Your investments: Looking for retirement income? Go global

If you are worried about your retirement you may want to invest in strengthening foreign currencies.

By AARON KATSMAN
June 15, 2011 22:35
4 minute read.
Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

 
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Retirees who are living on fixed income or income generated from their investment portfolio face a daunting task. With interest rates so low, how can they generate enough income from their portfolio to meet their expenses without eating into principle? Let’s say that you spend $70,000 a year and get $30,000 from Social Security.

In such a case you would need a portfolio of about $1 million to generate the $40,000 (4 percent return) needed to supplement your income. For the majority of retirees this is far from realistic: How many people retire with a million dollars? Not only that, but in a period where you can earn 1%-2.5% on investment-grade bonds, the 4% return assumed may be a stretch, and it will entail having to take some amount of risk by owning stocks, which in the event of a market drop could turn your $1m. into $800,000.

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What is a retiree to do? Recently we have been hearing on a daily basis how the US dollar has been dropping against all the major currencies in the world. A less-than-stellar economic recovery, continued printing of money and rising commodity prices have all contributed to the weak greenback.

Background information
The fall in the US dollar is nothing new. In fact, the dollar has been slowly depreciating since the Korean War in the 1950s. It is hard to find any empirical reason for the dollar’s behavior, but many theories exist that offer a variety of potential explanations.

My own opinion is that as the rest of the world has become wealthier, money has flowed into the local currencies of the main beneficiaries of global growth.

This has made other currencies more stable, decreasing the necessity to hold onto dollars.

The Israeli shekel is an example. Ten years ago, the Israeli economy was on the verge of collapse. Since then, the economic situation has drastically changed, and Israel now has one of the highest growth rates in the world. As a result, the shekel has turned into a strong currency, making it far less necessary to hold onto dollars.



What should we do?
For individual investors who need increased income, it may be time to start thinking global. Why not take advantage of a changing economic growth climate? If a 2% return is not enough to meet your needs, take a look at bonds that trade in foreign currency.

While it used to be difficult to buy these bonds, nowadays most brokerage firms have the ability to purchase them in various currencies. For example, a highly rated (AAA) bond in Brazilian reals can yield over 8%. A similar bond in Australian dollars will be over 5.5%.

What makes these bonds even more attractive is that the currencies have been strong against the US dollar. As such, not only do you get the high interest rate, you also have the potential to profit from the appreciation in the currency. If you can get a 5%-8% interest rate and a stable currency, you are way ahead of the game and will be able to meet your retirement goals with even less than $1m. in the bank.

However, it is also important to note that past performance is no indication of future results. With both of these options, if the US dollar gets stronger against the world’s major currencies, you can end up losing money. I am not saying to put all of your net worth in these types of currency, but some exposure can make a big difference in your retirement.

To say that foreign exchange can be volatile is an understatement, and you may need a strong stomach. But with a World Cup and Olympic Games scheduled over the next few years, many analysts believe that Brazil’s economy will continue to be strong, and that might provide support to the currency.

For investors who would rather not speculate in specific currencies but would prefer professional management, one can invest in a global or an emerging- market bond mutual fund. This is a managed portfolio of bonds that are denominated in multiple currencies.

The advantage of this route is that there is a paid manager who is an expert in currencies that manages the portfolio for you.

In addition, since it’s a bond portfolio, you also get monthly interest payments.

However, be aware that a fund like this can also lose money and is not guaranteed.

Speak to your financial adviser to see if you can enhance retirement income by incorporating foreign bonds into your portfolio.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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