Rareview: The 4% Rule Still Applies If You Know Where To Look

For decades, financial professionals have advised famailies to safely withdraw 4% of their assets each year for retirement income while maintaining an account balance high enough to keep income flowing in future years.

This became known as the “4% Rule.” Since the onset of zero interest rates, a fixed asset that can produce a 4% after-tax yield has been increasingly difficult to find, while the need to achieve income goals has become more acute.

Add in the triple threat of longevity, long-term healthcare costs, and market volatility, and it is easier to understand why the 4% rule has become all but obsolete. That is, of course, unless you know where to look for income.

Look No Further

The challenge of receiving a high pre-tax yield on traditional income investments increased in the last quarter as high yield joined emerging markets in falling below a 4.0% yield. The only traditional income investment that still offers a pre-tax yield above 4% is US preferred stocks, hardly an asset class that provides diversification benefits.

Now, more than ever, due to the lack of investments with a pre-tax yield above 4%, our ETF can act as an augmentation – if not an outright replacement – to your traditional income strategies.

The SEC 30-Day Yield of the Rareview Dynamic Fixed Income ETF (symbol: RDFI) is 4.67%. However, when you include the potential tax benefits related to its holdings of municipal bonds and emerging market debt, the taxable-equivalent SEC yield is above 5.0% for the three highest federal income brackets.

More Yield, More Risk? You Might Be Surprised

With the widespread acknowledgment that investors must move beyond traditional bond asset classes to achieve their income needs, the question often asked is: How much more volatility are you willing to accept in exchange for higher levels of yield?

We believe that non-traditional products deliver a high-quality yield for the additional risk that is taken. Moreover, investors have historically achieved more yield with diversification benefits than the high yield asset class without taking significantly more risk.

For example, RDFI’s volatility has been comparable to US high yield and investment grade since its inception. However, the fund has a higher yield, higher total return, and higher risk-adjusted return as of June 30, 2021.

(Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. For performance data current to the most recent month end, please visit www.rareviewfunds.com.)

Interest Rate Outlook

Over the next two years, interest rates are expected to remain low. Here is the current output according to our probabilistic interest rate model: The Federal Reserve is expected to raise interest rates by 0.25% once in the second half of 2022.

After the first interest rate hike, there is no more than a 50% probability that the Fed would raise an interest rate by 0.25% at any quarterly meeting. The ending rate for the Fed’s hiking cycle (aka the “Terminal Rate”) is expected to be 1.00%, which is down from more than 1.75% a few months ago.

Said differently, in a probabilistic sense, the most likely outcome of the Fed’s presumed tightening cycle currently is only a single interest rate hike and then no more hikes for the cycle – or “one and done.”

The key takeaway from an investing standpoint is that the current low interest rate issue is not likely to change materially between now and the end of 2023. Therefore, we believe the difficulty of obtaining more than a 4% yield for a client's portfolio is not likely to diminish.

We welcome discussing our products in detail and how they may help your client achieve achieve their income goals.

Rareview Capital is a TAMP strategist, member of America's Best TAMPs 2021 and will be included in the Wealth Advisor new Guide Model Portfolio and SMA Strategists 2022. For more information on Rareview Capital, CLICK HERE


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