Liam Gibson, Wealth of Geeks
According to a recent survey by the Bipartisan Policy Center, more than half of Americans lack confidence in their ability to retire when they want to and sustain a comfortable life. More concerning, those aged 45-54 feel the least prepared to retire.
Although three-quarters (76%) of Americans believe that saving for retirement is important, just 39% of respondents have a plan that will allow them to retire at their desired age.
While many Americans worry about outliving their retirement savings, some believe higher interest rates could help them avoid depleting their nest eggs by allowing them to live entirely off the interest generated by their investment portfolios.
Although the latest data shows inflation appears to be under control, the monetary and economic shocks of recent years have left many weary, and many are still licking their wounds from the cost-of-living crisis that followed the pandemic.
Looking to the future, many are understandably stressed about post-work life.
The safety net for retirees could soon be in tatters with dire forecasts suggesting Social Security trust funds may be depleted by the mid-2030s. What’s more, Northwestern Mutual’s 2024 Planning & Progress report shows the average person now believes they need $1.4 million to retire comfortably. And that number is projected to be even higher for Gen Z and millennials.
“People’s ‘magic number’ to retire comfortably has exploded to an all-time high, and the gap between their goals and progress has never been wider,” said spokesperson Aditi Javeri Gokhale, Chief Strategy Officer and President of Retail Investments and Head of Institutional Investments at Northwestern Mutual.
Yet many nest eggs never get so large. Rather than accumulating a sizable sum to draw down from in one’s golden years, could an “interest-only retirement” be a worthy goal instead?
—————
An interesting proposition
An interest-only retirement is precisely that — retiring and living only off the interest generated by one’s investments. While this strategy may sound limited to those with a high net worth, many people with a frugal lifestyle and access to other income sources like Social Security or pension plans may find the approach possible.
To do this, Americans invest in yield-paying assets that pay out regularly, ensuring enough money is available after retiring without touching the principal balance.
“The interest-only portfolio strategy is my most used approach as it allows clients to obtain a consistent income, not be concerned about stock market volatility, and provide a legacy to their beneficiaries,” says Chris Ward, Founder and Senior Wealth Advisor at EntryPoint Wealth Management. “I build portfolios of Stocks/ Bonds and other alternatives to provide a distribution rate of 4.5%, allowing clients to like on their dividends instead of liquidating investments.”
One drawback: Fixed payouts may need more wiggle room to accommodate larger, one-off expenses. However, occasional splurging can be part of a financial plan.
“Another benefit of this strategy is to allow higher spending when market returns are good for the ‘Memory’ events while establishing a baseline of portfolio value and income,” says Ward.
—————
Never enough
Some advisors still say interest-only is unfeasible. “I don’t recommend an interest-only retirement,” said Russell Glickstern, Wealth Advisor and Founder of Westchester Financial Planning. “Unless they have a pension, most people don’t have the assets to live on interest only. I recommend a total return approach… starting with a 4% withdrawal rate increasing or decreasing annually depending on the cost of living increase.”
Some call the “ 4% rule “ the sweet spot for retirees’ annual withdrawals. The move requires retirees to withdraw 4% from their investment portfolio in the first year of retirement and subsequent years, adjusting for inflation. Although modern experts debate its relevance, it remains a prominent touchstone in retirement planning conversations.
“The idea of living off the interest generated by a $1 million portfolio without drawing down the principal is appealing due to its potential to preserve capital for future generations or unexpected expenses,” says Arielle Tucker, founder of Connected Financial Planning.
“However, this strategy is highly dependent on the yield generated by the investments and may not be feasible in all economic climates. I advise clients to consider this strategy carefully, ensuring they have a diversified and sufficiently high-yield portfolio.”
Another risk factor is inflation.
