Impact of Low Interest Rates - Pebble Valley Wealth Management · 2019. 1. 11. · Kirk A....

Daniel E. Winslow, FSA, CPA – Winslow Financial LLC

Kirk A. Kreikemeier, CFP®, CFA, FSA - Pebble Valley Wealth Management

Impact of Low Interest Rates on Insurance Companies and Retirement Portfolios

CAA Workshop – March 20, 2013

Contact Information

2

Daniel E. Winslow, FSA, CPA – Winslow Financial LLC Registered Investment Adviser and Fee Based Planner

[email protected] 222 E. Wisconsin Ave., Suite 214 Winslow-Financial.com Lake Forest, IL 60045 (847) 217-0366

Kirk A. Kreikemeier, CFP®,CFA, FSA - Pebble Valley Wealth Management

Registered Investment Adviser and Fee-Only Planner [email protected] 4365 Lawn Avenue, Suite 5

pvwealthmgt.com Western Springs, IL 60558

(708) 246-2366

mailto:[email protected]




http://winslow-financial.com/


Topics covered today

{CONTACT DAN WINSLOW FOR SLIDES ON THE

FIRST THREE TOPICS}

Brief history of interest rates, deficits and money supply

Insurance company stock price performance

Insurance product changes

{SLIDES FOR FOLLOWING TOPICS SHOWN HERE –

KIRK’S PART OF PRESENTATION}

Typical retiree portfolio and why low rates matter

Measures to capture rate risk

No free lunch as retirees “hunt for yield”

3

Winslow Pebble Valley

Financial LLC Wealth Management

Questions on a retiree’s mind

4

“Why is my portfolio impacted by low rates more than others?”

“Haven’t fixed income returns been high lately?”

“How much are these low rates hurting my income?”

“Treasuries are safe. Can’t I just pick the high yielding ones?”

“Didn’t treasuries perform well during the last crisis?”

“What else can I do for more income?”



Context Graph #1 – Price vs. Total Return

5

$10,000 past 15 yrs in US Large Cap (w/ and w/o dividends)

Media and free data services typically only provide price return



Source: Morningstar Office

Context Graph #2 – When did you start?

6

US Equity Annlzd Return: start ‘98=4.60%; start ‘03=8.66%

Bond volatility low; inflation vs. cash; diversify ≠ insurance



Source: Morningstar Office

Context Graph #3 – Bond returns by Type

7

Aggregate bond returns solid, but quite a range within the index

30-Year treasury and high yield credit had very large swings



Source: Morningstar Office Source: Morningstar Office

Why low rates matter for a retiree

8

Retiree portfolio has more cash and fixed income

o Source of income and lower volatility in portfolio

Use historical return/risk but can’t ignore current market



Total return = price change + income

9

Yield is common metric but must consider potential price move

Price return for bonds has been larger driver but can be negative

Equities provide nice dividends but also carry price risk



Income return has declined significantly

10

Current income returns are far below historical levels

Income impact on $500,000 portfolio more than 50% drop



Risk in portfolio as investors “hunt for yield”

11

Given current environment, investors looking for more yield

Applies to both individuals and insurance companies

Focus is typically on income but be aware of risks

Use historical analysis but adjust for current environment

o Current low level of treasury rates

o Active Federal Reserve and other central banks

o Economic and credit cycle

o Uncertain tax law changes



Common risk measures

12

Equities - standard deviation

Bonds - duration or DV01

Duration = - (∆ Px / Px) / ∆ Rate

DV01 = Absolute ∆ Px given 1 basis point ∆

“Rate” can be driven by treasury rate and/or credit spread

Test question: “The lower the coupon rate, the ___ the duration?”



Source: PVWM, Excel, par bonds

Historic treasury rate for key maturities

13



Strategy #1 – Buy longer Treasuries

14

INCOME - Extra 2.61% yield but substantially more rate risk

RISK - +2.50% rate rise could lose an extra 33% of value

“Went from risk-free return to return-free risk.”

Approximate change in bond portion of $500,000 portfolio

using first-order duration statistic and given rate change



Historic corporate spreads

15



Strategy #2 – Buy corporate credit

16

INCOME - Earn additional spread over treasury

RISK – along with rate risk, taking credit risk

Similar duration, but higher credit risk, able to increase yield

Floating-rate funds take very little rate risk but high credit risk

Approximate change on same portfolio, first-order estimates



Strategy #3 – Dividend-paying stocks

17

INCOME - Dividend yield exceeds common bond indices

RISK - has over 4x price volatility of bond index

Focus on ‘low-beta’ stocks to reduce volatility but still > 3x

Qualified dividends have favorable tax; watch sector exposure



Strategy #4 – Maintain same withdrawal

18

INCOME – maintain lifestyle regardless of current market

RISK – deplete savings sooner than expected

‘Safe withdrawal rate’ based on total return concept

Each year the dollar withdrawal amount increased by inflation

During low returns, implicitly withdrawing more principal

Study by Blanchett, Finke, Pfau adjusted for current low rates

Safe withdrawal rate of 2.8% (vs. 4.0%) for a 90% success over 30 yrs

http://news.morningstar.com/pdfs/blanchett_lowbondyield_1301291.pdf

Sequence risk – impact of early years’ portfolio returns

Concerns after equity market loss; similar concerns after rates rise



Market impact on safe withdrawal rate

19

Preliminary research shows 4% may not always work

Source: “Can We Predict the Sustainable Withdrawal Rate for New Retirees” Pfau, Journal of Financial Planning, Aug 2011

Don’t spend excess

after good years

Be flexible on

spending after

severe crisis

Low actual

inflation helps

Recent study

concluded 2.8%



Sequence risk using static withdrawal rate

20

Forward– retire on 12/31/71 with initial 5% withdrawal rate

and actual portfolio returns over next 24 years

Backward– same actual returns but experience them in reverse



Source: Blanchett, Finke, Pfau study

Conclusions

21

Be aware of return source for fixed income

Know the duration of your portfolio holdings

Locking in low rates on debt is good, but be careful on assets

Look at risk/reward trade-off; take action, but be aware



Appendix 1 – Barclays Agg Composition

22

Only 21% corporate; 37% treasury and agency; MBS shrinking



Source: Barclays US Aggregate Bond Index Fact Sheet

Appendix 2 – Treasury rate vs. credit spread

23

Negatively correlated, especially during stress (-.31% overall)



Appendix 3 – Curve and Fed

24

1994 Fed shocked the 2-year; Bernanke’s Fed transparent but…



Appendix 4 – Equity and Inflation – ’71-’95

25

Reference for “Sequence Risk” – inflation matters



Contact Information

26

Daniel E. Winslow, FSA, CPA – Winslow Financial LLC Registered Investment Adviser and Fee Based Planner

[email protected] 222 E. Wisconsin Ave., Suite 214 Winslow-Financial.com Lake Forest, IL 60045 (847) 217-0366

Kirk A. Kreikemeier, CFP®,CFA, FSA - Pebble Valley Wealth Management

Registered Investment Adviser and Fee-Only Planner [email protected] 4365 Lawn Avenue, Suite 5

pvwealthmgt.com Western Springs, IL 60558

(708) 246-2366







Impact of Low Interest Rates - Pebble Valley Wealth Management · 2019. 1. 11. · Kirk A....

Documents

Transcript of Impact of Low Interest Rates - Pebble Valley Wealth Management · 2019. 1. 11. · Kirk A....