Displaying items by tag: yield
Having a steady source of income during retirement is a universal goal. According to a new research paper from Wharton, investors should consider a deferred income annuity product in their retirement accounts as this has shown to improve welfare for all groups when accounting for sex and education level.
Optimally, Americans would wait until they turn 70 before starting to receive Social Security payments, as it would lead to the biggest monthly check. Yet, most don’t for various reasons including a need for additional income, not wanting to work till this advanced age, and failure to plan properly.
One potential solution is a deferred income annuity which would allow prospective retirees to bridge the gap and create extra income in their 60s. This would increase the chances that they would be able to not claim benefits till age 70 and maximize income from Social Security.
These findings are especially relevant following the passage of the SECURE 2.0 Act in December 2022 which was created so employers would offer some sort of lifetime income payment option in 401(k) plans. The paper adds that options should also include a variable deferred income annuity with equity exposure in addition to fixed annuities.
Finsum: Ideally, retirees would be able to put off receiving Social Security payments until they are 70. One way to increase the odds of this are to include annuities in retirement plans to create income during interim years.
Retirees have many options when it comes to generating income from their portfolios. Each approach comes with its own tradeoffs in terms of yields, risk, and liquidity. In recent years, fixed indexed annuities have become increasingly popular as they generate higher returns than traditional investments, while offering protection during periods of poor market performance.
Fixed indexed annuities are issued by insurance companies. It provides a guaranteed return while also earning additional interest based on the performance of a specific index such as the S&P 500. Like most annuities, they also allow for tax-free compounding.
One of the major advantages of a fixed indexed annuity is that it reduces the downside risk of a decline in markets which can be more damaging to retirees. Research shows that these products deliver strong returns over long periods of time, although they do underperform during booms.
If an investors’ goals are to generate more income while reducing the overall risk in the portfolio, then a fixed indexed annuity is a prudent option. When determining whether a fixed indexed annuity is the right choice, a major factor is what it will be replacing in the portfolio.
Finsum: A fixed indexed annuity can help investors generate more income from their portfolios while also reducing risk. Downsides are less liquidity and underperformance during periods of strong market performance.
2023 was an unprecedented year for interest rate volatility. The yield on the 10-year reached a low of 3.3% in April following the regional banking crisis, peaked at 5% in October, and finished the year at 3.8% following a series of supportive inflation data.
Given that inflation has declined to 3.1% which is nearly 70% less than the highest levels of 2021, the odds of a soft landing continue to rise. Currently, the Fed’s plan is to loosen financial conditions by lowering the Fed funds rate, while it continues to shrink its balance sheet.
Part of the plan should also be to reduce bond market volatility especially since it has doubled over the past 2 years and remains elevated relative to norms. In some respects, elevated bond market volatility is a consequence of the Fed’s battle against inflation. Now, it must also effectively deal with this issue before it becomes more substantial.
Therefore, it’s likely that the Fed will cut back on its quantitative tightening program in which $95 billion worth of maturing bonds are not reinvested. Already, these efforts have succeeded in shrinking the Fed’s balance sheet by 15%. Another reason that curbing bond market volatility is necessary is that the Treasury will be auctioning off large amounts of notes and bills in the coming months.
Finsum: The Federal Reserve has made significant strides in turning inflation lower. Now, it must take steps to reduce bond market volatility.
2023 was a year of twists and turns for fixed income, although it ended with a big rally in the final months of the year. In 2024, Schwab Fixed Income strategist Collin Martin forecasts positive returns for the asset class and believes that yields have already peaked. Additionally, he notes that bonds are once again a diversifier against equities after an ‘anomalous’ 2022, especially at current yields.
Despite believing that yields have peaked, he remains bullish on the asset class, noting attractive opportunities to generate substantial income. However, investors will need to be selective in terms of duration and quality. Martin recommends longer-duration securities to take advantage of higher yields even if yields are currently higher in CDs, bank deposits, or Treasury bills. This is because longer-term yields at 4% are quite attractive, and it negates interest rate risk in the event of Fed rate cuts.
Martin added that investors should prioritize quality especially since there is no additional compensation for taking on risk in lower-rated or high-yield debt given current spreads. Therefore, stick to Treasuries or high-quality corporate debt which offer generous yields with minimal risk. Both would also outperform in the event that economic conditions further deteriorate.
Finsum: Schwab is bullish on fixed income in 2024 although it believes that investors need to be selective in terms of quality and duration.
Ask yourself: how do you think you’d respond to any investment product quoting a yield of at least 10%?, stated thestreet.com.
Off the top of your head, umm…okay, sure? Well, okay, that might be because, to capture a nosebleed level like that, usually, the fund’s rife with risk or the yield’s not sustainable.
Reasonably speaking, the highest yield you can reach on the fixed income side stems from junk bonds. Currently, the iShares High Yield Corporate Bond ETF chimes at approximately 8%.
Meantime, looking north, for this cycle, Canadian interest rate are looking at their high. What’s more, given the reopening boom and rate hike cycle are, by in large, in the rearview mirror, the time’s optimal to peak again at fixed income allocations, according to privatewealth-insights.bmo.com.
When inflation’s less than 3%, the top 15 industries are nearly all cyclical. Not long ago, Canada’s Consumer Price Index receded below that level. In the aftermath of a Fed pause, multiple sectors and, as a whole, the market, tends to perform well six and 12 months afterwards.