionally, someone retiring would end up holding CD’s, government and corporate bonds and other low volatility instruments that pay a reliable dividend. In recent years we have seen interest rates on medium to long term government bonds move closer and closer to 0%

It’s Not Going To Get Better Anytime Soon

The issue is that no one expects this to change anytime soon. Governments are stuck with very weak economies, they are trying to stimulate consumption through low interest rates. We might not be in Japanese territory just yet but it does not look promising. Most central banks have been reassuring investors by telling them that interest rates will remain very low for last 1 more year. They’ve been saying that for many years of course and there are no signs that it will change either.

Why 0% Interest rates Change Everything

Most of us start planning our retirement early on in life. We make certain assumptions and expect to gradually move most of our portfolio to fixed income securities by the time we retire in order to live off of interests. In a zero interest world, that is simply not possible.

The New Retirement Portfolio

I personally think there remain many different options in terms of retiring in such an environment. Clearly, fixed income securities should be part of the picture because they do bring some return, diversification and clearly help the overall portfolio return for a given risk profile. I do think though that 2 other types of securities should be used more than ever in retirement portfolios:

#1-Dividend Securities: A long term portfolio such as the Ultimate Sustainable Dividend Portfolio can help an investor generate decent, long term growing yield, in an optimal way. It does require a bit of work to optimize over time but I think that it remains a great way to do well in a zero interest environment.

#2-ETF Portfolio: ETF’s are a great way to gain exposure to multiple asset classes, all around the world at a very low cost. In a challenging environment, being able to save 1 or 2% in annual fees can end up making a world of difference as I have already discussed several times. Some websites such as BuildYourETFPortfolio give a good breakdown of everything that is involved in such a strategy