RETIREMENT
cles will see their payout rates decline as interest rates come down.
In any case, some advisors caution that clients should never put too much of their portfolio into these“ safe” investments. It would make the most sense to hold money-market allocations to“ cover approximately 12 months of living expenses as an emergency fund, while maintaining a longer-term asset allocation of stocks and bonds that aligns with [ their ] time horizon, risk preferences and financial goals,” says Colleen Jaconetti, a senior manager at Vanguard Financial Advisor Services’ Investment Advisory Research Center in Malvern, Pa.“ If investors are holding too much
in money markets, beyond their emergency savings, they should reallocate the excess to their equity and bond positions.”
That said, investors should not be making drastic changes in reaction to shifting Fed rates. They’ re better off“ sticking to their long-term asset allocation and financial plan, and not focusing too much on short-term market fluctuations,” Jaconetti says.
After all, comprehensive financial plans are designed to withstand all kinds of economic challenges. And an investor’ s income sources should be diversified, and include perhaps a mix of government bonds with dividend-paying stocks and strategies such as bond ladders, which stagger maturities for different time frames.
Rob Williams, managing director of financial planning at Charles Schwab in Denver, says investors should“ use all sources of cash flow, including growth in your portfolio, not just investment income.” He adds that an investor can reduce interest-rate risk by locking in yields in the middle of the curve— for example, from bonds with medium-term maturities, ranging from roughly two to 10 years. Such securities can strike the best balance between short-term, lower yielding, lower risk fixed-income securities and longer-term ones at the opposite end of the risk / return spectrum.
For clients who need additional guarantees on a stream of income, a simple and low-cost fixed annuity might be a good option.
However, remember that in 2023 and 2024 there was“ an inverted yield curve,” meaning that short-term Treasury bills actually sported higher yields than longerterm ones. This typically signals a market anticipating recession.
If clients instead keep searching for higher yielding securities, they will undoubtedly add more risk to their portfolio. If they’ re comfortable with that, they might consider a small allocation to highyield bonds, corporate credits or international securities.
“ It’ s never too late to lock in yields,” Williams says.“ Fed rate cuts directly impact the shortest-term interest rate only, not the rate on all bonds.”
Overall, clients should be reminded that rate cuts aren’ t all bad news. When interest rates come down, bond investors usually get a boost in the value of their portfolio if the bonds were bought at higher yields than the new ones have.
Additionally, when bond yields are less attractive, equities usually rise. Lower rates often accompany declines in inflation, which boosts people’ s purchasing power and fuels economic growth, benefiting business fundamentals and dividend sustainability.
One concern this time around is that the Fed may be cutting rates while inflation remains stubbornly in the 3 % area.( This, incidentally, is a double-edged sword for retirees. While they might be getting less yield, they usually find some comfort in the fact that their Social Security payments are tied to the Consumer Price Index, not the interest-rate movements themselves.)
“ We address rate anxiety by reframing the conversation entirely,” says Pat Nerney, head of investment solutions at Dynasty Financial Partners in St. Petersburg, Fla.“ We show clients historical examples of how diversified portfolios have successfully navigated multiple rate environments. We conduct stress tests demonstrating portfolio resilience across different scenarios. Our key objective is shifting clients from yield-chasing worry to confidence in comprehensive planning.”
For clients who need additional guarantees on a stream of income, a simple and low-cost fixed annuity might be a good option. Annuities have many critics, who decry their complexity and costs. But some advisors insist they should not be categorically rejected. It might even be wise for clients who are interested in an annuity to act promptly: Interest rates partly determine the payouts on these vehicles, and potential buyers might want to take a look at annuities before payouts decline.
“ If you’ re waiting, and feel rates may fall, and are in retirement, in good health and want more guaranteed income, it could make sense to annuitize an existing annuity or purchase a new income annuity now,” Williams says.
50 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2025 WWW. FA-MAG. COM