Don’t let low interest rates get you down

How do I generate enough income from my savings to help maintain my retirement?

It’s a question many investors are asking. And an important one considering the current low-interest rate environment. Historically, answering this question was relatively easy. Investment experts may have suggested investors buy a certificate of deposit (CD) or other short-term fixed income investment. But in this environment, I’d suggest investors consider other options.

Why? A simple example might help explain.

Let’s assume an investor has saved $250,000. Twenty years ago, if they’d invested that amount in a CD, they may have earned 5% or $12,500 per year. Today, that CD would likely yield only 0.25% or $625 per year.1 That’s a retirement lifestyle hit of almost $12,000 per year!

Now you’re left asking: what should I do?

Maybe you’ve made a commitment to retirement and you’re on the right track. Perhaps you’re not there yet and you still have some work to do. In either scenario, you’re probably wondering what you can do, considering the current environment, to generate more income from your savings.

Don’t let low interest rates get you down. Instead, focus on what you can change.

If you still have some work to do to prepare for retirement, increasing your contributions may be an option. Or maybe even working longer – it’ll give you more time for contributions and it’s less time you’re drawing from savings.

In either scenario, it’s important that you consider taking some investment risk. But that part isn’t all on you. If you choose to use a target date fund, the portfolio management team can play a big part, too.

What’s the portfolio management team here at Principal® doing to help investors?

Our team is considering the low-interest rate environment and trying to generate income without taking undue risks. And we use many different investment strategies to do that. These include high yield securities, dividend-paying stocks, a series of liquid alternative investments, and short-term securities. Yes, all of these present some risk. But by blending these strategies together, we can try to keep any single risk from dominating the portfolio.

The key take away? Investors using a target date fund don’t have to go it alone.

My team’s job is to try and manage the portfolio in a way that maximizes the return without taking excess risk. The investor’s job is doing what they can to increase their savings as much as possible. It’s through this joint effort that investors using a target date fund can try and make progress toward their retirement goals.

About Target Date Funds

Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Neither asset allocation nor diversification can ensure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for a full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.

1 The assumed rates of return in this example are hypothetical and do not guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. This is for illustrative purposes only.

 

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This document is intended to be educational in nature and not a recommendation and is not intended to be taken as a recommendation.  This material was prepared for general distribution and is not directed to a specific individual.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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