Retirement Stewardship During Extremely Low Interest Rates


The COVID-19 pandemic has created some significant economic repercussions, not the least of which is a further reduction of already low prevailing interest rates.

They were already low—now they’re EXTREMELY low.

Furthermore, the Federal Reserve recently announced that it would keep interest rates near zero for the foreseeable future, perhaps through 2022 or longer. It also expressed some optimism about an economic recovery and believes that keeping rates low for at least the next two years will help the economy rebound to its pre-pandemic state.

Ten years ago, 10-year treasury bonds yielded what most investors considered a “paltry” 3.8%. A decade before, they were paying 6.4%! Compare that to the current interest rate of .74% on a 10-year treasury bond. The 20-year rate is 1.29%. If you’re willing to tie up your money for 30 years, you’ll earn a whopping 1.52%!

Medium to long-term treasuries aren’t very enticing, are they?

Most retirees (myself and my wife included) are focused on investing for income while preserving capital but hoping for some inflation protection through capital growth. Our portfolio contains mostly dividend-paying equity funds (35%), treasury inflation-protected securities (TIPS), and high-quality corporate bond funds (55%), and occasionally, alternative income solutions. (I also hold about 10% in cash.)

Low interest rates may help fuel an economic recovery, but they wreak havoc on retirees who primarily rely on interest income to help fund their retirement. This is causing many retirees like me to re-evaluate their retirement income investing strategy.

Do I need to abandon bonds in favor of more dividend-paying stocks? Should I shift more of my assets to riskier, high-yield bonds, REITs, CEFs, or MLPs? Are commodities, such as gold and silver, the way to go? Or, is it finally time to get serious about a Single Premium Fixed Income Annuity (SPIA)?

Is debt biblical?

Some may object to receiving interest income altogether since it is tied to some form of corporate or government debt. But you may be surprised to learn that lending excess money and collecting interest (in some, but not all, circumstances) has been around since biblical times and some verses appear to commend lending, providing it is done without greed, justly, and with compassion and integrity:

The Lord will open to you his good treasury, the heavens, to give the rain to your land in its season and to bless all the work of your hands. And you shall lend to many nations, but you shall not borrow. Deut. 28:12

It is well with the man who is gracious and lends; he will maintain his cause in judgment. Psalm 112:5

Whoever multiplies his wealth by interest and profit gathers it for him who is generous to the poor. Prov. 28:8

Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.  Matthew 25:27

Debt is never called a sin in the Bible. But there are also warnings about it:

The rich rules over the poor, and the borrower is the slave of the lender. Prov. 22:7

He who puts up security for another will surely suffer, but whoever refuses to strike hands in pledge is safe.  Proverbs 11:15

So, while I understand the objections that some might raise, I don’t see a strict prohibition against it in the Bible, except when used to exploit the poor.

Bond fund “yields”

If you look at the yield typically quoted by an investment management firm for a bond fund, it is the “distribution yield” or “TTM” (trailing twelve months). It is a good indicator of past performance, but it doesn’t tell you what the fund will yield in the future.

Bond fund managers are also required to report what’s called the “SEC yield.” It’s also based on past performance. It’s a complex calculation, but it estimates the yield you would receive in a year, assuming each bond currently held in the fund’s bond fund portfolio is held to maturity. (Obviously, that may or may not be the case.) It also assumes income reinvestment and accounts for fees and expenses.

Most financial types seem to favor the SEC yield calculation as a more reliable predictor than the TTM and think it will be more consistent month-to-month. But whether one or the other will be closer to the actual yield over the next 12 months is something that only the markets can determine. As you have probably heard many times, past performance is not an indication of future returns.

The bottom line is that it’s probably best to look at both the TTM and the SEC yields when evaluating any bond fund.

What about the alternatives?

Investing in one or more of the alternatives to bonds that I alluded to previously means one thing: injecting more risk into my investment portfolio. My current asset allocation is relatively conservative (35% stocks, 55% bonds, 10% cash). So, to get a higher income, I would have to take more risk. There is no alternative.

Quality dividend-paying stock funds typically pay 2 to 4% in dividends. For example, I own the Proshares S&P 500 Dividend Aristocrats Fund (NOBL), which has a TTM yield of 2.12% and an SEC yield of 2.46%. I also own the Schwab US Dividend Equity Fund (SCHD), with a TTM yield of 3.2% and an SEC yield of 4.15%. Neither fund’s share price has gotten back to it’s early 2020 (pre-pandemic) highs. 

