John Taft: Protecting Retirement Income in a Time of Volatility

There's an old saying on Wall Street: When faced with a bear market, the best thing you can do is play dead. Making sudden, poorly thought out movements will likely only make your situation worse.

That's easier said than done for those who are in or nearing retirement. Retiree investors counting on their investment portfolio to provide steady income over the course of their non‐earning years have reason to feel alarmed – nothing disrupts even the best retirement income strategies as much as selling equities during periods of market decline. Talk about digging a hole that's hard to climb out of.

History has shown that it takes on average roughly seven years for most of the volatility surrounding equity returns to work itself out.

To avoid the pitfalls of selling stocks while they're down, retired investors might consider funding the next several years of spending with fixed income securities. Bonds used to be expensive in the post‐financial crisis regime of accommodative monetary policy and ultra‐low interest rates.

But now that interest rates have risen, the bond market has become a lot more attractive.

A laddered seven‐year portfolio of municipal bonds in today's market yields about 2.6%. That's after tax – cash you can spend. Projecting spending needs (taking inflation into account) and using principal and interest from a laddered bond portfolio to fund those needs can give you the time needed for the equity portion of your portfolio to rebound. Better still, it can protect you from having to draw down during periods of market volatility.

Given historical returns of 7.5%, the value of a diversified stock portfolio can be expected to grow by more than 50% over the next seven years – long enough to rinse, repeat and start the process of building a new ladder all over again. While exposure to bonds is no guarantee to keep the bear at bay, those near or in retirement who are worried about market volatility might want to give fixed income a second look.