With all the major hype and hoopla surrounding millennials and their sky-high achievements, baby boomers seem to be much less a topic to talk these days. Practically no one speaks about them, let alone the stocks that they must buy.
It is, however, an extremely important topic. Given how baby boomers – the bulk of the population – are now moving towards retirement, and how bond yields are going up, and how experts are leaning towards calling the bonds bull market history, it is prime time for the generation to take action and make their portfolios as risk-free as possible.
Here are the top 5 stocks that baby boomers can buy to help stay well-off getting into and throughout retirement.
Royal Caribbean Cruises (RCL)
As a general rule, retirees with a good amount of savings in their accounts tend to travel quite a bit during the first decade of retirement. Given that the oldest of the generation is now 72 years old, they still have a couple of years to travel before they settle for good.
This makes up for one of the many reasons why buying a stock in Royal Caribbean Cruises Ltd (NYSE:RCL) is a fantastic idea for baby boomers. Stocks here have a low risk factor as there are a large amount of baby boomers near to the age of travel who are sure to participate in cruising. Added to that is the fact that millennials too are now very interested in and participate in cruising in large numbers – which is always good news for the business, as even when the boomers will pass over the cruising phase, there will be a large group of millennials to pick up the slack.
There are numbers to show it too – In the last 5 years, RCL stock has gone up by an average of 30% every year – a momentum that is expected to continue for a few more years to come.
Vail Resorts (MTN)
Not all baby boomers are interested in cruising – there are several health-conscious ones who love to enjoy life and keep fit by engaging in more sporty activities such as skating and skiing.
With a good many of baby boomers being in great form, several do ski their way well into their 80’s, if not further. In fact, chances are that many of these have worked past the age of 65 – not with the purpose of earning money, but to spend their time in a more productive manner.
Owning stocks in a company such as Vail Resorts, Inc. (NYSE:MTN) makes it all the more a sweeter (not to mention low-risk) Given that it is one of the world’s biggest ski resort companies, it is sure to receive plenty of business from baby boomers from the next two decades at the very least. And even when the phase does pass, one can assume that there will be a lot of millennials to pick up the pace.
Ameriprise Financial (AMP)
Lauded as one of the most stable, Ameriprise Financial, Inc.’s (NYSE:AMP) stocks have been appreciated since before it turned out to be a sought-after insurance company. In between these years, their stock has grown by 316%, which is over two-and-a-half times that of S&P 500.
As of the end of 2018, Ameriprise had over $131.8 billion assets under management, with major presence U.S. and in countries all over Europe. Not to mention the fact that their asset management business (which is in fact their main business) generates over $80 billion in annual gross sales.
Such a low-risk, high-reward situation is especially ideal for the younger of the baby boomers, who may still be looking for good stocks to invest in. Those who already have can sit back and enjoy the fruits of their choices.
Further debunking the myth that baby boomers aren’t the healthiest generation, there are many who are not interested in travel, but do more than their bit to stay fit. Scores of baby boomers today opt for healthier activities such as Zumba, running, Pilates and yoga.
Taking up a rather large part of the yoga accessories and apparel market is Lululemon Athletica Inc. (NASDAQ:LULU) – a company that is known and reputed to be the go-to place for many a customer to buy their grear. Not only is their gear popular among both sexes, it is popular across all ages due to their wide range of styles and products that serve the purpose whilst not compromising on comfort. This high selling point makes it an ideal area for would-be investors.
Vanguard Health Care ETF (VHT)
Regardless of how fit baby boomers will be, one cannot escape the fact that they do – or at least will need an advanced quantity and quality of healthcare. Vanguard Health Care ETF (NYSEARCA:VHT) is one company that really is prominent here, with its high reputation and low-risk stocks.
Armed with a 372 healthcare stocks-strong portfolio, a median market cap of $76 billion, and $7.2 billion in total assets, the company practically the strongest in the traditional healthcare sector, and with the large number of baby boomers in the picture, is sure to continue to do so. It is no wonder then that it is one of the biggest ETFs in the country.
Let’s face the facts here – nobody likes probate. The further we remain from the lengthy and long-drawn (and not to mention, costly) process, the better we feel about ourselves and our precious assets.
