Are Bonds Giving You the Blues?
The “Bond Blues” are beginning to show their ugly faces. Your supposedly safe investments are now showing losses, and if certain bond issuers don’t reorganize their affairs, they could possibly default.
What do you do? Where else can you get favorable tax treatment on your money and a decent rate of return with little or no risk? The answer is twofold.
First, you wake up from your lazy portfolio slumber and take action, that’s what you do! You realize your bond’s real return. You need to know now if you have extra, built-in value in your bond, which will disappear if you do nothing.
For example: If your 5% interest, 20-year muni bond of $100,000 is now worth $120,000, and you’re still only getting $5,000 per year in interest, you need to know you’re getting an actual 4% return on your money – not 5%. Huh?
Despite the fact that on your statement, your bond is worth $120,000, it will mature in 20 years for only $100,000. So now, you have a guaranteed built-in devaluation in your bond, and it will lose $20,000 over 20 years. That is $1,000 per year of lost value! What do you do?
Now that you are ready to take action, it’s time for the second part of the plan. A simple, safe solution would be to sell your bond and place your $120,000 in a 7-year or 10-year fixed annuity. Yes, a plain old, vanilla fixed annuity!
Your $120,000 will earn between 3.35% and 4%, depending on the insurance carrier. It will be tax-deferred while it grows and have full 10% liquidity in one year. It will generate around $4,800 a year in tax-deferred interest – an amount close to your 5% bond. The real advantage here is now you have fewer worries. With a fixed annuity, there is no bond default to worry about and no loss or devaluation to worry about, should interest rates spike in the next five or 10 years. Plus, if you need cash for health care expenses, many annuity carriers give you full access to your money for terminal illnesses or long-term medical needs.
There is also no loss of earning power, since you can use a 10% free withdrawal window and move a portion of the money into higher interest-bearing accounts if interest rates spike. You could arrange for a blend of fixed interest earning annuities: some 5-year, 7-year and 10-year lengths to give yourself more options.
And the last great benefit is that all of the money is probate-free, should you die. Insurance laws protect your money from third-party legal troubles when you’re gone.
Sometimes, simple things work better. Start feeling good about your money again, and talk to your advisor about fixed annuities. They’re safe, they’re simple, and they work.
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