How To Lock In Retirement Income Despite Falling Interest Rates

Here we go again.

You can almost hear the collective heavy sigh escape from retirees and near-retirees alike.

There are numerous reasons to feel optimistic about the Fed’s initiating a new interest rate cycle, which has a host of positive effects:

• Falling rates should bring mortgage rates down to levels where many young renters can finally afford a house.
• Businesses can access capital to grow and expand at a lower cost.
• Consumers can finance large ticket items at lower rates.
• Lower rates should lead to a lower dollar in the international exchange markets, helping US companies be more competitive when exporting.

However, collecting income from investments is not something that gets easier with lower interest rates.

For over a decade, income-seeking investors struggled with a lack of options. Bank rates were minimal. Treasury yields were minuscule. Even stretching out to junk bonds yielded insufficient cash payments to fund retirement or take their nest egg over the finish line without undue risk.

For a brief shining moment, that changed. Yields were high enough to grow retirees' nest eggs and fund their dreams. Those yields will probably start disappearing now that the rate cycle has changed.

There is a good chance that rates will decline over two years or more to prevent the economy from slipping into a recession and help the Treasury manage spiraling interest costs.

What happens now? How can those approaching retirement lock in cash flows that allow them to reach their goals and then collect enough cash to live the planned life?

Dividends from stocks and real estate investment trusts will be a big part of the solution. You cannot just focus on yield, however. High yields can disappear in the blink of a board meeting if a company runs into trouble.

Then, there is the always looming threat of inflation. Although inflation has come down thanks to the aggressive actions of the Federal Reserve, it has not gone away. It is not going to go away. Your income stream will need to continually grow at a rate that exceeds the underlying inflation rate, or you will lose purchasing power.

In 2000, a Big Mac at the Golden Arches would have set you back $2.24. Today, that same artery-clogging delight would cost you about $5.29. $10 would have bought you 4.4 Big Macs; today, you can only get 1.9 diet busters for the same cash. Your money has lost about 70% of its purchasing power.

You need to find companies with decent dividend yields. The companies must be financially strong enough to stand up to whatever the markets can throw at them. They must be focused on paying a dividend and growing that dividend to help shareholders offset the hidden inflation tax.

We can use the screening tool we are developing for Benzinga Edge and Benzinga Pro to find some companies that can provide the income you need and the inflation protection you must have so that you can fund your retirement without ever running out of money.

Very few investors will consider Whirlpool (WHR) an exciting stock. Truth be told, it is not an exciting company. It makes stoves, ovens, washers, dryers, garbage disposals, garage doors, and other household appliances and conveniences.

However, it’s worth considering that Whirlpool is a 112-year-old company that started with an Upton, Michigan, insurance salesman who convinced his uncle to add a small electric motor to a manual washing machine.

Last year, Whirlpool had total sales of more than $18 billion. The company has paid a dividend every year for almost 40 years. The payout has been increased every year for 28 years.

The company has survived depressions, recessions, world wars, and countless financial crises, and it’s still here. It may not be an exciting company, but stop for a moment and consider life without a washer, dryer, garage door opener, and oven. It is not pleasant, as millions in the southeastern United States can tell you after the past months’ power outages caused them to live without appliances.

The company is profitable and is committed to using cash flow to pay down debt, buy back stock, and pay dividends. It may never be your top-performing stock, but the dividend checks should go up quarter after quarter for decades.

At the current price, the stock yields over 6.5%. Over the past decade, the dividend has grown from $2.88 to $7.02 a share. That is a growth rate of more than 9% annually, which easily exceeds the inflation rate of less than 3% over the last decade. It even matches the inflation spike that massive government stimulus and a broken supply chain caused in 2022.

Interest rates are going to go down. The income you earn from your portfolio does not have to follow them.

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