Summary: With Christine Benz, Personal Finance Editor at <a href="http://Morningstar.com" target="_blank" rel="noopener noreferrer" data-cke-saved-href="http://Morningstar.com">Morningstar.com</a> and author of The Morningstar Guide to Mutual Funds: Five Star Strategies for Success<br> Steve spoke with <a href="https://www.morningstar.com/authors/30/christine-benz">Christine Benz</a>, Personal Finance Editor at Morningstar and the author of “<a href="https://www.amazon.com/Morningstars-30-Minute-Money-Solutions-Step/dp/0470918136">Morningstar’s 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances</a>” and the “<a href="https://www.amazon.com/Morningstar-Guide-Mutual-Funds-Strategies/dp/0470137533">Morningstar Guide to Mutual Funds: Five Star Strategies for Success</a>”, to get some insights for retirees on how to handle the current low-yield environment.<br> The Bucket Strategy<br> Steve started off their conversation by asking Christine straight out how, in such a low-yield environment, people expecting to live off their yield income can manage to get by. He laid out the current situation on yields, saying, “The 10-year Treasury is around 0.6., 0.7%. Short-term CDs are in the 1% range, maybe 2%. So, that probably means, after taxes, losing money to inflation.” Christine replied that “It’s been an ongoing challenge over the past several decades where we’ve had yields on safe investments go lower and lower and lower. That’s left income-oriented retirees with the option of either subsisting on less or gravitating to higher risk, higher income-producing securities. I think that there are other ways to think about building cash flow in retirement that don’t involve exclusively income distribution.”<br> Steve then asked her to explain what she calls “the bucket strategy.” Christine credits Coral Gables financial planner Harold Evensky as a strong influence in developing the strategy which she explained to listeners: “The basic idea is that you’re kind of structuring your portfolio as a series of buckets. In bucket one, you’ve got cash—CDs, money market accounts, what you have in your checking account, etc. The idea is to have in there two years’ worth of expected withdrawals that you can subsist on when your portfolio isn’t kicking off enough income to meet your living expenses.” She went on to explain bucket two: “Once you’ve developed bucket one, then you’re kind of stepping out on the risk spectrum. With bucket two, you’ve got a portfolio of high quality short and intermediate-term bonds. You’re taking more risks, but you’re potentially picking up a little higher income. The goal is to build yourself a runway with buckets one and two of roughly 10 years’ worth of portfolio withdrawals in safe investments.”<br> To combat the current extremely low-yield situation, Christine further suggested, “I think you can potentially add some corporate bonds into the mix to potentially pick up a slightly higher yield. You might also think about adding some dividend producing equities.”<br> Seek Professional Advice<br> Steve remarked about how much the yield environment has changed over the years. “When I started in the business in 1981, the yields on fixed income were considerably higher than the dividend yields on stocks. But in recent history, that has turned around 180 degrees. We now see a higher yield on the average stock, let’s say 2%+, than we do on US Treasuries and on some corporate bonds as well.” He asked Christine if people can manage to keep up with inflation with a 10-year runway composed mostly of bonds paying less than 2%.<br> Her advice was to get professional advice, explaining that each individual’s personal financial situation and needs are different. “It’s very personal – run the numbers and see how your retirement portfolio sustainability looks. It may be that 10 years’ worth of cash flows in very...