Remember, dividend yield is calculated by dividing the dividend by the company’s share price. So, as stock prices fall, the dividend percentage will rise if the dividend payout remains consistent. During extreme economic distress, both tend to go down because companies may have to reduce their dividends.

Stock market risk is ever-present, as demonstrated by the volatility we’ve seen since early this year. However, since my allocation is relatively low, I could bump it up to 40 or 50% without taking an extreme amount of additional stock market risk. That said, I’d rather not if I don’t have to.

My bond funds are mostly TIPS and investment-grade corporate bond funds. The current TTM yield on my Treasury Inflation-Protected Securities fund (TIP) is .86%, but the SEC yield has jumped to 5.20%. (It’s also up 8.84% YTD due to inflation expectations and interest rate reductions.) However, the SEC yield on my core corporate bond holding, the iShares Core USD Total Bond Market (IUSB), is only 1.52%. Yet, it’s also up 6.36% YTD. (Note the contrast between the YTD performance of these bond funds versus the stock funds I mentioned earlier.)

I could invest in higher-yielding income funds, such as those that hold “junk bonds.” For example, a popular junk bond ETF (JNK) has a TTM yield of 5.48% and an SEC yield of 5.36%. (It’s down 1.54% YTD, which is understandable.) The problem with junk bonds is that they carry greater interest-rate and default risk (meaning that they can be much more volatile than other types of bond funds, especially during bad economic times.) Those risks have been made very evident with the economic uncertainty precipitated by the pandemic.

Another popular strategy is to invest in real estate investment trusts (REITs) for their high yields. I could invest in an individual REIT, such as the Simon Property Group, SPG (a regional mall REIT). It has an annual yield of 8.02%, but it is down a whopping 55%, mainly due to the pandemic. There are also funds of REITs, such as Vanguard’s Real Estate Index Fund (VNG). It yields 3.65%, but it is also down for the year (- 14.76%).

REITs are typically highly leveraged and can be hypersensitive to economic downturns, so, much like junk bond funds, they tend to more volatile than other types of bond funds. Given the possible challenges of commercial real estate in the future, I’m not too interested in these right now.

Gold, silver, and other commodities (such as oil and gas) are also suggested to replace bonds due to the diversification they provide for stocks. The problem is that commodities can also be very volatile, and they generate little or no income. So, at least for now, I’m going to pass.

Closed-End Funds (CEFs) and Master Limited Partnerships (MLPs) are also high-income options. I am currently looking into both as potential sources of income, so possibly more on that in the future. Suffice it to say that both carry a higher risk than traditional bond funds. Even if I did something here, I would be very cautious and probably wouldn’t allocate more than 5 or 10% of my portfolio to them.

Time to consider annuities?

I have written about annuities several times. Some financial experts suggest that replacing a portion of your bond investments with an immediate income or indexed annuity (while retaining a healthy allocation to stocks) could be a wise choice. You could get a “guaranteed” return in the 4 to 6% plus range, which is much better than we’re likely to see in the bond markets any time soon.

Of course, the problem is that you or I have to hand over a large chunk of cash to an insurance company to purchase the annuity. This is what tends to be most off-putting to many retirees. However, if other “safe” investments (such as CDs, treasuries, etc.) stay persistently low, annuities may become more attractive.

I was already planning to take another look at annuities as I got closer to age 70 (I will be 68 next month), so I plan to do more research and analysis. Look for future articles on this.

Bonds still matter

Since most investors have some allocation to bonds (retirees tend to have more), they are also one of the most critical to get right as global central banks continue have lowered interest rates to near-zero (rates are at zero or negative in some countries).

With income from bonds at all-time lows (but they do produce some income), I view bonds as playing a vital role in smoothing out the volatility of risk assets such as stocks. But rather than relying on bonds primarily for income, I probably need to focus more on total return.

Recall that I noted the YTD share price performance of my bond funds along with my stock funds. My bond funds are up while the stock funds are down. The reason is that bond values often increase when stocks decrease. (However, during the March 2020 crash, both went down.)

Earlier this year, I did some minor rebalancing of my portfolio. I sold some appreciated bond funds and purchased more shares in some of my stock funds. Selling bonds when they are up, and stocks are down is a way to produce additional income (with a “total return” approach), so I could have used the proceeds for income if needed. No matter what, bonds provide diversification, with is very important.