One of the best ways for people to avoid probate is to draft a living trust along with (or even without) your will. A living trust ensures speedy delivery of assets and helps you avoid probate, helping your family avoid unnecessary inconveniences after your passing.
That being said, all is not advantageous when it comes to making a living trust. Depending on several factors including (but not limited to) your age, marital status, and financial status, a living trust could be useful or not. For most people, however, the answer is somewhere in the middle.
Here are the factors that will help you determine whether or not living trusts really are the best for you – probate and otherwise.
For those with a medium to large amount of assets and in their advance stages of life, making a living trust is justified. Not only is there a lot of money at stake, there is not enough time, and it really does not make sense to put all of that through probate. Additionally, having a living trust would help in making sure that there is someone to make crucial decision if you are incapacitated, but not dead.
However, if you are relatively younger – at least under-50 – earn a mid-level income, and have few assets, making a living trust would make very little sense. While you may not be very rich, you are sound both in terms of health and finances, and it is best to keep that stable and not worry about costs surrounding probate – which is decades away anyway. All you need is a serviceable will to transfer your property to your beneficiaries.
While living trusts are largely convenient, they come with a steep downside i.e. the time and cost involved establishing as well as maintaining the trust. A trust drafted by a lawyer would cost no less than $1,000, and possibly more according to the nature of your trust and the amount of maintenance work you will have to do. Furthermore, even if you have a living trust, you will still have to make at least a simple will, that will act as a back-up legal tool.
If you are rich and have a lot of assets that need to be in one place, making a living trust makes sense. Otherwise, it would simply be a time and money-intensive way to be hard on what assets you do have. The better thing to do here would be to wait out a few years and check if making a living trust really is a means that justifies both the beginning and the ends.
Your marital status largely determines how you may leave your estate to your loved ones after you have passed away. Chances are, you would like to leave the major portion of your property to each other in case you die. Going by this assumption, if you are young, avoiding probate is not a worry. Additionally, if you are among the several couples who own their assets jointly, those assets would not have to go through probate.
Another reason why you might not need a living trust is because most states allow their surviving spouses to make use of expedited probate procedures to avoid the time and cost that comes with the standard probate.
Saving for your retirement is a must, no matter what one’s current financial status may be. As daunting a task as it might seem, there are ways to make it, thanks to the various retirements schemes and plans out there.
One of the most common and popular retirement plans is the Individual Retirement Account. Popularly called the IRA, it is a savings account made to help people save up money that they can later spend when they retire. They are of 2 types – Traditional and Roth IRAs. While the former allows providing deduction for holders’ contributions and helps them defer taxes on their savings till the time of withdrawal, the latter does not offers it’s holders any such provisions. That being said, it does make investment earnings both tax and penalty-free during withdrawal. Both of these plans are usually offered by employers.
For small business owners and the self-employed, however, there is a slightly different variation of the IRA. Called the Simplified Employee Pension or, simple the SEP IRA, this is a variation of the the traditional IRA tailored for the self-employed. Freelancers, and small business owners with at least one employee are eligible for an SEP IRA.
Here is how you can get started to open your IRA account, and by extension, start building your own retirement nest egg:
Step 1: Decide the IRA that suits you the best
Before you even begin the process of opening your IRA, you need to make your priorities straight. The first step towards doing that is to decide upon the plan that would suit you the best. There are several factors that will influence the type of IRA you should use – these include (but are not limited to) – your income, age, debts, tax status and overall financial status.
Step 2: Consider opening an SEP IRA
For several freelancers and small business owners, opening an SEP IRA is a viable option, since they can easily use it to make tax-deductible contributions for themselves and/or their business. It is therefore important that you consider if an SEP IRA would work better in your particular situation.
Remember: Only you – the owner and employer – can contribute to your IRA.
Step 3: Choose where you would like to open your IRA
The next important step to take is to choose the place where you will be opening your IRA. The appropriate thing to do is to choose the account provider that offers the lowest possible account fees, good customer support, commission-free exchange funds, and a range of mutual funds sans transaction fees.
