The Upside: Building retirement income from your investments

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Subtitles are AI-Generated.

 

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Hello and welcome to The Upside, I'm Nicole Correale.

 

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When people hear retirement, they picture beaches, travel, maybe finally

 

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figuring out Pickleball. What they don't picture is how their money is supposed

 

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to show up every month once the paychecks stop.

 

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That's where fixed income comes in, helping to turn a portfolio into something

 

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more dependable, something that can feel a little bit like a paycheck.

 

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Today I'm joined by Christine Thorpe, an institutional portfolio manager, to

 

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break down how fixed income can support a more dependable retirement.

 

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Especially in today's sticky inflation environment.

 

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Christine, welcome to the show. Thanks for having me.

 

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And it's so nice to see you in studio.

 

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Love being here. You came up from Boston.

 

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That's right. And the mandates you focus on are really US centred.

 

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So you are concentrated mostly in US fixed income.

 

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That's correct. So when people think about retirement, a big concern is that

 

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steady income and something that can come to them regularly like

 

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their standard paychecks. So how does fixed income fit into that role?

 

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Sure. Yeah. Well, I think the paycheck is a good analogy because

 

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there's a reason why it's called fixed income, right?

 

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So I think that income generation is really an important

 

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sort of first stool of the three legs of why investors

 

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typically look to include fixed income in their portfolio.

 

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So you're right. With fixed income you're essentially, you

 

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take a bond, you're

 

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government and they're going to pay you.

 

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Sort of regular income over time.

 

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So that's where you get really that stability.

 

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I will say, away from income, there's other parts that

 

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I think are really important to why it may make sense to include fixed income

 

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in your overall diversified portfolio.

 

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And that includes things like capital preservation.

 

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So fixed income returns typically are more stable

 

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compared to equity, which is gonna be more-

 

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more volatile.

 

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Exactly, and much more obviously, of course, a bigger source of potential

 

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growth. But that does help protect

 

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your retirement nest egg, having a little bit less volatility.

 

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And then the third part is that diversification element as well.

 

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So we think about potential swings in equity markets,

 

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if equities are down, hopefully Fixed Income is doing its

 

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job of sort of. Offsetting that and really providing diversification

 

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benefits. So a lot of different reasons why, I think overall fixed income

 

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is important for investors, particularly those at or around

 

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retirement.

 

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So for new investors or DIY investors, let's just

 

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focus in quickly on bonds and if you can compare a

 

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US treasury to a corporate bond.

 

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So the same concept is the same in terms of, you are

 

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making a loan to, again, either the government or a

 

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corporation. What we really think about is the difference

 

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in credit risk. So when we are making alone to the

 

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government, we really of that as a risk-free rate.

 

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Doesn't mean that it may not be subject to price volatility and things like

 

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that, but you really are sure that you are going to

 

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likely get paid back the money that you have lent.

 

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Now, the other side of that is if you are loaning money to

 

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a corporation, that's where you can add in

 

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some credit risk, right? There may be more questions about their

 

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ability to get paid, for an investor to get pay back.

 

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We think about that in terms of additional yield investors

 

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typically will earn by lending to those higher...

 

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A more riskier entities, but that's really

 

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sort of the breakdown. We think of treasuries being very low

 

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in the credit risk spectrum versus lending to

 

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a corporation.

 

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Well, a huge topic that will never go away

 

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is interest rates and inflation.

 

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And right now, I guess, US headline inflation is just above 3%,

 

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not the highest it's been, you know, but also higher than maybe

 

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it was in 2025, just last year.

 

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So for someone in or nearing retirement, is this good news, bad news?

 

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What does it mean?

 

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Sure. Yeah. I mean, you know, inflation, you're right.

 

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It's been a top story.

 

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I mean, if we go back to, you, know, 2022, right, that's when, you know, in

 

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the U.S., we were hitting peaks of 9%.

 

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Exactly. So, you know, since then, we've made, you know, tremendous

 

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amount of headway in terms of getting inflation back down.

 

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But, you know, it certainly continued to be fairly sticky.

