Interest Rate Risk a Growing Concern for Boomers

Thirty-three percent of Baby Boomers are actively managing interest rate risk in their portfolio, up six percentage points from last quarter. This is according to “StreetWise,” E*TRADE’s quarterly tracking study of experienced investors.

Dividend-paying stocks are Boomers’ top choice, cited by 40%. Their interest in fixed income slipped seven percentage points since last quarter to 16%. Baby Boomers face challenges when searching for income.

Fifty-eight percent of Boomers say the traditionally defensive and dividend-heavy health care sector has the most potential this quarter, up three percentage points since last quarter.

“Investors approaching retirement traditionally turn to bonds to provide a steady stream of income for their portfolio,” says Mike Loewengart, vice president of investment strategy at E*TRADE Financial. “That said, with bond yields under pressure in this low-rate environment, it is forcing some to get a bit more creative. Defensive sectors like health care and dividend-paying stocks like blue-chips and large-cap companies could offer investors better yields right now.”

Loewengart says that even the highest-yielding equities can disappoint, so it is important for investors to delve into a stock’s fundamentals. Additionally, divided growth should not take a back seat to yield, and international dividend payers may offer opportunities, he says.

This should be a focus when looking at target-date funds (TDFs) often used as the default investment in employer-sponsored defined contribution (DC) plans. Recent J.P. Morgan research shows, as participants transition from the accumulation to the decumulation phase, the potential adverse effects of a market downturn on total lifetime wealth reach their peak. Simply put, as net spending continues to deplete balances, it becomes more and more difficult to recover from market losses, even with stronger returns in the later retirement years.

Anne Lester, head of retirement solutions for J.P. Morgan Asset Management, recently highlighted the deep analytical work her team has done regarding the optimal shape of TDF glide paths during investors’ retirement years. “We take the stresses of real-life participant saving and withdrawal behavior into account, and we rely on well-diversified glide paths to manage a range of participant-experienced risks associated with DC investing,” Lester explained. These include market, event, longevity, inflation and interest rate risks.