Low interest rates mean recalculating the retirement income formula

It's time for some more straight talk about interest rates.

The yield late last week on the 10-year Treasury note, one of the main benchmark rates, was up a bit to about 1.85%. If it still seems low, that's because it is. The key rate might stay low, too — and not just for the rest of this year.

That's not an interest rate forecast, by the way. It is trying to be realistic in financial planning.

Unless folks are in the finance business, they might think rates collapsed as a result of the Great Recession a decade ago and just haven't yet recovered. That's not exactly what happened. The 10-year note rate was lower last week than it was in late 2008, during the most worrisome period of the financial crisis.

The rate has been gently drifting down since then, although bond prices (and thus rates) do bounce around, like assets in active markets do. Last fall, the yield was more like 3% for the 10-year note, but that was before fears blossomed about slowing global economic growth and trade disputes extending as far as the eye could see.

The Federal Reserve has dropped its target interest rate three times this year, even with historically low rates of unemployment. Fed officials would probably dispute this, but it's not clear they really get why their theoretical neutral interest rate, a sort of Goldilocks rate of interest that's not too hot or cold, continues to decline.

Now admittedly, interest rates do not usually grab the attention of anyone not looking to finance a new house or car. Yet for that big generation of Americans now retiring, low-risk investing ideas that provide income have got to be top of mind.

Inflation was a big part of that high-rates story, but inflation-adjusted rates are now down, too. When is it getting back to normal?

Frustrated regular savers usually cannot get into the most dangerous investments that promise higher returns, but there are ways to buy trouble by "reaching for yield."

This is when an investor finds a 1.4% certificate of deposit rate discouraging, and starts thinking about a real estate project or one of these high-yield, exchange-traded funds.

Remember, investors don't get paid more unless they take more risk. One baby step up in risk from a federally insured bank certificate of deposit (CD) is still safe, but if expected returns are a lot higher, there's a lot more risk.

There are obviously good real estate deals to be had, but it's hardly unheard of for a deal to go under and take the equity investment with it. Even if it succeeds, the investment money might be tied up with no easy way to get it back.

One useful idea from the financial services industry (amid its many unhelpful ones) is called the target date fund. Pick the fund that's closest to the year of retirement, and an adviser works out the mix of assets, gradually moving more money out of stocks.

There are lots of options out there, including from the low-cost fund families. Bond giant PIMCO displayed a colorful chart with 12 different types of things to invest in, with about half the money invested in stocks when five years from retirement. Other funds might have 65% of the money in stocks five years out.

Whatever the mix, one of the good things that happens is called rebalancing the portfolio.

It's a pretty simple idea, too. If an investor is comfortable with 50% of assets in stocks, and stocks had a very strong year of performance, the portfolio might be 55% stocks by December. So sell some stocks and move the money into bonds.

Now the portfolio is back to the right mix, but here's what really happened: They bought low (bonds) after selling high (stocks).

When doing the math, using this idea for a family, on a simple spreadsheet — more back-of-the-envelope than financial model — the goal was just a 4% annual payout. It had two different approaches side by side.

One was a 10-year Treasury note at 1.85%, so the best the investor could do was $1,850 per year on $100,000. The principal would be perfectly safe, yet getting $4,000 out to spend would mean selling some of the bonds, a classic case of eating the corn set aside for spring planting.

The other approach put most of the money in a broadly diversified set of stock funds and kept 15% in the checking account, to make sure there's cash to cover bills for at least three years. This plan pulled out $4,000 a year, or 4%, to live on. It included some random down years for stocks, too, with an average annual return in stocks of 5.5%.

The only point here was to show another way to finance life when interest rates on savings don't seem to pay enough.