Retirement Insights

Is There Such a Thing as “Too Diversified?”

A client brought up the concept of being too diversified recently, and it gave me pause. My initial reaction was that there is no such thing . Diversification is a good thing. It allows you to minimize  risks inherent in individual investments (company gets sued, senior executive leaves, “next big thing” flops, etc.) and take…

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The Art of Disciplined Investing

Often the least sexy advice is the right advice. It’s not exciting, but it will accomplish your goals. This goes for investing, too. Think of your portfolio as a farm. You’ll have good years and bad years, but if you focus on the important parts and don’t let yourself get distracted, you’ll reap the rewards…

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How Much Income Do I Need in Retirement?

Most people are focused on saving for retirement so they’ll have the money they need to fund their income in retirement. However, ask most people how much they’re going to spend in retirement and they have no idea. To plan for retirement effectively, you need to have some sense of what your spending needs are…

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Why Does Everyone Experience Such Different Retirement Income Outcomes?

Individual investors are vulnerable to the sequence of market returns experienced over their investing lifetimes. Individuals who behave in exactly the same way over their careers—saving the same percentage of the same salary for the same number of years—can experience disparate outcomes based solely upon the specific sequence of investment returns that accompanies their career and retirement.

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How To Buy Individual Bonds

Bonds can be purchased on both primary (when bonds are first issued) and secondary (subsequent trading) markets. There are wholesale markets for large institutions (with trades of at least $1 million) and retail markets for individual households.

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Taxonomy Of Retirement Income Bond Ladders

Finally, a full thirty-year bond ladder could be created with the idea of generating “lifetime” income. A thirty-year bond ladder is as long as can be constructed with available bonds (it does not truly provide lifetime income).

The bond ladder would be spent down entirely by year thirty, creating a problem for someone still alive in year thirty-one. For this reason, not all assets should be used to construct such a ladder.

It is important to set something aside for unplanned contingencies and the prospect of living longer than thirty years. For unplanned expenses, while the bond ladder is liquid, selling portions of it to meet unexpected expenses directly means sacrificing some of the assets earmarked for later retirement spending.

Also, retirees selling individual bonds prior to their maturity dates face interest rate risk, as a rise in interest rates would force capital losses to be realized in these cases.

For someone considering a thirty-year retirement income bond ladder, it is important to also take a serious look at income annuities as a cheaper and more secure way to generate lifetime income.

The next category of bond ladders consists of different ways to build bond ladders extended over time to keep the length relatively constant as time passes. Rolling bond ladders are not meant to be fully wound down.

As bonds mature with the proceeds spent, new bonds are purchased with other financial assets to extend the ladder length. Rolling ladders provide the basis for time segmentation strategies.

Possibilities for designing rolling ladders include to automatically extend the ladder length by one additional year as each year passes (automatic), or to develop a strategy to only extend the ladder when certain conditions are met (market-based).

Possible decision criteria for extending a rolling ladder could be stock market valuations, current interest rates, recent market performance, or the individual’s personal situation with respect to being adequately funded as determined by a capital needs analysis (personalized).

We will discuss different strategies in more detail when we get to the topic of time segmentation. Next time, we will consider how to construct an actual retirement income bond ladder.

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Understanding the Funded Ratio

Everyone wants to know where they stand with their finances – Will I be able to have the retirement I want? Do I have enough? Roughly how far do I have to go? Am I overfunded (believe me, it happens)?

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