“Since interest rates have climbed over the last few years, the idea of living off the interest is being discussed again, says Ryan Cravitz, founder of Cravitz Financial & Insurance Solutions. “However, the problem with this approach is that the longer you live, the more inflation is going to take a toll on your purchasing power. Today, people are living so much longer. Many will live for 20 to 30 years or more in retirement. Assuming just 3% inflation a million dollars will only be worth about $553,000 in 20 years.”
“Inflation is a significant risk in an interest-only retirement strategy,” Tucker says. “Over time, the purchasing power of the interest income may decline, especially if the portfolio yield does not keep pace with inflation.”
To counter this risk, Tucker assists her clients in regularly adjusting their portfolios, allocating to assets like Treasury Inflation-Protected Securities (TIPS) and growth stocks.
Another strategy is to generate interest through other income-generating assets, like property.
“Using rental income could work, but one must always seek out what return they would have to receive on passive income to match the rental income,” said Michael Rosenberg, Founder and Managing Director of Diversified Investment Strategies.
“If the passive income through an investment portfolio is equal to or greater, why be a landlord when you can have the same or greater income without the responsibility of managing and maintaining a property, especially when one is retired.”
Beyond the 4% rule, another approach some financial advisors suggest considering includes establishing guardrails.
“Consider risk-based guardrails (if risk increases, spend less & if it decreases, spend more) as a more flexible and realistic alternative,” says Jason Siperstein, president and wealth advisor at Eliot Rose Wealth Management. “This method doesn’t confine you to living off interest alone but adapts to the natural ebb and flow of your expenses, ensuring you can maintain your desired lifestyle throughout retirement.”
When it comes to retirement planning, there is no one-size-fits-all solution. The growing gap between retirement aspirations and preparedness highlights the need for proactive and adaptable financial planning that considers various factors, including sources of income and net worth.
Whether pursuing an interest-only retirement strategy or adhering to the traditional 4% rule, individuals must tailor their plans to fit their unique financial situations and goals.
Whatever the strategy — diversified portfolios, inflation adjustments, or others — alternative income sources serve retirees well. As Americans grapple with economic uncertainties and shifting retirement landscapes, the key lies in staying informed and flexible to ensure a secure and comfortable retirement.
Although three-quarters (76%) of Americans believe that saving for retirement is important, just 39% of respondents have a plan that will allow them to retire at their desired age.
While many Americans worry about outliving their retirement savings, some believe higher interest rates could help them avoid depleting their nest eggs by allowing them to live entirely off the interest generated by their investment portfolios.
Although the latest data shows inflation appears to be under control, the monetary and economic shocks of recent years have left many weary, and many are still licking their wounds from the cost-of-living crisis that followed the pandemic.
Looking to the future, many are understandably stressed about post-work life.
The safety net for retirees could soon be in tatters with dire forecasts suggesting Social Security trust funds may be depleted by the mid-2030s. What’s more, Northwestern Mutual’s 2024 Planning & Progress report shows the average person now believes they need $1.4 million to retire comfortably. And that number is projected to be even higher for Gen Z and millennials.
“People’s ‘magic number’ to retire comfortably has exploded to an all-time high, and the gap between their goals and progress has never been wider,” said spokesperson Aditi Javeri Gokhale, Chief Strategy Officer and President of Retail Investments and Head of Institutional Investments at Northwestern Mutual.
Yet many nest eggs never get so large. Rather than accumulating a sizable sum to draw down from in one’s golden years, could an “interest-only retirement” be a worthy goal instead?
—————
An interesting proposition
An interest-only retirement is precisely that — retiring and living only off the interest generated by one’s investments. While this strategy may sound limited to those with a high net worth, many people with a frugal lifestyle and access to other income sources like Social Security or pension plans may find the approach possible.
To do this, Americans invest in yield-paying assets that pay out regularly, ensuring enough money is available after retiring without touching the principal balance.
