The income in fixed income is back!

It may be time for retirement savers to give a thrown-out rule of thumb a second chance.

Smart savers have long understood that the closer they get to retirement age, the less money they should probably have in stocks. This concept gave rise to the "100 minus your age" rule—an easy way to estimate what percentage of your portfolio should be allocated to stocks.

At first, the math made sense. When you’re 25, you can afford to have 75% of your savings in stocks because you won’t need the money for years. But if you are 75 and already living off your retirement savings, it’s safer to have only 25% of your money invested in stocks—with the balance stashed away in bonds, annuities, money market funds, certificates of deposit, and other fixed-income products that offer reliable income with less volatility.

Over time, however, the income in fixed income started to disappear. From 2010 to 2020, the yield on five-year Treasury bonds averaged a measly 1.5%—a far cry from the 7% average that fixed-income investors had enjoyed from 1970 through 2010.¹ This decline in rates made fixed income products less attractive for retirees or near-retirees who needed investment income to live off. “Lower interest rates ended up forcing people into riskier parts of the market,” explained Michael Sowa, senior director for investment product research in TIAA’s Investment Management Group.

With many blue-chip stocks offering 3% to 4% dividend yields, some savers wound up ditching fixed income in favor of dividend stocks offering more income and, potentially, better total returns. The strategy paid off for the most part, with the Dow Jones U.S. Select Dividend Index returning 364% between January 2010 and April 2022.²

But the good times for stocks ended last year when the Federal Reserve started hiking interest rates to combat inflation. With stock prices down and bond yields trending higher, now may be the right time for conservative investors to consider diversifying their portfolios. Older investors in particular might consider scaling back equity allocations to levels more appropriate for savers nearing retirement or already retired. “We expect conditions for the equity market to remain challenging this year and into next,” said Sowa. “So if you’re looking for diversification and income generation, it’s arguably a good time to be in fixed income.”

Talk to your tax professional or TIAA wealth advisor before making major changes to your portfolio. Trading in highly appreciated stocks for fixed-income products may trigger capital gains taxes in taxable accounts (though it won’t in IRAs, 403(b)s, 401(k)s or other tax-advantaged accounts). Your TIAA advisor may have strategies to mitigate any tax liabilities. In the meantime, here are five fixed-income products worth considering:

• Certificates of deposit. One-year CDs were yielding 4.25% to 5.25%, according to bankrate.com as of June 15, 2023. Another benefit: CDs are FDIC-insured if issued by a U.S. bank and held by a depositor with $250,000 or less with that institution.
• Treasury bonds. Backed by the full faith and credit of the U.S. government, Treasuries remain the gold standard for safety. These days, they’re providing solid income, too. Yields on five-year Treasury bonds have been in the 3.5% to 4% range for much of 2023, their highest levels since 2007 according to ycharts.com.
• Municipal bonds. Municipal bonds don’t yield as much as Treasury bonds, but they can still be better deals for investors in higher tax brackets. What makes munis special is that they are generally exempt from federal income taxes and from state income taxes in the states where they are issued. That can be very attractive to high earners living in high-tax states. Consider a Boston couple with $500,000 in joint income. To match the take-home income from a Massachusetts municipal bond yielding 3%, the couple would have to buy a taxable bond yielding 5%.³
• Money market funds. Valued for their safety and liquidity, money market funds have been big beneficiaries of Federal Reserve rate hikes. Money market funds have gone from yielding next to nothing in early 2022 to 4.5% (or more) as of June 1, 2023.⁴
• Annuities. The IRA version of TIAA Traditional, a fixed annuity issued by Teachers Insurance and Annuity Association of America, pairs full liquidity and low volatility with a bond-like yield. The guaranteed interest rate for new contributions made in June is 5.2% through February 2024, when all of Traditional’s rates reset. (This promotional rate could adjust higher or lower in future months. Also, in-plan versions of Traditional may offer higher rates.) For conservative investors who prioritize preservation of capital over growth, a fixed annuity like Traditional may be preferable to other fixed-income products such as bond funds. Bond funds generally lose value when interest rates rise, whereas fixed annuities will not decline in value.