Laddering With Individual Bonds – Part Three

This article is part of a series; click here to view Part 1. Exhibit 1.1 provides reasonable approximations for sustainable spending in retirement as it relates to a bond interest rate (or a fixed return for an investment portfolio) and a retirement longevity assumption. For a sixty-five-year-old with $1 million, the exhibit shows sustainable spending…

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Laddering With Individual Bonds – Part Two

This article is part of a series; click here to read Part One. I would argue that it is much easier for a retiree to ignore unrealized capital losses on an individual bond than for a professional trader or retiree needing to sell bond shares to meet expenses because the individual bond is bought with…

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Bond Pricing 101

As a bond provides a contractual right to a series of future payments received at specified points of time, the price for a bond is simply the present discounted value of the future cash flows. The face value of a bond will be repaid at maturity. A zero-coupon bond provides only a bond’s face value,…

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Laddering with Individual Bonds

Duration matching is not straightforward for bond funds when shares of the bond fund must be sold to meet ongoing retirement expenses. If rates have risen, shares of the bond fund may need to be sold at a loss, with more shares sold to meet a given spending objective. This triggers sequence risk and locks…

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The Yield Curve and Break-Even Inflation

Understanding the relationship between bond risk and time to maturity and duration of a bond provides the basis for understanding the bond yield curve. The yield curve shows the yields to maturity for a series of bonds—typically US Treasury bonds—with the same credit quality but different maturity dates, along with the term structure for interest…

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The TIPS You May Need – Treasure Inflation-Protected Securities (TIPS) – Part 2

This article is part of a series; click here to read part 1. In 2003, Zvi Bodie and Michael J. Clowes published the book Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals, in which they argued that typical retirement-oriented investors should rely primarily on TIPS for their retirement savings. Of course, other…

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The TIPS You May Need – Treasure Inflation-Protected Securities (TIPS) – Part 1

In discussing retirement liabilities, it is also important to address the issue of inflation and how to think about bonds when they are meant to fund a liability that grows with the consumer price index. Fortunately, this is now practical as the United States began issuing Treasury Inflation-Protected Securities (TIPS) in 1997. Backed by the…

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Bond Duration

Bond prices are sensitive to interest rate changes, and bond duration is a measure of just how sensitive. For instance, in Exhibit 1.1 (shown in my last article), an increase in interest rates for the simple bond from 3 percent to 4 percent caused the bond’s price to fall by 8.1 percent. This bond has…

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Understanding How Bonds Work

Before we can discuss bonds in depth, it is important that we establish a common understanding of what bonds are and how they work. As a starting point, a bond is a contractual obligation to make a series of specific payments on specific dates. Typically, this includes interest payments made on a semiannual basis until…

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How to Create Reliable Income Sources with Bond Ladders, SPIA’s and DIA’s

The change from working and saving to not working and spending from your portfolio is daunting. Layered on top of these “normal” concerns are today’s troubling headlines. This “headline risk” has contributed to recent market volatility. While we understand that this volatility can cause one to be nervous, our view is that no matter the market, one can always be worried about it. So, what should you be doing now or in the future if you have these concerns?

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