How can you create increasing income in retirement in a bond bear market?

Senior couple doing the income tax declaration onlineHow critical is it to have a strategy to address increasing income in retirement? You know, interest rates are rising. We all see it in the short term and the more medium- and longer-term rates. Car loans are more expensive, mortgages are more expensive. The short-term rates are really going up. There’s now concerns about inflation. With interest rates having been so low, there’s no question in my mind that we’re on the front edge of a bear market in bonds. That’s because when interest rates go up, bond values go down. Therefore, it can be challenging to generate increasing income if you are depending upon traditional methods of retirement planning.

One of the two major sources of guaranteed income most people will have in retirement is Social Security. It’s been estimated that there will be a 3% Cost of Living Adjustment (COLA) in 2019, which would be the biggest annual hike since 2012. Now in 2018, the cost of living adjustment was 2%, which many people were happy to see. But that followed a 0.3% increase in 2017 and no increase in 2016. These numbers highlight increases in inflation.

Here’s the problem: since 2009, the average cost of living adjustment has been 1.2%. Yes, in the last two years, we’ve had greater increases, but most people haven’t seen that much of a difference on their net check. Once you are drawing Medicare (which you are eligible for after age 65), most people typically have their Medicare premiums deducted from their Social Security check (if they are already drawing it). The Medicare premium increases have been wiping out most of the increases in Social Security benefits.

If you are lucky enough to have a pension, many pensions have no cost of living adjustment. And even if they do, what is that cost of living adjustment going to look like in the future? Inflation is starting to rear its ugly head, and in the traditional sources we draw from for retirement income, we’re going to see little, if any, increases in our income.


The Importance of Planning

That’s where having a financial plan comes in. We have to have a solution to provide increasing income that lasts longer than we do, and there’s a lot of ways to do that.

When discussing money in retirement, it’s not so much about the investment amount – it’s about how those investments are going to generate dependable, increasing income. Using the traditional 4% rule, where you draw 4% from your savings the first year and start increasing it for inflation, may be a problem in today’s market environment – especially if you use the traditional approach of stock and bond mutual funds. This approach to retirement income could leave you vulnerable of outliving your money.

Business graph with arrow showing profits and gainsInstead, time horizon should be a critical component of income planning. Structure your income based upon when you will need the money. Money you’re going to need in the next 5 to 10 years should be held in stable investments, so you know it’ll be there for you when you need it. Money you’re not going to need for 10 or more years can be invested more aggressively because it can weather some market volatility.

Unfortunately, dependable, increasing income is probably not going to come from the traditional bond market. Beware traditional bonds! There’s no doubt in my mind that we are on the front end of a bear market in bonds, and what could end up being a historic bear market in bonds. Traditional U.S. bonds (including treasuries, investment grade corporate bonds, and investment grade municipal bonds) are, in my opinion, doomed to failure over the next 15-20 years. I’m not saying you shouldn’t have any traditional bonds in your retirement portfolio and mutual funds. But you have to be very, very careful because while bonds help us in the short term, in the long term, they’re likely to be a losing proposition.