Step 4: Decide upon the amount of initial deposit you would like to make to start your IRA
Your initial funding is the first step to determining how much your IRA would be worth and how much you can and should possibly contribute to it. While a few brokers do have $0 minimum deposit rate, most require a minimum investment of $1,000.
Step 5: Plan your investment options
There are several ways to invest in IRA funds – individual stocks, bonds, and mutual funds are some of those ways. Make sure to choose the investment options that suit your situation best and help you make the most with the least risk.
Step 6: Plan your time on when and how you would like to manage your IRA
Opening and maintaining an IRA requires time and involvement – which is tricky when you are freelancing or running your business. Make sure to devote some time to pay attention to IRA matters, given how crucial they would be after you retire. Additionally, you can utilize a robo-advisor to help manage your account with the help of computer algorithms.
Step 7: Decide your marital status when you open your IRA
Your marital status determines the extent and contributions of your IRA. For instance, if you file your IRA as a with your spouse (if that is applicable), you can make twice the amount of contributions.
Step 8: Consider the option of opening your IRA online
In today’s day and age, when technology is at its prime and time if of the essence, the internet is one of the best places for the self-employed to open an IRA. All you need to do is to go to the website of the provider and fill in the relevant information such as employment information, social security number and contact information.
Step 9: Plan the funding of your IRA account
How you fund your IRA is a crucial step in determining where your account would stand eventually. Make sure to include your account number when you set up your IRA.
Step 10: Make automatic transfers to your IRA account
Setting up automatic transfers has more benefits that you can count. Not only does it help allocate a fixed amount every month, it would help you structure your expenses around it. It also acts as a reinforcement in maintaining your bank account, given how you would like to avoid making any kind of defaults (and the amount of fees that it would entail).
If you among the many baby boomer and are currently earning at your best in your career, you’re probably also wondering how you would be handling your finances during retirement to lead a comfortable life. After all, with all the news headlines about retirement challenges going around, there is quite a bit of concern on the matter.
It’s not all bad news, however. In fact, Financial Finesse’s recent report on generation-wise financial wellness says that Baby Boomers are in fact the strongest when it comes to financial position. And with some good judgement and sound planning, they can take advantage of this financial position to save enough to have a fulfilling and financially plentiful retirement.
Here are some steps that you can take as a Baby Boomer to secure your own retirement prospects:
Make a spending plan while keeping retirement budget in view:
Much like Baby Boomers and retirement, budgeting tends to get a bad reputation, mostly because it is imagined as a constant struggle to find a way to monitor spending all the time. This couldn’t be farther than the truth, however.
In reality, budgeting is the art of bringing a balance between wants and needs, and one’s spending power. It’s a great way to both save and be grounded at the same time. By making a proactive plan around your spending habits, you can plan where you will put your money well in advance, and make sure that your life goals and spending are in the same league.
Besides, there are other very key advantages to making a spending plan – from avoiding spending too much before retirement (and increase your debt), save up some extra money to pay your current debts before retirement, and make the best of specialized tax-advantaged accounts such as HSAs, 401(k)s, and of course IRAs.
Consider your options for health insurance:
One of retirement’s biggest concerns when it comes to expenses are those that are related to health care. Quite legitimately so, as healthcare requirements tend to complicate and increase as one nears (and later enters and further advances into) their retirement years.
In the event that you already have medical insurance for retirement, you must begin to review your options, and estimate how much said options would cost you. If the plan you are on is a highly-deductible one along with plan with an HSA option, you must do you best to set aside the $3,450 max for individual coverage, or the $6,900 max for family coverage – you can also save an additional $1,000 if you are 55 or above.
Estimate what you would need for long-term care:
Long-term care is both a requirement and a cost-drainage factor on retirement expenses. And while it can never be avoided, one can do their best to work around it to earn and save enough for a full comfortable retirement. Not planning in advance can lead to depletion of funds within a few years followed by financial misery.
While making your plans, you must bear in mind that Medicare does not cover expenses for long-term care. Which leaves you to either liquify assets or use your retirement savings. The best alternative to this would be to purchase long-term care insurance in advance that will help you stay protected when you have retired.
