One of the costliest errors people make in their retirement planning is focusing all of their efforts on getting to retirement but forgetting about how to get through it. The idea of protection and sustainable income in retirement never seems to make it into their thinking.
That’s because retirement plans, for those who even have a plan, and there are very few who do, are never updated. Most plans still sit on the shelf where they were placed immediately after being received.
Tax-free bonds have always been the only way to increase your income, reduce your tax bill and increase the safety of your portfolio, all in one neat little package.
But bankruptcies in Harrisburg, Detroit and a couple of small California cities, combined with the crushing effect of the $2 trillion pension and benefit liability municipalities have run up, have cast a dark shadow over what has historically been a true safe harbor for retired people.
The muni market has really had a tough ride for the past year or so.
This is another chapter is the series of how to not wake up broke in your 80s.
Since the 2008 crash, the tendency of almost all small investors is to be too conservative. The result is what I call a safety trap, and it will devastate a portfolio just as being too aggressive will. It just takes a little longer.
The culprit is inflation, and if your money isn’t growing faster than the long-term inflation rate, you’re in line for a huge, very bad surprise.
What would you do if your pension were cut by 50%?
A small town in Rhode Island recently did exactly that: cut the retired police chief’s, policemen’s and firemen’s pensions by 50%.
And that’s the same scenario being thrown around by retirement experts for public employees in the wake of the Detroit bankruptcy.
You know it’s coming. Every experienced investor who is paying attention knows it’s coming. I’m…
The topic today is bargain hunting…
Most small investors are great savers and – in all other things except investing – good bargain hunters.
But, when it comes to stocks and bonds, they are the worst.
In case you missed it, Bill Gross of PIMCO fame, one of the most respected bond gurus in the world, has pronounced April 29 of this year the official end of the 30-year bull market in bonds. This is the second time in as many years that he has made the same prediction.
Needless to say, he was wrong last year, but only on a timing basis. A lot has changed since last year and he could be right, again.
The search for yield in this zero-interest-rate environment is causing many retired persons to fall into a bond trap that will be a complete surprise. And it will cost a lot of money.
Most investors assume the “coupon” rate is what they earn while owning the bond. Depending on the price of a bond, your return and your interest rate can be two very different numbers.
And it’s the annual return that matters.
Sequence of return risk is now considered one of the greatest risks to a successful retirement, especially those in the early stages of retirement.
Sequence of return is when money is withdrawn as asset values are falling in value. Think of 2000 and 2008 and how virtually all investors sold at losses in those markets. The market will sell off again – that’s what markets do – and this risk will take its toll again. It is devastating to a retirement portfolio that depends on long-term average returns.
The same factors driving investors back into stocks – stronger balance sheets and earnings – also make high-yield bonds more attractive for the retired or about-to-retire investor.
Since 2008, companies have reduced the size of their workforces, lowered or restructured debt, reduced inventories and strengthened their balance sheets – all of which support equities. But bonds issued by the same companies benefit from the same improvements and can deliver above-average returns with more security and much less volatility than stocks.