Why Investors Should Rethink Traditional Income Strategies
Humans are creatures of habit. We all have daily routines, whether it’s walking the same lunchtime route, watching a familiar TV show, or cooking the same meal over and over again. Once we develop a pattern, it can take a drastic change to convince us to rethink our approach.
One such shake-up to ingrained investment habits is the changing landscape of income investing.
In today’s infographic from New York Life Investments, we explain why traditional long-term bonds may not be as effective as they were in the past, and which additional income strategies investors can consider.
The Status Quo
For years, investors have relied on traditional longer-term bonds as the centerpiece in an income portfolio. These debt instruments usually pay out interest to investors on a predetermined schedule, providing a steady income stream investment. Historically, they have also been subject to less volatility than equities.
The typical bond portfolio is diversified, much like the Bloomberg Barclay’s U.S. Aggregate Index. Here’s how the sectors are broken down in the index:
Unfortunately, this income strategy has been less effective in recent years. Over the last decade, core bond duration has increased by 1.5 years while yields have decreased by almost 2%. Essentially, interest rate volatility has increased—but investors are less compensated for the risk.
In light of low rates and higher expected market volatility, it’s critical that investors explore other income solutions. Luckily, there are many lesser-known asset classes for investors to consider.
Additional Income Strategies: An Investor’s Choice
When investors decide how to re-allocate, they can keep these objectives in mind:
- Preservation of principal (risk level)
- Pursuit of capital (growth potential)
- Perseverance in markets (long-term objectives)
Which additional income strategies can they explore?
Taxable Municipal Bonds
Issued by state and local governments, the yield of taxable munis has historically been higher than that of other sectors. Taxable munis also have a strong credit rating—over 76% of U.S. municipal bonds outstanding are A+ rated or better.
Insured Municipal Bonds
Investors can get additional downside protection with insured municipal bonds, which are guaranteed to pay interest and principal back by private insurers. They have historically performed similar to munis while capturing less of the “downside”, often providing an attractive risk-adjusted return for income investors.
Short-duration, High-yield Bonds
Bonds with a shorter duration and higher yield can be a lower volatility approach to achieving the same income investing goals.
Yield and Risk in Bonds (July 1, 2014 – June 30, 2019):
|Bond Type||Yield||Standard Deviation (annualized)||Yield per Unit of Risk|
|U.S. Aggregate Bonds||2.49||2.94||0.85|
|High Yield Bonds||6.05||5.60||1.08|
|Low-duration, High-yield bonds||5.00||3.90||1.28|
Short duration funds have lower interest rate risk, and can offer attractive yield per unit of risk.
Equities can also play a role in an income focused portfolio. Investors should look for established companies that are achieving:
- Growth in free cash flow
- Stable or growing dividends
- Share buybacks or debt reduction
Over the last 40+ years, the annual compound return of stocks with growing dividends have outperformed dividend cutters on the S&P 500 by more than 4%.
Preparing for Your Future
Maximizing the benefit from new income opportunities can take time. For this reason, it’s important to consider potential portfolio changes now, so that these strategies can play out in the lead up to retirement years.
It may be tempting to stick with the status quo—both in daily routines and investment strategies—but those who proactively adjust their approach will be able to maximize their potential.
Charted: Retirement Age by Country
We chart current and effective retirement ages for 45 countries, revealing some stark regional differences.
Charted: Retirement Age by Country
The retirement landscape can look completely different depending on what country you’re in. And charting the retirement age by country reveals a lot of differences in the the makeup of a labor force, both for economic and cultural reasons.
This graphic delves into the current and effective retirement ages across 45 nations in 2020, based on comprehensive data from the OECD 2021 report.
Defining Retirement Ages
Before we dive into the numbers, let’s clarify the measurements used by the Organisation for Economic Co-operation and Development (OECD):
- The current retirement age is the age at which individuals can retire without penalty to pension after completing a full career starting from age 22.
- The effective retirement age refers to the average age of exit from the labor force for workers aged 40 years or more.
Many countries have seen workers effectively retire earlier or later than the current retirement age. This variance can arise due to a multitude in factors including differences in career start ages, some industries offering earlier retirements or benefits for later commitments, or countries facilitating different workforce exits due to market demands and policies.
Some people also choose to retire early due to personal reasons or a lack of available work, receiving a smaller pension or in some cases forgoing it entirely. Likewise, some people choose to stay employed if they are able to find work.
Retirement Age by Country in 2020
Here’s a snapshot of the current and effective retirement ages by country in 2020:
|🇨🇷 Costa Rica||62||67||62|
|🇨🇿 Czech Republic||64||63||62|
|🇰🇷 Korea, Republic of||62||66||65|
|🇳🇿 New Zealand||65||68||66|
|🇬🇧 United Kingdom||66||64||63|
|🇺🇸 United States||66||65||N/A|
|🇪🇺 European Union (Average)||64||63||N/A|
|🇨🇳 China (People's Republic of)||60||66||61|
|🇸🇦 Saudi Arabia||47||59||N/A|
|🇿🇦 South Africa||60||60||56|
Three countries had the highest current retirement age at 67 years, Iceland, Israel, and Norway, but all had slightly lower effective retirement ages on average. On the flip side, Saudi Arabia had the lowest current retirement age at only 47 years with full pension benefits. Only Türkiye at 52 years was close, and notably both had much higher effective retirement ages on average.
Discrepancies between different regions are clear across the board. Many Asian countries including China, India, and South Korea have official minimum retirement ages in the early 60s and late 50s, but see workers stay in the workforce well into their late 60s. Meanwhile, most European countries as well as the U.S. and Canada have more workers retire earlier than minimum retirement ages on average.
Almost all of the countries with measured effective retirement ages for women also saw them exit the workforce earlier than men. This can be the result of cultural gender norms, labor force participation rates, and even the setup of pension systems in different countries.
The five exceptions in the dataset where women retired later than men? Argentina, Estonia, Finland, France, and Luxembourg.
Looking to the Future
In 2023, France sparked controversy by raising its early retirement age by two years. This decision triggered widespread strikes and riots and ignited debates about the balance between economic sustainability and individual well-being.
Given aging demographics in many developed countries and a continued need for labor, this isn’t expected to be the only country to reassess retirement. The OECD projects a two-year increase in the average effective retirement age by the mid-2060s.
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