As market conditions put pressure on steady yields for retirees, investors who rely on a fixed income source can turn to an exchange traded fund.

The 4% rule has been popular for retirees to gauge how much money they will require each year without running their retirement accounts dry before 30 years. However, the lower projected outlook for equities and bond markets could put the rule in jeopardy.

According to Morningstar, CNBC reports that the 4% rule “may no longer be feasible” for seniors given current market conditions. Instead, the researchers argue for a new 3.3% rule.

Christine Benz, the director of personal finance and retirement planning at Morningstar and a co-author of the new report, notes that retirees have capitalized on a “trifecta” of positive market developments in the past several decades, including low inflation, low bond yields, and strong stock returns. However, many retirees or investors near retirement have become too complacent, expecting the good times to continue rolling.

While not inevitable, bonds are “highly unlikely to enjoy strong gains over the next 30 years,” and high stock prices will likely fall or revert to their mean, according to the report. Additionally, historically high inflation levels can also eat away at real yields or reduce retirees’ fixed-income purchasing power.

Retirees, though, have a few options to ensure the longevity of their investments, such as making fewer withdrawals after years of negative portfolio returns, forgoing inflation adjustments in those years, or reducing regular withdrawals by 10% and reverting back once investment returns are again positive.

“There are some simple tweaks you can make,” Benz adds. “It doesn’t have to be one giant strategy; it can be a series of these incremental tweaks that can make a difference.”

Investors can also look to alternative strategies to help potentially stabilize their portfolios. For example, ETF investors can consider the Nationwide Risk-Managed Income ETF (NYSE Arca: NUSI), which seeks to provide current income with a measure of downside protection.

NUSI follows a rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index, an index of the 100 largest non-financial stocks on the Nasdaq exchange. The ETF potentially may complement traditional equity and fixed income allocations or function as a possible hedge for investors.

The Nationwide Risk-Managed Income ETF establishes a collar strategy to generate monthly income. Collar strategies involve holding shares of the underlying stock while at the same time buying protective put options and writing calls for the same security. A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and on a specified date. A call option gives its owner the right but not the obligation to buy that asset instead.

For more news, information, and strategy, visit our Retirement Income Channel.


This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.

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