Retirees are grappling with market volatility driven by rising Treasury yields and declining dividend-paying sectors. Financial experts recommend strategic steps such as maintaining robust cash reserves in high-yield options, actively rebalancing portfolios to capitalize on underperforming assets, and selectively employing tax-loss harvesting for bonds to fortify income streams and manage risk.
Retirees are currently facing a turbulent financial landscape as a recent surge in Treasury yields has led to price declines in their bond holdings. Compounding this challenge, some traditionally favored dividend-paying sectors, such as real estate and financials, have experienced dips exceeding 2% in the past month. Even the Vanguard High Dividend Yield Index (VYM) has seen a 1% decline, contrasting with utilities' modest 1% rise and healthcare's 4% gain.
The 10-year Treasury yield recently soared past 5.3%, marking a 24-year high, before settling near 5.085%. This period of significant bond market volatility has naturally sparked concern among retirees reliant on their savings for income. "When the bond market is in turmoil, clients' eyebrows are raised," notes Jessica Ness, CFP and financial advisor at CJM Wealth Advisers, though she reassures that diversified portfolios have generally held strong.
While a complete overhaul of one's retirement strategy may not be necessary, experts suggest a few key adjustments to bolster income and navigate market fluctuations.
Build a Robust Cash Buffer
A crucial defense against market downturns is maintaining a substantial cash reserve, ideally enough to cover six to 12 months of expenses and required withdrawals. This cash not only provides liquidity but can also generate attractive interest income in today's higher-yield environment without significant interest rate risk, thanks to short-duration fixed income assets.
For instance, the Crane 100 Money Fund Index boasts an annualized 7-day yield of 3.7%. Specific money market funds like the Vanguard Federal Money Market Fund (VMFXX) offer 3.81% yield (0.11% expense ratio), while the Fidelity Money Market Fund (SPRXX) yields 3.57% (0.42% expense ratio). For those seeking slightly higher returns with minimal duration risk, short-term bond funds are an option. The iShares Ultra Short Duration Bond Active ETF (ICSH) has a 30-day SEC yield of 4.38% (0.08% expense ratio), and the Vanguard Ultra-Short Bond ETF (VUSB) offers 4.78% (0.1% expense ratio).
Rebecca Venter, senior fixed income client portfolio manager at Vanguard, emphasizes the wisdom of "cash tiering" and "short-term liquidity buckets" to ensure a stable, defensive, and liquid allocation for volatile periods. She adds that "the short-term bond space provides meaningful yield with less interest rate risk so bond portfolios can be more stable through interest rate volatility.”
Actively Rebalance Your Portfolio
Don't shy away from rebalancing. This involves strategically selling off some of your top-performing assets and reinvesting in those that have lagged. This practice prevents overconcentration and helps maintain your desired risk profile. "Rebalancing is where the magic happens, that is where we see the opportunities," states Ness. She highlights trimming large-cap growth stocks, which have been "high flyers," and allocating to underperforming small and mid-cap stocks. For example, the Russell 2000, despite an earlier surge, has fallen over 7% in the past three months, and the State Street SPDR S&P Midcap 400 (MDY) is down almost 4% over the same period.
Implement Selective Tax-Loss Harvesting
For retirees holding bonds in taxable brokerage accounts, the recent rise in yields might present an opportune moment for tax-loss harvesting. Selling losing bond positions can offset capital gains elsewhere in your portfolio. If losses exceed gains, you can deduct up to $3,000 against ordinary income, with any unused losses carried forward to future years. However, investors must strictly adhere to the IRS's wash sale rule, which prohibits repurchasing a substantially identical asset within 30 days before or after the sale.
Rafia Hasan, CFP and chief investment officer at Perigon Wealth Management, sees this as an excellent time for tax-loss harvesting on bonds, particularly for clients in higher tax brackets who can benefit from the attractive taxable equivalent yield on municipal bonds. She advises favoring intermediate-duration bonds (five to seven years) over very long-duration options. Hasan concludes that while the fixed-income market remains challenging, the increasing role of yield in total bond returns is a positive sign for savers and bond investors moving forward.
