Robert Carlson
Bob Carlson is editor of the newsletter Retirement Watch. He is a managing member of Carlson Wealth Advisors and chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com
For the past four decades, retirees have enjoyed low prices on goods and services and long bull markets in both stocks and bonds. But retirement expert Robert Carlson warns that those halcyon days are over. Emerging long-term economic trends in the post-pandemic era will mean higher costs to borrow money, higher prices and a waning central bank influence on stock and bond markets. Investment returns will be lower…and lifetime taxes will be higher.
Carlson says this new paradigm will require different strategies to strike a balance between keeping your retirement money safe and still allowing it to grow. Retirees will need to rethink how they handle their investments…their taxes…and their Social Security benefits. Here are Carlson’s best strategies for this new world…
Many retirees are waiting for the world to return to the way it was before the pandemic. That’s not going to happen. New shifts in the economy, the work force, corporate America and Washington, DC, will make it more difficult to maintain financial security and independence during retirement. Here are four trends that will significantly affect retirees…
Trend #1: Everyday prices will remain high. Forces that have kept inflation low for decades are reversing. What that means for your retirement: High inflation is particularly harmful to retirees living on fixed incomes because it eats away at the purchasing power of their money at the same time that life spans are increasing. One out of every three 65-year-olds will live until at least age 90…and half of all married couples at age 65 can expect one spouse to live beyond 90.
Trend #2: Money won’t be cheap anymore. Short-term interest rates remained near zero for most of the last two decades. But due to inflation, interest rates have soared and are likely to stay elevated. Rates near zero were an aberration. Rates are likely to creep back to their long-term averages, with brief declines during recessions. What that means for your retirement: Higher interest rates make carrying credit card debt and other loans more punishing and put a damper on stock market returns.
Trend #3: Investment returns will be lower. Over the past 40 years, the S&P 500 has returned an average of about 11% annually, while the total bond market averaged a 7% return per year. This performance greatly exceeded the economy’s rate of growth, which is unusual. Going forward, many analysts believe that stocks will produce mid-single digit returns and bonds will have no capital appreciation at all beyond their yields. Many of the trends that raised corporate profit margins and goosed stock returns now are peaking or reversing. There will be less free trade and globalization…higher labor costs…a less business-friendly government…and an economy that is growing more slowly because fewer people are working. What that means for your retirement: Compared to the past, it now will take your portfolio much longer to recover from investment mistakes and big losses.
Trend #4: Taxes will be higher. Income tax rates now are at their lowest level in decades. Those rates will expire after 2025 unless a majority in Congress and the president agree to extend them. That seems unlikely because the government needs greater tax revenue to plug the federal budget deficit and fund Medicare and Social Security. What that means for your retirement: Your taxes may be higher than you think in the years after you stop working.
Old investing strategy: Fixed-income investors should hold widely diversified bond funds for safety and cash yields. Problem: Decades of falling interest rates and low inflation lured retirees into believing that diversified bond funds were a stable, low-volatility choice. But the value of your fund shares can fluctuate greatly during periods of rising inflation and interest rates.
New investing strategy: Replace bond funds with US Treasuries, brokered certificates of deposit (CDs) and multiyear guaranteed annuities (MYGAs). These investments are easy to use and understand…offer recent annual yields of 4% to 6%…carry little potential for default…and allow you more control over when you can get your money back without risking any losses. US Treasuries can be purchased directly at TreasuryDirect.gov or through your brokerage firm. Brokered CDs work the same way as bank CDs but tend to have higher yields of one-quarter percentage point or more, which—rather than being compounded—are paid in regular intervals. MYGAs are the insurance world’s equivalent of CDs but tend to pay even higher rates than comparable Treasuries and bank CDs. To see MYGA pricing for residents in all 50 states plus credit ratings of all the insurers, go to
StanTheAnnuityMan.com.
Old investing strategy: A balanced portfolio of 60% stocks and 40% bonds provided an attractive combination of growth, stability and all-weather diversification. It worked because stocks and bonds typically moved in opposite directions from each other—stocks benefited from economic booms, and bonds tended to thrive during corrections and recessions. Problem: Last year, the traditional 60-40 portfolio imploded. Bonds lost nearly as much as stocks. This balanced combination isn’t diversified enough to reliably handle the wider variety of economic environments I expect in the future.
