Long Islanders in or near retirement are caught between a high-expense rock and a low-interest-rate hard place.
Bills for taxes, housing, health care, food, insurance, utilities and transportation are unrelenting, and safe investments provide meager interest payments.
"The good news is that if you have a balanced portfolio, you've done well over the past decade," said Barry Ritholtz, chairman of Manhattan-based Ritholtz Wealth Management, referring to a mix between stocks and bonds. "The bad news is that real yield is ultra low."
Take a retiree who wants to supplement his or her Social Security income by investing a $100,000 nest egg in a 10-year Treasury note, guaranteed by the federal government.
With a recent annual yield of 1.7%, that note would provide monthly income of $141.67. If the current 1.7% inflation rate (based on the previous 12 months through August) were to continue, the "real" inflation-adjusted return on that investment would be absolutely nothing.
By comparison, 20 years ago, the 10-year Treasury was yielding 5.83%,well above the inflation rate of 2.3%, and enough to provide monthly income of $485.83.
The issue is gaining urgency because pension plans that provide a reliable income stream to supplement Social Security payments increasingly are a relic of a bygone era.
While half of American households with retirees 70 to 74 years old have defined-benefit pensions, only one in five workers under 50 has such a plan, according to government data analyzed by the nonprofit LIMRA Secure Retirement Institute based in Windsor, Connecticut.
Companies are moving away from pensions and toward employee-contribution plans, such as 401(k)s and IRAs, said Marilyn Stefans, owner of Summit Advisors of Long Island Inc., a financial planning firm in Woodbury.
More than half of primary income for future retirees in the 40 to 54 age bracket will have to come from 401(k)s and IRAs, according to data from LIMRA.
That means retirees no longer will be able to simply rely on monthly pension and Social Security checks. Instead, they will have to manage their own portfolios independently or with an adviser.
Retirees will "need to create their own income," said Jafor Iqbal, assistant vice president at the LIMRA Secure Retirement Institute.
And Long Island has more than its share of retirees. About 18% of Nassau County residents and almost 17% of those in Suffolk are age 65 or over, according to the Census Bureau. That compares to about 16 percent nationwide.
Some lucky retirees locked in investments at higher interest rates years ago.
James De Franco of Franklin Square, 81, gets a large share of his retirement income from tax-free municipal bonds. De Franco sold his Bronx pharmacy in February 2007 and put a big chunk of his money into tax-free municipal bonds yielding about 5% with staggered maturities.
By comparison, the Vanguard New York Long-Term Tax-Exempt Fund now has a 30-day standardized yield (based on a Securities and Exchange Commission formula) of about 1.65%.
Before retiring, De Franco did some soul-searching.
"I more or less categorized my lifestyle and what I wanted," he said. "I thought about it heavily before I sold the store."
His timing was good. After he sold, the subprime mortgage crisis of 2007-2008 sent the economy and the stock market into a tailspin. The Federal Reserve and other central banks applied aggressive stimulus measures to economies around the world, leading to today's low interest rates.
With the municipal bonds providing financial ballast, De Franco's retirement features frequent trips with his wife of 53 years (Greenland was a recent stop) and a role as organizer of the Long Island Stock Traders Meetup Group, which meets monthly at the Plainview Library. "I have a wonderful life," he said.
Like De Franco, Jane Leitner of Bayville thought long and hard before retiring in 2012 from a job as an outpatient nurse for senior citizens.
"I ruminated about it every day before I retired," she said. "There's a lot of fear and worry and concern about the ability to provide for yourself."
Leitner, 73, said she was "not a big saver" during her working years. Now she primarily relies on Social Security and a pension for day-to-day expenses, while trying to avoid dipping into her IRA account (aside from required minimum distributions), which holds stocks and bonds.
Like many Long Islanders, much of her net worth is in real estate.
"Down the road, I may have to liquidate my home and go into a condo," she said. "Then I'd have a chunk of change."
George Adjami of East Meadow retired in 2007 as vice president of technology and member services at the Medical Society of the State of New York.
But to this 78-year-old, retirement does not mean days of leisure. Social Security, pensions and required minimum distributions from retirement investments cover his expenses. But about five years ago, he began working in sales and operations at his son's Massapequa business, Realty Evolution Corp., which manages foreclosed properties.
"I retired, but, believe me, I've been active," he said. Still, he has found time to travel to places including Greece, Croatia and Japan and manage his investments, primarily stocks and exchange-traded funds, which hold baskets of securities like a mutual fund, but trade like a stock.
Adjami said about half of his portfolio is in stocks and he is unfazed by market swings.
