Planning for retirement income has become increasingly more complicated amidst changing markets, historic inflation, and looming rising interest rates. There are several different categories of risk to consider that can change the income a retiree would have available to them from their retirement plan, all with varying degrees of effect on the portfolio.
A recent white paper from Allianz discussed several of the main risks to retirement income and how they can adversely affect a portfolio and divided the risks into acute and gradual categories. Acute risks encompass things such as growth risks and are directly related to market performance and volatility.
Most investors tend to focus primarily on the importance of portfolio growth during their working years, but it is equally, if not more important, in retirement years. Aggressive portfolios carry higher risk but offer higher rewards and are generally weighted more heavily into equities. Even a 2% difference in returns can equate to a 25-30% change in retirement income over the portfolio duration.
However, market variations can have a heavy impact on even moderate portfolios, with the S&P ranging in returns from 2.7%-13.9% in the last 20 years, which can translate significantly, even in a portfolio that only carries 35% allocation equities. Diversifying exposures and asset types can help bring balance to market risks.
Chief amongst gradual risks in the concern and impact of inflation on retirement income and portfolio performance in the long-term. Rising inflation puts pressure on portfolios with higher fixed income allocations because they tend to be more sensitive to rising interest rates, reducing the value of the fixed income investments.
Inflation also means the cost of living increases for retirees and larger withdrawals that might have been anticipated initially; a 2% increase in inflation, when planning retirement income to last until the age of 95, results in a 23% reduction in affordable income. With longevity being another gradual risk and the need for retirement income to be extended more years as the average life expectancy increases, balancing for inflation is vital.
Finding High Income, Risk-Adjusted Opportunities
For investors that are seeking income potential that is risk-adjusted in the midst of any market environment, the American Century Multisector Income ETF (MUSI) is an excellent option. For those considering retirement and looking for the chance at a higher income, MUSI is a viable option that offers increased returns in any market condition.
MUSI is an actively managed ETF that seeks diversified exposures across investment grade corporate, high yield, securitized, and emerging market bonds.
The portfolio managers rotate sector allocation depending on the global macroeconomic outlook combined with the relative valuation between sectors. This sector allocation considers inflation, economic activity, and monetary policy utilizing fundamental research and quantitative modeling.
MUSI invests in both investment-grade corporate bonds as well as high-yield “junk bonds.” The fund can also invest in preferred stock, convertible securities, bank loans, and other equivalents within equities. By investing in securitized credit instruments, the fund is capable of liquidity in times of market movement. Investing in high yield bonds typically means shorter durations that are less affected by rising interest rates, as well as the ability to capture the call price of a company refinancing to lock in lower rates before rates rise further. This penalty is rolled into the returns for high-yield bonds and equates to even greater returns for investors.
The investment allocations for MUSI as of the end of October are 50.19% into credit, 25.13% into securitized, 17.29% into emerging markets, and 6.41% into equities.
MUSI carries an expense ratio of 0.35%.
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