 

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You know, we had the potential pass-through of

 

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tariffs. As consumers are paying higher prices

 

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for goods in the US as a result of that policy, you also

 

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have the potential impacts from all this

 

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AI-related spend.

 

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And now we're layering on higher energy prices due to

 

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the recent events in the Middle East.

 

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So that's certainly keeping inflation higher.

 

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I think it's really hard to see in a scenario where we're going to get

 

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back to at 9%.

 

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Right. You know, back in 2022, there were a lot of very specific

 

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events behind that when we think about sort of all the stimulus

 

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and the money that consumers had to spend.

 

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We also had, you know, supply shocks coming out of the pandemic, things like

 

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that. So that's certainly not our base case.

 

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But it is something that the Fed has certainly dialled in, in

 

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thinking about, you know, being sensitive around how sticky inflation has

 

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been.

 

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Speaking of sticky inflation, the outlook for rate cuts has

 

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now kind of completely diminished, I guess you could say,

 

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or vanished completely. We were expecting a few, and now it's holding, and

 

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maybe one near the end of the year.

 

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Does this change how much income bonds can potentially provide

 

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today for investors?

 

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Yeah, sure. I mean, you're right.

 

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You know, coming into this year, markets were really pricing in

 

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closer to two cuts by the Fed.

 

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But with all of the, again, geopolitical uncertainty

 

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and questions around oil prices, markets have walked that back.

 

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And they're basically saying, we don't know, right, if the Fed's

 

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going to be able to cut or, you know, is the Fed actually going to have Now,

 

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that's not in our base case.

 

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Clearly, if inflation was to get really unsustainable

 

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and the fundamentals in terms of the growth picture don't really

 

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deteriorate. But again, it's hard to really see that type of scenario playing

 

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out. So for now, I think we can expect the Fed to be on

 

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hold. I think from a retiree perspective,

 

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that means that we're still in this pretty elevated yield environment.

 

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You know, the yield on the U.S.

 

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Aggregate bond index, which is...

 

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We think about sort of measuring broad yields in

 

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the fixed income environment, that yield is around four and a half percent.

 

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So that's much higher than where we were sort of the

 

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pre-2022 period.

 

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And so that still feels pretty attractive in terms of investors being

 

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able to earn a nice source of income.

 

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Now you've spoken on Fidelity Connects, that your current approach is

 

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about being patient and focusing on quality.

 

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So why is that especially important for people relying on

 

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their investments to help fund retirement?

 

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And I guess before that, if you can just, what do you mean by quality?

 

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Yeah, sure, sure. So we think a lot about sort of credit quality

 

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and if you're familiar with any of the rating agencies,

 

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they assign different evaluations,

 

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exactly, credit ratings for issuers of all

 

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shapes and sizes.

 

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I'll say we also do that internally, so we've got our own fundamental

 

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research analysts. They're doing a lot of that same work to

 

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figure out. Again, sort of what is that credit worthiness of the

 

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various issuers?

 

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And so, you know, when you think about, you know these overall,

 

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when you about credit quality overall, you

 

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know from our perspective as really an active fixed income manager, we're

 

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thinking about everything through the lens of, you now,

 

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generating appropriate risk adjusted returns for our clients.

 

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Uh, and so.

 

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We're not getting paid what we feel is appropriate to take on a lot of

 

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risk. We're gonna take down the level of risk in

 

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our portfolios. And really, in the context of quality, that means we're

 

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gonna move up in quality in our portfolio.

 

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So today, valuations for corporate bonds

 

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are extremely rich from our perspective.

 

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We still have some exposure, but it's a lot less than we traditionally have.

 

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And instead we have a lot U.S.

 

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Treasuries. That feels like a good trade-off where we're still earning pretty

 

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attractive yields, but we're not incurring as much credit risk.

 

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So I'd say that's really based on a assessment of

 

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valuations rather than fundamentals.

 

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There's still a lot of decent strength across the economy, but

 

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that's how we're going to approach it.

 

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So we've got a lot of liquidity. We're really up in quality just waiting

 

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for a better opportunity in the market.