Here are some ways in which you can begin to make your expense plan for long-term healthcare:
- If your healthcare estimate run to the $200k to $2-3 million range in terms of assets, you should consider going for an insurance plan that offers long-term coverage.
- Regular reviewing of your investment portfolio will help you understand if it is properly diversified.
- See if the state you live in offers any long-term care partnership programs. Such programs help you to store assets that equal to amount of insurance coverage. Even if you have utilized the benefits, you would be eligible for Medicaid.
- If you have a percentage as high as 10-15% in a single stock, make sure to diversify it. Stocks fluctuate with time, and you do not need the upheavals that come with a plummeting stock close to the age of retirement.
Estimate the amount of money you would need during retirement:
One of the best things you can do is to estimate the amount of money you will need during retirement is to review your finances. Yet, ironically, people rarely (if ever) take out the time to run basic retirement calculations. This is due to reasons such as the fear of finding their status and an uncertainty on the tools required for their progress, among others.
Reviewing your current finance and expenses and making an estimated plan of your future finance and expenses will help you understand what course of action you should take to understand what you will need and what you can do to spend your retirement in peace and financial fulfillment.
In today’s day and age, marriage is not the only way for couples to stay under one roof. In fact, data from the U.S. Census Bureau says that the number of adults who live cohabit together is 29% more than what it used to be in 2007 – and over a half of this percentage is aged 35 and younger.
Just like marriage, cohabitation has a profound effect on estate planning – albeit one that is markedly different from that of married couples. Given that there is no set legal system in place for those who cohabit (as opposed to marriage), it is important to understand how estate plan would work in such situations, and how couples who cohabit can take advantage of benefits afforded by married couples such as social security, right to property, inheritance and decision making privilege, among others.
Here are key elements that unmarried couples must consider when making their estate plan:
Avoid probate by re-titling your real estate:
In general, having a sound estate plan helps you make sure that your assets will remain safe, avoid probate, and go to those you wish to with no hassles. This applies even more so in case you are cohabiting – in the absence of proper legal documents, your assets would fall under intestacy laws, and your near and dear would all have to go through the long-drawn system of probate.
While there is always a chance for your property to ultimately by subjected to probate, there are things you can do to avoid the undesirable situation as much as possible. You can start by transferring your property to a joint trust with your partner. That way, if you die or become incapacitated before them, your partner would be able to administer the estate in the capacity of a successor trustee.
Secondly, you can enter into joint tenancy along with your partner. This is a special kind of ownership wherein two or more people can own a property collectively – even if they are not related by blood or marriage. If one of the tenant dies, their interest immediately passes on to the surviving tenant(s).
Name your partner as your Attorney-in-Fact:
The Power of Attorney is the most essential and critical of all estate planning tools that you must have. This is one document that affects you throughout your lifetime, as opposed to others, which affect others and only after you are dead. By using a Power of Attorney to appoint your partner as an ‘Attorney-in-Fact, you can make sure that they have the power to act on your behalf in legal, medical and financial matters – when you are unable to make decisions for yourself. Additionally, you should add your partner and give them the power to make end-of-life decisions by appointing them as your proxy via an Advance Directive for Health Care document.
Appoint your partner as your “pay-on-death” beneficiary:
For those who are technically not married, financial and legal instruments (such as will and estate plans, bank accounts, insurance policies, and retirement plans) give you the option to at least one individual – in this case, your partner as a “pay-on-death” beneficiary. This allows your partner to receive your assets after your death automatically – even if you are not married. So for instance, if your partner is listed as the pay-on-death beneficiary of your bank account, all he or she has to do is take a copy of your death certificate, along with a proof of their identity. The bank will then re-title the account to their name or transfer the funds to their account.
Include your digital assets in your estate plan:
The touch of technology has altered the whole world we live in – and estate planning is no exception. With the rise of technology has risen the amount of online “assets,” namely social media accounts, e-mail accounts, websites, and even finance in the shape of cryptocurrencies. It is, therefore, essential for you to include said digital properties your estate plan and make sure that your representatives have the access to take actions to reassign and/or delete your online accounts after you pass away.
