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Boost Retirement Returns in Low-Interest Rate Era

Today's retirees and those approaching retirement face challenges generating income in the current low-interest rate environment. While that may be starting to change, it could be several years before the Federal Reserve is able to return its benchmark interest rate to a more historically normal level.

For many individuals, that means investment returns may not be matching historical averages. In a low-yield environment, investors may need to save more in order to secure a targeted income for retirement.

"Over the last 100 years or so, the S&P 500 has returned just shy of 10 percent annually on average," says Jeff Reeves, executive editor at InvestorPlace.com in Rockville, Maryland. "Since 2000, the stock market has averaged about 6 percent."

[See: 7 of the Best Stocks to Buy for 2017.]

Going forward, investors may not be able to count on high historical average equity returns.

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"We think that investors should expect lower stock market returns than they have received over the past 20 years," says Jason Staley, investment relationship manager at Schneider Downs Wealth Management Advisors in Pittsburgh.

Others agree.

"The old school of thought was that investors could earn 7 percent to 9 percent in the stock market, but those days are long gone for the foreseeable future," says Drew Horter, president and chief investment strategist of Horter Investment Management in Cincinnati.

What are some of the factors weighing on stock market returns? The ongoing global economic sluggishness since the 2008 global financial crisis plays a role in the lower stock returns.

"We are in the midst of a global economic slowdown," Horter says. "Companies are having difficulty organically creating profits and growth both domestically and internationally. We're seeing increased M&A activity, as companies that can't create profits look to merge and obtain earnings growth together."

Another factor pressuring stock return rates is the global interest rate environment. Global interest rates are at historically low levels, with almost all central banking authorities taking accommodative measures to stimulate in the economic recovery, Staley says.

"Investors are being forced into investing in riskier assets in order to earn a reasonable rate of return," Staley says. "As investors step out from less risky investments like government bonds and invest in other types of fixed income or equities it has driven market prices and valuations upward. As the price for these riskier investments has gone up, investors will likely receive less return than they did in previous years."

Indeed, equity markets have rebounded significantly since the depths of the financial crisis in 2008-2009, with the Standard & Poor's 500 index showing a cumulative 220 percent price appreciation from March 9, 2009, through September 2016, Staley says.

What's next? "After such a sustained and significant market appreciation, it is natural for markets to take a breather," Staley says.

Also, the strong rise in stocks since 2009 has left domestic equity valuations more expensive than their average historical levels, Staley says. While this is to be expected after a significant market rally it also means that "above-average valuation levels tend to coincide with below-average returns," he says.

[See: 10 ETFs That Pay Sky-High Dividends.]

Here are eight strategies investors can consider to prepare for a stronger retirement outcome in the current low-interest rate environment.

Consider working longer. "If financial markets produce a lower overall return than in previous years, investors are likely going to have to save and invest more money to retire, which leads to many individuals working longer," Staley says.

Sock away more savings. Review your current retirement savings plans. Take the time to determine how much money you will need in retirement. "In most cases, investors underestimate how much money they will need for retirement and will have to work longer to fund retirement or alter their retirement plan to accommodate the assets they have put away for retirement," Staley says.

Plug unnecessary spending. Track your current cash flow analysis and spending habits. Identify areas where you can spend less and direct those savings toward accounts geared for retirement, Staley says. "Doing a thorough analysis of your spending during your working years will help avoid material shortfalls in assets needed to retire," he says.

Favor high dividend stocks and short maturity bonds. "We recommend getting rid of high-growth stocks and instead allocating more to high dividend-paying stocks," Horter says. "With bonds, we advise our clients to shorten maturities. We recommend two to five years."

Expand your portfolio globally. Talk to your financial adviser about a holistic approach to the markets that includes many different sectors and geographies, Reeves says. "I personally think U.S. stocks have been overbought by investors and that now opportunities lie elsewhere, such as emerging markets and Europe," he says. "That doesn't mean U.S. stocks are doomed, but if you want to maximize your performance you need to consider all sectors and all nations in your portfolio, not just traditional American blue chips."

Rebalance your portfolio regularly. "This process, we believe, allows the investor to lock in gains from securities that have appreciated over time and reset their asset allocation to their original risk tolerance," Staley says.

Monitor fees. Ask questions about all of the fees that are associated with your investments. "These fees are taken directly out of principal and affect the performance and overall growth of investments," Staley says. Make low-cost choices. There are a variety of exchange-traded funds (ETFs) with expense ratios of 0.30 percent or lower that can still provide you with exposure to key asset classes but with a cheaper fee.

Consider a tax-loss harvesting strategy. Tax-loss harvesting is the practice of selling a security that has experienced a loss and replacing with a similar security. By harvesting the loss, investors are able to use that loss to offset any taxes on investment gains in other securities and investments, Staley says.

[Read: How High Rates Affect Target-Date Funds.]

"Markets have rallied tremendously from the depths of the financial crisis, and many investors have significant unrealized gains in their portfolios," Staley says. "We believe it is prudent for the investor to analyze their investment accounts and if they have investments currently held at a loss to 'realize' the loss in a particular security by selling and using this as an opportunity to lock in gains in other investments in their account."



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