At its January meeting, the Federal Reserve Bank Open Market Committee stood pat on interest rates, keeping the federal funds rate at 1.5 percent to 1.75 percent. Fed Chair Jerome Powell deemed Fed policy appropriate given our current strong economy, but noted that future Fed actions will depend on events, a normal “who really knows?” out.

In a Jan. 30 forecast, Kiplinger opined that the Fed will not raise or lower rates in 2020, unless the coronavirus outbreak gets worse. It’s possible that if the contagion intensified and slowed global growth materially, the Fed could cut rates once to boost confidence. 

Kiplinger sees that as unlikely: “Expect an extended period of low interest rates, with the 10-year Treasury yield staying below 2 percent with a flat yield curve.” 

On Friday, Feb. 7, 2020, the 10-year Treasury note offered a yield of 1.578 percent. On Dec. 31, 2019, the benchmark 10-year note closed with a yield of 1.909 percent, making headlines as “the lowest year-end close in 7 years.”  With interest rates down year-to-date, there’s little upward pressure on interest rates.

With interest rates still low by historical standards, why is so much money pouring into bond mutual funds and separately managed accounts? The answer, primarily, may be “de-risking” midst the baby boomer retirement age wave. The oldest boomers turn 74 in 2020 and the youngest age 56. Many are retired and the rest are planning for retirement, or at least they should be. 

Financial advisors often talk about the “Retirement Red Zone,” the five years before retirement or the five years after where poor investment performance a la 2007-2008 can have negative long-term longevity funding consequences. 

Investors have learned it takes a 100 percent gain to overcome a 50 percent loss. Despite a 10-year plus stock market bull run, or maybe because of it, aging boomers want a reasonable cushion in cash and bonds to sustain their cash flow needs in case of a market drop, a “paycheck fund.” When you’re retired and no longer working, you depend on your retirement nest egg to supplement Social Security or pension income, if you have a pension. You would want to leave a quality stock portfolio alone to recover after a drop.

We see folks subject to Required Minimum Distribution rules taking their 2020 RMD out while the market is reasonably high, hedging against uncertainty given potential market volatility in an election year. You could keep the cash in reserve in an IRA reserve account if you don’t want to take it out all at once up front, saving funds to make charitable contributions out of your IRA if you are over age 70 ½ under Qualified Charitable Distributions rules, potentially a “tax-wise” strategy. You must take personal possession of all RMD funds by the end of the year.

Note that under the SECURE Act, the age when RMDs begin has been extended from age 70 ½ to age 72. The RMD change does not apply to those who already reached age 70 ½ by 12/31/2019. (Note: Inherited IRAs have different rules).

Inflows into tax-exempt bond funds and muni bond managers have accelerated with the capping of state and local tax deductions in the 2017 tax overhaul. A Georgia investor may look for funds that can include Georgia muni bonds for relief from state income taxes.

Given ample lower risk reserves in bonds and “no risk” FDIC-insured cash, you still need an inflation hedge to sustain spending power over a potential 25- to 30-year retirement. With a sufficient “paycheck fund” you can retain reasonable holdings in inflation hedges and dividend payers, such as value stocks, real estate and other cash flow generators. Even as the Fed frets about low inflation, the Wall Street Journal shows year-over-year All Items inflation running at 2.3 percent, a drip process that eats into buying power over time.

With low interest rates, bonds and cash may sustain near-term spending power, but long-term spending power is eroding adjusted for inflation and even fairly modest tax brackets. Diversification still counts as part of a comprehensive investment policy!

Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;  Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of  SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.

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