Over the weekend Barron’s had a “special report” about retirement that consisted of two articles; one on the optimal time to take Social Security and one on income investing.
This is a very fun topic to write about and explore because the evolving nature of what retirement will mean for boomers and succeeding generations when compared to previous generations. Many people will have to create their own innovative solution that goes beyond merely living off of investments and Social Security while spending thousands every year on exotic trips.
For years I have been saying I do not expect to get Social Security or at best, get a very watered down of Social Security as we know it today. What I think will happen is that there will be means-testing such that people who do the right thing (maintain an adequate savings rate for many years) will lose out here, some will read that and think responsible people will be punished for having been responsible.
The article on alternative income solutions and strategies covered a lot of ground so not a lot of detail but was a good starting point for people starting realize that income investing is becoming more complicated. Buying a bunch of long-dated treasuries is no longer a favorable one-way trade. The article touched on ladders, all-ETF portfolios, actively managed solutions (funds and separate accounts), munis, closed end funds and a couple of others.
There was also mention of dividend stocks as bond substitutes but also the warning that dividend stocks are not bonds they are stocks. If some dividend stock near and dear to your heart went down 20% in a down 50% world as was the case with some stocks in 2008 and 2009 you’d probably be pretty pleased. If you were expecting a dividend stock to trade like a bond you’d probably be pretty disappointed with a 20% decline. Most investors do not want to take on equity-beta in the fixed income portion of their portfolio even if they don’t realize that now.
While this would be an opportunity to tout AdvisorShares funds, the reality is that there are good products from many fund providers that can be part of the solution here. In general terms, I have written many times about seeking out smaller allocations to various markets segments, like the ones mentioned by Barron’s along with some individual issues. While 30% in emerging or high yield seems very aggressive, 5-10% seems reasonable when combined with other exposures that have different attributes and so will react differently to rising rates, widening or narrowing of spreads and any other drivers of return.