Write detailed instructions for your partner:
A lot needs to be done when someone passes away – from things as sensitive as distribution of assets to those as seemingly mundane and simple and paying pending bills and turning off subscriptions. Writing a letter of instruction for your partner to tell them (or, alternatively, any other representatives) all the things they should know regarding managing your estate. This includes handling bills, canceling services and/or subscriptions, handling personal effects and making sure that certain members of the family and friends are notified.
Having such instructions in hand will make executing them a much simpler task for your partner and/or other representatives to manage all of your affairs after your passing.
For most, one of life’s biggest goals is to have saved enough to live out their retirement peacefully and with financial independence. It is therefore, highly essential to have a proper retirement savings strategy in place.
Individual Retirement Accounts (IRA) can – and do – play a very vital role in such situations – being one of the most common ways for people to set aside money to be used during retirement. IRAs are of two types – traditional and Roth – money going into a traditional IRA is contributed as tax-deferred, but taxed when withdrawn, while money going into a Roth IRA only goes into the account after tax deductions but is tax-free when withdrawn. You can either contribute through one or the other, or sometimes even both, so long as you stay within the annual limit for making contributions.
Given the rather complex nature of IRAs, and the confusion around the same, there are several myths that surround them, which can often cause unnecessary distress on the part of both present and would-be contributors.
Here are three key misconceptions that surround IRAs, and what really is the truth about them:
Myth #1 – You cannot contribute to an IRA if you are unemployed:
Although it is mandatory to be an active income earner to qualify for contributing to an IRA, the Internal Revenue Service does have exceptional provisions whereby those who are technically unemployed can also make contributions. The most common of these is the spousal IRA.
As the name implies, the spousal IRA allows the unemployed spouse to contribute to the IRA (within contribution thresholds), so long as their spouse is employed. It works as a suitable option especially for women, who tend to take at least some time out of their careers at some point (either to have and/or raise children or to care for their elders). For them, the spousal IRA can allow them to track their retirement savings and keep to the norm – even if they are temporarily not working.
To qualify for spousal IRA, the non-working spouse must:
- Be married
- Be able to file returns for joint income tax
- Have a household earned income that matches the contributions made by the working spouse to their IRA, and the non-working spouse to their spousal IRA
Myth #2 – If your earnings are more than the specified income thresholds, you will be disqualified:
Whereas earning a large income is always a great thing, it can disappoint when it comes to contributing to an IRA. This is because there are set limits when it comes to making IRA contributions.
In the event that you don’t have a workplace retirement plan in place already, it is possible for you to make contributions (and later fully deduct your contributions) even if you make a salary as high as $1 million. Limits can still arise, however, in case you are not covered but your husband or wife is.
In the event that you do have a workplace retirement plan, your income will cast a larger shadow on your eligibility to contribute. If you earn $72,000 or more and are single, or earn $119,000 or more, and are married, you are ineligible to deduct any part of your traditional IRA contributions. That said, you could continue to contribute to a traditional, non-deductible IRA.
Roth IRAs, however, are much more stringent. Earning a higher income can easily disqualify you from making direct contributions. This applies even if your current workplace does not offer you a retirement plan.
All said and done, you could still save via the “backdoor” option – this happens when you make a non-deductible contribution to a traditional IRA, and thereafter and then convert said contributions into a Roth IRA one.
Myth #3 – You cannot contribute to an IRA if you have a workplace plan in place:
This is a big confusion surrounding IRAs – and a false one too. Many think that if their workplace has a retirement plan like a 401(k) in place, they are ineligible to contribute to IRAs. The truth, however, is that if you are employed and under the age of 70 years and 6 months, you can contribute to a traditional IRA. The only caveat here would be that you would not be able to make deductible contributions. For Roth IRAs, you can contribute at any age, so long as your income lies below a certain limit.
Doing your taxes is a tough job. With laws and rules changing with every region and year, there is a lot of confusion around how it should be done in the most efficient manner – not to mention one that is easiest on the pocket.
While there are way too many myths for us to bust in one go, we can help you with the top five tax myths that currently prevail in the world of taxes, help you get the best of your returns and avoid getting audited.
Tax myth #1 – It is voluntary to file your taxes:
Very obvious, yet one of the biggest myths to circle around the world of taxes – no matter what state you may be in, it is always mandatory to pay your taxes.
