Why QE3 makes retirees queasy

The Federal Reserve’s announcement last week of a new, open-ended round of “QE”—quantitative easing, or bond buying designed to grease the wheels of the economy—means downward pressure on interest rates is likely to continue for a while.

As a result, income investors in general are losing due to lower rates. Near zero interest rates have prevented families from building or rebuilding their net worth … because yields are historically low or even negative.

Here is an example of the implications:

Couple X is retiring. They’ve decided to split a $600,000 portfolio into three equal piles and invest it in 10-year Treasurys, 5-year CDs and a mix of investment-grade corporate bonds that yields the average for that sector. And because they’re a hypothetical couple, they’re making all these investments on the same day.

If they’d retired five years ago —before our most recent recession kicked in—they’d have nailed down annual yields of 4.81% a year on the Treasurys, roughly 5% on the CDs and roughly 6% on the investment-grade bonds. Annual pre-tax income from their portfolio: $31,620, not a bad supplement to the monthly Social Security checks.

But If they’d retired today, based on recent closing prices they’d be earning 1.83% on their Treasurys, 1.37% on the CDs, and 2.92% on the corporate portfolio. Now they're taking annual income of $12,240—less than 40% of what they might have earned with different timing.

Without making some other aggressive moves or trimming their spending, this couple is more likely to be eating into their principal to pay for living expenses each year.

Bottom line: Today’s monetary policy creates a pool of retirees who feel they have to take some bigger investment risks, whether they like it or not. Spread that calculus over some 40 million retirees over the age of 65, and about $5.2 trillion in assets held in IRAs , and you’ve got a lot of money roaming into some very unfamiliar places.

Source:  Matthew Heimer, Moneywatch


The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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