“The interest-only portfolio strategy is my most used approach as it allows clients to obtain a consistent income, not be concerned about stock market volatility, and provide a legacy to their beneficiaries,” says Chris Ward, Founder and Senior Wealth Advisor at EntryPoint Wealth Management. “I build portfolios of Stocks/ Bonds and other alternatives to provide a distribution rate of 4.5%, allowing clients to like on their dividends instead of liquidating investments.”
One drawback: Fixed payouts may need more wiggle room to accommodate larger, one-off expenses. However, occasional splurging can be part of a financial plan.
“Another benefit of this strategy is to allow higher spending when market returns are good for the ‘Memory’ events while establishing a baseline of portfolio value and income,” says Ward.
—————
Never enough
Some advisors still say interest-only is unfeasible. “I don’t recommend an interest-only retirement,” said Russell Glickstern, Wealth Advisor and Founder of Westchester Financial Planning. “Unless they have a pension, most people don’t have the assets to live on interest only. I recommend a total return approach… starting with a 4% withdrawal rate increasing or decreasing annually depending on the cost of living increase.”
Some call the “ 4% rule “ the sweet spot for retirees’ annual withdrawals. The move requires retirees to withdraw 4% from their investment portfolio in the first year of retirement and subsequent years, adjusting for inflation. Although modern experts debate its relevance, it remains a prominent touchstone in retirement planning conversations.
“The idea of living off the interest generated by a $1 million portfolio without drawing down the principal is appealing due to its potential to preserve capital for future generations or unexpected expenses,” says Arielle Tucker, founder of Connected Financial Planning.
“However, this strategy is highly dependent on the yield generated by the investments and may not be feasible in all economic climates. I advise clients to consider this strategy carefully, ensuring they have a diversified and sufficiently high-yield portfolio.”
Another risk factor is inflation.
“Since interest rates have climbed over the last few years, the idea of living off the interest is being discussed again, says Ryan Cravitz, founder of Cravitz Financial & Insurance Solutions. “However, the problem with this approach is that the longer you live, the more inflation is going to take a toll on your purchasing power. Today, people are living so much longer. Many will live for 20 to 30 years or more in retirement. Assuming just 3% inflation a million dollars will only be worth about $553,000 in 20 years.”
“Inflation is a significant risk in an interest-only retirement strategy,” Tucker says. “Over time, the purchasing power of the interest income may decline, especially if the portfolio yield does not keep pace with inflation.”
To counter this risk, Tucker assists her clients in regularly adjusting their portfolios, allocating to assets like Treasury Inflation-Protected Securities (TIPS) and growth stocks.
Another strategy is to generate interest through other income-generating assets, like property.
“Using rental income could work, but one must always seek out what return they would have to receive on passive income to match the rental income,” said Michael Rosenberg, Founder and Managing Director of Diversified Investment Strategies.
“If the passive income through an investment portfolio is equal to or greater, why be a landlord when you can have the same or greater income without the responsibility of managing and maintaining a property, especially when one is retired.”
Beyond the 4% rule, another approach some financial advisors suggest considering includes establishing guardrails.
“Consider risk-based guardrails (if risk increases, spend less & if it decreases, spend more) as a more flexible and realistic alternative,” says Jason Siperstein, president and wealth advisor at Eliot Rose Wealth Management. “This method doesn’t confine you to living off interest alone but adapts to the natural ebb and flow of your expenses, ensuring you can maintain your desired lifestyle throughout retirement.”
When it comes to retirement planning, there is no one-size-fits-all solution. The growing gap between retirement aspirations and preparedness highlights the need for proactive and adaptable financial planning that considers various factors, including sources of income and net worth.
Whether pursuing an interest-only retirement strategy or adhering to the traditional 4% rule, individuals must tailor their plans to fit their unique financial situations and goals.
Whatever the strategy — diversified portfolios, inflation adjustments, or others — alternative income sources serve retirees well. As Americans grapple with economic uncertainties and shifting retirement landscapes, the key lies in staying informed and flexible to ensure a secure and comfortable retirement.