New investing strategy: You will need a greater balance of investments including inflation-indexed bonds, gold, commodities, real estate and foreign currencies. My “true diversification” portfolio consists of 10 mutual funds and exchange-traded funds (ETFs) whose returns and volatility aren’t closely tied to each other and the major market indexes. This portfolio won’t do as well as a 60-40 portfolio during stock bull markets, but it will better protect capital during other phases of the market cycle, avoiding big losses in any given year and generating solid, steady returns in most market environments. Here are the 10 funds and recent asset allocations in my true diversification portfolio now…
18%: FPA Crescent (FPACX). Fund manager Steven Romick, who has overseen this hedge-fund–like offering since 1993, invests in any asset class, sector or geographic region, even buying private equity. Recent yield: 0.13%.
13%: Cromwell Marketfield Long/Short (MFADX). The fund can invest in or sell short almost any investment. The managers develop several unrelated economic and investment forecasts and look for investments whose prices don’t yet reflect those forecasts. Recent yield: 0.44%.
12%: Cambria Trinity ETF (TRTY). This exchange-traded fund invests in 25 underlying ETFs, specializing in everything from emerging-market debt to inflation-protected bonds to mid-cap value stocks. Recent yield: 3.19%.
12%: Leuthold Core Investment (LCORX) assesses market valuations and trends, then spreads assets across more than 200 investments, from long and short positions in stocks to mortgage-backed securities. Recent yield: 0.58%.
11%: T. Rowe Price High Yield (PRHYX). This junk bond specialist holds more than 400 bonds with an average credit quality of B. It benefits from a large, global research team and a careful, disciplined approach. Recent yield: 6.35%.
11%: Boston Partners Global Long/Short (BGRSX) invests in stocks around the world that have positive business momentum and solid fundamentals. It shorts stocks that it deems very overvalued. Recent yield: 2.08%.
8%: DWS RREEF Real Assets (AAASX) holds investments in domestic and foreign markets (including emerging markets) and in five different asset classes that tend to do well in inflationary environments including Treasury inflation-protected securities (TIPS), real estate investment trusts (REITs), infrastructure companies, commodities and gold. Recent yield: 1.91%.
5%: Cohen & Steers Realty Shares (CSRSX) owns more than 30 REITs, companies that operate or finance income-generating real estate and pay dividends to shareholders. Recent yield: 3.35%.
5%: Oakmark Fund (OAKMX) selects about 50 large and mid-cap stocks that are trading at least 40% below the price that veteran manager William Nygren thinks they are worth. Recent yield: 0.78%.
5%: WCM Focused International Growth (WCMRX) invests in 30 to 40 stocks, mostly in developed nations. Its portfolio holds reliable, slower-growing large companies that dominate industries, as well as faster-growing, more volatile ones. Recent yield: 0.0%.
Old tax strategy: Delay tapping your tax-advantaged retirement accounts as long as possible. Problem: Now that the age for required minimum distributions (RMDs) from IRAs and 401(k)s has increased—it reaches 75 a decade from now—RMDs have become a tax time bomb, especially if income tax rates rise in the future. If you let the value of your tax-deferred accounts swell into your 70s, you might have to take very large RMDs that can push you into a higher tax bracket, as well as trigger stealth taxes such as larger Medicare premiums down the road.
New tax strategy: Mitigate the impact of RMDs. Strategically reduce the total taxes you pay over the long run by paying some taxes before you have to at today’s low rates. Example: Look for opportunities to draw down tax-deferred accounts during your “bridge years,” the years soon after you stop working when you may find yourself in a lower tax bracket. Invest the after-tax amount in a taxable account and/or Roth IRA. There’s little risk that you’ll pay higher lifetime taxes this way and a good likelihood that taxes will be reduced.
Old Social Security strategy: Take Social Security benefits as early as possible. Problem: Lower investment returns and higher inflation could vastly reduce the likelihood that your money will last into advanced old age. Most retirees underestimate their risk of living a very long life.
New Social Security strategy: Treat Social Security like a longevity annuity. Delaying Social Security from age 62 until age 70 increases your annual benefits for life by nearly 80% when adjusted for inflation. Plus, if you are the higher earner in a couple and die first, delaying benefits results in higher survivor protection for your spouse.
Important: The death of Social Security is greatly exaggerated for today’s retirees. The federal government has the ability to draw from other sources of revenue to keep providing full benefits to all participants until 2044…and Congress is likely to pass legislation to keep it funded beyond that.
