Thursday, July 17, 2014

5 Rules for Retirees To Follow In This Low Interest Rate Environment

Those living on a fixed income are especially vulnerable during periods of low interest rates like the one we are in now. Here are five easy-to-remember rules to help keep yourself out of trouble:

  • Don't go out past 10 years in maturity for the time being. A 7-10 year bond might fall approximately 7 or 8% in price when rates head back up, but remember, it will come due worth 100 cents on the dollar at the end of those 7-10 years. A 30 year bond, like those found in many bond mutual funds, could fall 15% or more in price, and that bond won't be coming due at 100 cents on the dollar until 2044! That's a long time to wait.
  • Make sure your trust officer or investment advisor is not buying discount coupon bonds. All things being equal, a premium bond is less sensitive to rising interest rates than a discount bond.
  • Don't get talked into buying a lot of high yield bonds. High yield bonds may fall in price even more dramatically than other bonds when interest rates move back up.
  • Don't just sit in money market and wait for higher rates. Higher rates may take a few years to come about. Each year that you wait costs you 4% or so in yield. In four years, you will have given up 16%. It makes more sense to buy short and intermediate maturities than it does to sit in money market.
  • Make sure you are working with someone that knows bonds. Ask them their background and check their credentials. Many stock brokers focus only on stocks. Your bond portfolio is your income, make sure it is being managed professionally!