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Retirement Planning Question – Long Term Bonds


Q: Excellent show on Sunday! I have been listening to Money Matters for years and you are doing an excellent job in living up to the high standard that Mike set for the show. I appreciate it very much.

You got my attention when speaking of the downside to long term bond funds in the current environment moving forward and mentioned the upside of floating rate bond funds. I did a little research and found that Vanguard did “A Primer on Floating Rate Bond Funds” and it was an interesting read. My take was that they are still advocating a broad based approach to bond holdings – which I sort of agree with.

Here is my situation as it relates to my wife’s IRA , which represents about 34% of our retirement holdings. She is about 40% weighted in the IRA in Long Term bonds. I would be very interested on your analysis and recommendation on what to do with the weighting of the long term bond fund holdings in light of Sunday’s conversation.

As a point of reference, my wife is 49 and I am 51. I am full time employed with an annual gross income for about $190K. My wife has been unemployed for the past year and has recently began doing consulting work in her former profession. As I said, we have about 700K in total retirement holdings at this point.

Looking forward to your feedback, and once again, I really enjoy the show!

A: Firstly, thank you for listening to the show and thanks for this great question. Currently we are at all time lows for interest rates and the worry as Wes mentioned is that when rates begin to rise investors will lose principal. Bond prices have an inverse relationship to interest rates. There are several ways that you can combat this… You should own short term bonds, floating rate bonds, or build a short term bond ladder. These bonds will be least effected by a rise in rates. You should also consider adding REIT’s, MLP’s, and Royalty Trusts to your income portfolio. These asset classes pay healthy distributions and tend to rise in value in inflationary periods.

Long term bond funds will be most affected when rates rise. Because these bond funds are managed to a specific maturity the bonds never come due or mature. In fact, the fund manager will sell shorter maturities to buy longer maturities, hence the problem. I don’t believe Vanguard has a solution for floating rate bonds. You may consider moving your account to a custodian like Schwab or Fidelity. They will give you better access to the asset classes mentioned above. Also, we offer a free one hour consultation. If you would like to come in and have us look over everything and give some suggestions just let me know.


 

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