When interest rates are lowered, existing bonds that pay higher rates of interest become more valuable. Over the last 10 to 20 years, declining interest rates have fueled a dramatic rise in bond prices, but that is unlikely to repeat in the next decade. Since rates are near zero, the only direction they can go is up (unless they go negative).

Bond duration also plays a significant part in this. The longer the duration and the greater the interest rate decline, the more valuable the existing bonds become (since the interest is higher). Therefore, long term bonds (10-years plus) tend to be more volatile than short-duration bonds (typically 1 to 3 years) during times of interest rate changes.

Reducing bond volatility

There are two ways to reduce the volatility of bond funds. One is to buy quality (treasuries and investment-grade corporate bonds), and the other is to focus on short and intermediate-term durations. This can help prevent significant losses during times of economic turmoil.

My core bond holding (IUSB) would be considered an intermediate-term bond fund (average maturity of 6.3 years). The TIPS fund has an average maturity of 7.85 years, so it is also considered an intermediate-term fund. I also own the iShares 0 -5-year Investment Grade Bond fund (SLQD). Not surprisingly, it has an average maturity of 2.28 years. However, the SEC yield is only .69% (TTM is higher at 2.64%, and it is up 3.9% YTD).

This shows how the shorter the duration and the higher quality your bond funds are, the more stable they are and how they can provide a “ballast” for the more volatile stock funds in your portfolio.

During the early weeks of the pandemic, many investors ran to the safety of short-term US treasures. These securities are very safe and carry minimal interest rate risk. So, does it make sense to go all-in with short-term treasuries as the ultimate protection from a volatile stock market?

The short answer is no, probably not. You will give up income (since rates are near zero) and also the potential for capital appreciation in the future. It would be like holding your money in cash, which makes it subject to inflation. If you spent 3% a year from those funds, you would be depleting your investment principle.

Are negative yields possible?

In a normal functioning bond market, even with interest rates near zero, the average investor would seldom, if ever, experience a negative yield (meaning it would cost them to own a specific bond or bond fund). But it’s not out of the question for bond traders.

The “yield to maturity” is the amount of interest that a bond will pay from now until the bond matures (expires), usually expressed as a percentage of its face value. In rare cases, the yield to maturity could be negative, depending on what an investor initially paid for the bond and how many payments will be made before it expires.

The US has never experienced a negative yield in its sovereign debt (treasuries). But, in the last year or so, it has become more common in the global economy. Many investors pay just a little over par (face value) for high-quality bonds because of extremely low-interest rates. That results in a negative return in exchange for the safety and liquidity that high-quality government and corporate bonds provide.

But what about “negative interest rates”? Numerous countries in Europe and Japan have negative rates, mainly for their sovereign debt.

If rates go negative in the US (they are already at near zero), your bond holdings become an expense you have to support instead of a source of income and growth. You’re paying the financial institution to hold on to your cash for you, like a virtual safe deposit box.

Of course, with rates near zero, an interest-bearing checking or savings account that is paying .1 to .5% percent is, technically, a “negative interest” account if you factor in inflation of between 1.5 and 2.5 percent.

Interest rates are indeed absurdly low by historical standards. If rates go negative, the perception (and utility) of bonds as part of a diversified retirement portfolio will be very negative as well.

No silver bullet

What will I do? Well, all things considered, I plan to retain my current allocation to quality bond assets, not because they offer an excellent yield, but because they are not closely correlated to stocks. Plus, they are still yielding something. As a recent retiree, I am concerned about sequence risk, and diversification is a good way to deal with it.

I have found no single magic silver bullet for dealing with current low interest rates. Some options add more risk, others don’t pay much income, and annuities, depending on the product, can be costly and complex.

So, since I have been dealing with already low rates over the past decade, I will continue with more of the strategies I’ve already been using: dividend-paying stock funds combined with intermediate-term TIPS and investment-grade bond funds, along with a short-term bond fund and cash.

That said, I’m going to continue to look for ways to “juice” my income a little without taking too much risk, but that is obviously something easier said than done. Stay tuned!


👋 Hi, I’m Chris Cagle, the founder of Retirement Stewardship, a blog that focuses on the various aspects of retirement from a Christian stewardship perspective (1 Peter 4:10).

I write as a retiree who is dealing with the things I write about. I base most of the articles on my research and experience applying it to my situation and how it might apply to yours.

If you’re new here, check out the site introduction for an overview. You can also learn more about me.


My Books

Redeeming Retirement: A Practical Guide to Catch Up (2021)
The Minister’s Retirement (2020)
Reimagine Retirement: Planning and Living for the Glory of God (2019)