Picture credit: Kevin Trotman || In general, it is probably best to put off retirement as long as you can…
I’ve seen a number of articles suggesting that it is a bad time to retire at present, because the market value of portfolios has declined. I’m here to tell you that the opposite is true.
Why did I pick these three dates to show you the US Treasury Yield Curve? On 1/3/2022, the stock market hit its high point. On 11/7/2022, pessimism about FOMC policy hit its high point. 12/13/2022 is now, leaving aside the rally in long Treasuries after the FOMC announcement on 12/14/2022.
Yes, asset values on a mark-to-market basis have declined by around 15%. But the yield you can obtain from those asset has doubled! You are not in a worse position to retire. You have a greater expectation of income now if you converted your assets to a bond ladder.
And I can tell you that the yield that you can get from a bond ladder has more than doubled since the beginning of 2022. So even if your assets have declined by 15% or so, the income you can receive now from bonds is far greater then before. You can even throw in some TIPS for inflation protection, and still have more income.
What’s that, you say? Why not stocks that pay growing dividends? Why the focus on default free bonds?
I start with Treasury securities because they are the backbone of the fixed income market. Everything else prices off of them.
Most dividend-paying common stocks yield less than Treasury securities now. That said, one way to compare a stock with growing dividends is to look at its current yield, and add to it half of your estimate of how fast stockholders’ equity per share is growing. If you were perfectly accurate, you would not cut it in half, you would add in the whole percentage growth in equity. This would assume that management is reinvesting the equity at high returns on equity, or planning on paying it out to shareholders at a more rapid rate.
Income opportunities are much higher now than in the yield-starved 2010s. Do you want income in retirement? It is on offer now.
Nominal yields may be encouraging but real yields on Treasuries are negative, aren’t they? Whether they’ll stay negative for long is unknowable.
I suppose there’s a good argument for retiring and enjoying your life before the side effects of the vaccines injure or kill you.
Or, in the UK, before the consequences of the NHS abandoning its patients for months at a time come home to roost.