 

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And on that, which brings in patients not reacting

 

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to day-to-day headlines, which is something that I guess doesn't

 

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really, I shouldn't say, I mean, correct me if I'm wrong, but doesn't generally

 

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impact.

 

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Bonds, it's something you hold for a longer period of time than maybe

 

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a single security.

 

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So it's important, I guess. It is important for retirees to not focus

 

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so much on the day-to-day headlines and how to stay focused

 

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on the long-term health retirement income during shorter-term market

 

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swings.

 

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Yeah, sure. I think if you go back to the basics

 

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of fixed income, where you're making a loan

 

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to an issuer, really the expectation is

 

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you're going to get paid what we call that principal, that amount

 

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you loaned at the end of when that loan

 

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is up, and then you're going to pay paid interest along the way.

 

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And so, you know, if you're holding bonds until maturity.

 

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You're really not incurring that market

 

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price volatility.

 

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So I think that's an important fundamental understanding within fixed

 

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income and why it makes sense to be thoughtful about

 

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not overreacting to whatever the

 

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news headlines of the day are.

 

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I will also just say as, again, as active fixed income managers

 

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on our team.

 

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You know, we want to be really thoughtful about not trying to time the top or

 

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the bottom of a market. You know?

 

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I think that's incredibly difficult to do.

 

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So when we see periods of, you know, better market opportunity,

 

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we're going to start to sort of gradually lean into that.

 

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And then certainly as valuations get really expensive, we'll start to

 

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take some of that risk off and again, just have a lot of liquidity

 

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and wait for that. So.

 

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You know, every day we're getting new headlines about the events in the Middle

 

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East. I can't tell you where oil prices are going.

 

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I think that's incredibly difficult to do.

 

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But if you take sort of that long-term perspective, you know there may be

 

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bigger opportunities out there.

 

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Or, you know that also just helps avoid, you know selling at sort of the bottom

 

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when you don't have.

 

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Want to. Right. Long-term perspective and also what you touched on at the

 

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beginning, which is diversification.

 

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And I think one of the general, I guess, I don't want to say a

 

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rule or general idea is that when you have a portfolio,

 

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it's the 60-40.

 

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Do you still see that as a good compliment or there's kind

 

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of been a narrative shift in the 60 40, maybe not so much.

 

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What What is your current take on that?

 

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Yeah, I mean, there are a lot of questions out there, hey, do bonds still

 

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offer that diversification benefit?

 

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And there's periods where, even in the early days,

 

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post the invasion into Iran,

 

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where bonds were selling off at the same time as equities.

 

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But what I think is important is, we really care about

 

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bonds offering that divers notification benefit when you're seeing,

 

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you know. Massive equity drawdowns.

 

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That's what is most important.

 

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And the other thing investors should keep in mind is when

 

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we see those periods where the

 

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sell-off is really being driven by inflation and

 

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the resulting Fed reaction, that's typically when you see bonds

 

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and equities move in the same direction.

 

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So if we were to get some type of growth shock, You

 

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know, really a much bigger slowdown in growth expectations,

 

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you know, concerns about sort of the fundamental health of the U.S.

 

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Economy. It's in those periods where I would expect, you, know, bonds

 

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to provide more of that benefit relative to equities, and

 

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again, I think that's when investors really care about it.

 

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So, over time, I do think there's that role for bonds to play,

 

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you now, be a or ballast in portfolios.

 

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But you know, you may have periods in between there where it's not working the

 

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way you would like it to. Right, right.

 

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So you've said that fixed income can offer an attractive

 

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total return profile right now.

 

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What do you mean by total return?

 

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Sure. Yeah. So there's different parts of that return in

 

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fixed income. So first, you've got price return.

 

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So bond prices will move inversely with moves in

 

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yields. So when yields or really when rates are

 

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going up, bond prices will tend to fall.

 

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And of course, the reverse of that is also true.

 

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So as rates fall, bond price will increase.

 

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So that's one part of it. Then the other part of it is you get to...

 

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You know, include sort of that coupon or that

 

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income from bonds. So it's that price return plus income, which

 

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is your total return in fixed income.