"I'm a risky guy," he said; "more risk than the outside world tells you retirees should have." Experts typically advise people to put a large percentage of their investments in stocks when they are young, but ratchet down to less volatile investments when they are at or near retirement age.
Freeport resident Paul Cullen's job as director of family support services for a nonprofit agency ended in 2014. Since then, the 71-year-old has been searching for a comparable position.
"I didn't want to let go of what I had," he said of his 38-year career.
Cullen, an avid preretirement saver, has roughly half of his investment portfolio in stock mutual funds and half in bond funds, said financial adviser Stefans, who counts Cullen and Leitner among her clients.
Like many investors, Cullen sometimes gets rattled in times of stock market turmoil. That's when Stefans said she steps in and reminds him of his long-term investment horizon. But, for retirees, a stock market decline is only one of many financial risks.
On the financial side, failure to diversify could drag down returns if one asset class sees a downturn. .
"If you're close to retirement and a recession hits, you could lose a big chunk" of your portfolio, said Meeghan Rogers, a finance professor at Farmingdale State College.
Health care costs, including long-term care, can eat into a retirement nest egg.
Inflation can cut into the buying power of pensions and reduce the value of bonds and other fixed-income securities. Even now, with inflation at 1.7%, that means that the cash in your pocket is losing 1.7% of its buying power per year.
"Don't think that hiding cash in the mattress is the answer," Rogers said.
Pension plans, seen by many as an anchor in a turbulent financial world, are not entirely risk free either. Pension plans themselves manage portfolios to fund payouts to retirees and many are coming up short.
So what can retirees do to generate income and make sure their money lasts as long as they do?
There are several choices, some more appetizing than others.
The most obvious is that retirees can tighten their belts, by downsizing, moving to an area with lower taxes, putting off travel or doing without that fire red convertible.
On the income side, retirees can try to extend their working lives either full- or part-time.
Social Security benefits are a mainstay for most Americans. Delaying taking benefits past full retirement age carries a reward in the form of larger checks down the road. (Consult ssa.gov.)
Beyond Social Security and pensions, retirees who saved for retirement are left with an array of choices for squeezing yield from their investment portfolios.
"There's no magic bullet," Ritholtz cautioned. "There's no easy solution. Return and risk are two sides of the same coin."
Even 30-year Treasury bonds (yielding a recent 2.15%), an extremely safe investment, carry the risk that inflation will kick up, making that yield and the bond less valuable.
One strategy to mitigate such risk is to create a "bond ladder" with staggered maturities. The bonds spin off income and as each bond matures, the principal can be used to buy a new one that is added to the ladder. If inflation increases, newer bonds would carry that higher interest rate.
Another option is certificates of deposit, which also can be laddered. For example, Bethpage Federal Credit Union recently posted a CD with a 5-year maturity and an annual percentage yield of 2.55%. (A $100,000 investment provides monthly income of $212.50.)
Local governments and agencies also issue bonds, known as municipal bonds, or munis, which can carry tax advantages for residents of that locality, particularly investors in higher tax brackets.
Corporations issue bonds as well. Corporate bonds, whose safety level is reviewed by rating agencies such as Standard & Poor's, can be accessed individually or through bond mutual funds or exchange-traded funds.
The Vanguard Intermediate Term Corporate Bond Index Fund had a recent SEC yield of 2.74%, giving a $100,000 investment a monthly payout of $228.33.
Real estate investment trusts, preferred stocks and master limited partnerships also can generate income, but all carry risk of varying kinds and are not for every investor, Ritholtz said.
"It's all about suitability, tolerance and time frame," Stefans said.
Retirees who have ready cash and want to reduce risk on at least part of their portfolio can purchase an immediate annuity, an insurance product that provides monthly payments for a set period or a lifetime. A New Yorker who invests $100,000 and begins taking payments when he or she turns 70 in May 2021 would receive $561 per month for life with no death benefit, according to a Charles Schwab income annuity estimator.
Some stocks, though subject to the ups and downs of the equity markets, also pay quarterly dividends. AT&T Inc. was paying a recent 5.46%. Exxon Mobil Corp. was at 4.9%. The SPDR S&P Dividend Exchange-Traded Fund, which trades like a stock, had a recent yield of 2.54%.
In the end, Ritholtz said, a mix of stocks and bonds may fluctuate, but it has the potential of keeping up with inflation and offsetting that longevity risk.
"These days people live a really long time," he said. "You want your portfolio to keep you covered."
Words of Financial Wisdom
“Money can't buy you happiness but it does bring you a more pleasant form of misery.” — comedian Spike Milligan
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." — Warren Buffett