 

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I'll say, you know in periods like we had back in 2022

 

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where, you know the Fed was really aggressively raising rates.

 

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You know, we saw bond prices move lower significantly.

 

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And back then we didn't really have much yield to offset that.

 

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And so that's why. We had a much bigger negative return for fixed

 

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income than investors would typically expect.

 

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If we fast forward to where we are today, we

 

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could still see some price volatility in bonds, but

 

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you also have a lot more cushion with that, call it four and a half percent

 

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yield on the US AG to offset that.

 

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So even if rates sell off, you're gonna get some of that

 

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cushion from that yield. And of course, the opposite again is also true.

 

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If rates move significantly lower, that's when you get a bigger price

 

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appreciation or capital appreciation, plus you get to combine that with

 

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the higher yield. So you're setting yourself up for a potentially larger

 

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total return.

 

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In that type of environment.

 

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Okay, so if we just look at the current environment then today for

 

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someone nearing retirement or in retirement, how should they look at

 

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investing in fixed income or staying in if they're already in it?

 

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Yeah, I mean, I think the first point is just the starting yield that

 

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you can earn in fixed income is pretty attractive.

 

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We're in, call it the 80th percentile relative to the last two

 

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decades. You take the yield on the US AG.

 

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So that's an opportunity that we haven't had for a long time to actually

 

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generate income from the fixed income portion of your

 

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portfolio. So certainly still play, you know, a place for

 

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retirees. To be able to get that out of their

 

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allocation there. So I think that's a really important consideration.

 

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Certainly, if we move into a period where the Fed has

 

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to cut aggressively, you could see those yields really

 

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start to move significantly lower and perhaps in a

 

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fairly short amount of time.

 

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So I always caution investors just be thoughtful around that potential.

 

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That's when you're gonna, again, potentially a bigger total return opportunity.

 

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But that income generation piece won't be as sustained for

 

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as long. So I think looking at starting yields today

 

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makes fixed income really attractive.

 

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I've got some work to do, I've gotta start.

 

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It's funny because we're both far off from retirement,

 

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but I remember being in high school and thinking about my retirement

 

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days. And all I would think about is having a

 

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beautiful garden and maybe a villa in Italy.

 

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But yes, I never thought about how to get this

 

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income that comes like a paycheck and fixed income, like you said, and it's

 

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attractive today.

 

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Um, do you have a dream retirement plan or is there something, do you want to

 

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yacht off of the Caribbean?

 

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Of that, Nicole. I think you mentioned a Tuscany in, or to be a

 

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villa in Tuscani.

 

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Yeah, sign me up for that for sure.

 

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Well it's so great to have you join us.

 

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Thank you so much. And thank you for joining me on the Upside.

 

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For more investor content, be sure to subscribe to our YouTube page to never

 

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miss an episode and sign up for our newsletter.

 

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And remember, working with a financial advisor is the best investment you can

 

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make on your financial journey. For the Upside, I'm Nicole Correale.

 

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Thanks for listening to, or watching, Fidelity Canada's The Upside podcast.

 

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Subscribe on your podcast platform of choice so you don't miss an episode.

 

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If you like what you're hearing please leave a review or a five-star rating.

 

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Fidelity mutual funds and ETFs are available by working with a financial

 

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advisor or through an online brokerage account.

 

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Visit fidelity.ca/howtobuy for more information.

 

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While on fidelity.ca you can also find more information on future live

 

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webcasts. Don't forget to follow Fidelity Canada on LinkedIn, YouTube,

 

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Instagram, or X. We'll wrap things up today with a quick disclaimer.

 

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The views and opinions expressed on this podcast are those of the participants

 

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and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

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its affiliates. This podcast is for informational purposes only and should

 

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not be construed as investment, tax or legal advice.

 

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It is not an offer to sell or buy or an endorsement, recommendation or

 

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sponsorship of any entity or security cited.

 

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Read a fund's prospectus before investing.

 

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Funds are not guaranteed.

 

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Their values change frequently and past performance may not be repeated.

 

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Fees, expenses and commissions are all associated with fund investments.

 

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Thanks for tuning in. We'll see you next time.