The confusion happens because people often mistakenly refer to a passage in the Form 1040 instruction book that states that the tax system is a voluntary one. While that is correct in theory, it has no bearing upon the status of paying taxes, which is as mandatory as it gets.
Tax myth #2 – Students need not pay any taxes:
A truth to some extent, students earning less than $12,000 a year do not need to file their income taxes. Those earning more than that figure, however, need to pay taxes on a mandatory basis.
That being said, if you are a student under the age of 24, your parents claim you as a dependent, and you meet certain criteria, you can avoid having to pay taxes. It doesn’t matter if you go to school full time. You need to file your income taxes.
Fortunately, there is the IRS to help with this – there is a very handy “quiz” on their website to help understand if you need to file a tax return.
Tax myth #3 – Pets can be filed as dependents
Although pets have a very special status in life (for they are loved and require a lot of investment), they cannot be filed as dependents, and therefore cannot get you a tax break.
That being said, pets can be leveraged to make tax breaks in some circumstances – for instance, if the pet in question is a service animal such as a therapy animal or a guide dog, or even a guard animal for your business (if that is applicable). Make sure that you have a detailed record related to your pet, as the IRS will require both the proof of the need of a service animal, as well as the proof that said service animal is trained to help you.
Tax myth #4 – The accountant is responsible for filed tax errors
To err is human – and something that’s applicable even to accountants and financial experts. Even the finest of experts can sometimes make a mistake and that could potentially result into you getting audited.
You heard that right – even if it is your accountant who makes the mistake, it is you who will be on the hook. The only way you can avoid this from happening is by making them double check their work, and then potentially double-checking it yourself.
Tax myth #5 – Your “home office” gives you a deduction
Your company may have a flexible policy allowing you to work from home on some days. You may even be a full-time remote worker. But that does not mean that you will be eligible for tax deductions.
In order for your workplace to be eligible for a tax refund, it must be available for exclusive and regular use, and must be the principal place of conducting business. Therefore, not should your office be exclusively for work, it must be the place where you would conduct all of your business activities, including (but not limited to) in-person meetings with clients and/or customers. You can only add your home office as a refund if it strictly meets these requirements.
Living the freelancers’ life is the dream for many – the ability to be your own boss, set your own working hours, and achieve a higher level of work-life balance. And with over 36% of the American workforce engaging in some or the other kind of freelance work, the gig economy is indeed going from strength-to-strength.
That being said, the working for the gig economy also comes with its own downsides, most of all being the lack of any kind of employer-sponsored benefits and retirement accounts like the IRA or 401(k). Having a clear absence of such a structure makes it very difficult, if not impossible to save for retirement in a clear-cut manner.
With the right perspective, however, this supposed weakness can easily be turned into a strength. Whilst you do not have a solid employer-sponsored 401(k) as a freelancer, you are your own boss and do have the flexibility to make a lot of choices the average employee couldn’t. As a freelancer, you can (and should) take advantage of the options that you do have and can use to save for retirement.
Here are some common investment accounts that you can use to save for the future as a freelancer:
Traditional and Roth IRAs
Individual Retirement Account (IRA) allow individuals to set aside part of their savings for their retirement. As a freelancer, you can choose and work with either of a traditional or a Roth IRA, or even a plan that combines the two. Those aged 50 or less can deposit up to $5,500 into a traditional or Roth IRA or a combined plan. Those over 50 can deposit an extra $1,000.
Any money that you deposit into a traditional IRA is pre-tax, so your savings will be subject to tax when you withdraw them during retirement. Roth IRA, on the other hand, requires you to pay the taxes on the money before you deposit it, making the withdrawn money tax-free.
Opening an account is easy – you can easily do it online through a broker, such as Betterment, Vanguard, or Fidelity.
A Simplified Employee Pension IRA (SEP IRA) is a retirement account ideal for those who make their living as freelancers. In this plan, workers can add either of $55,000 or 25% of their net earnings – whichever turns out to be the lesser – annually. Accounts can be set up with online like with a traditional IRA, and contributions can be easily deducted.
As the name implies, a solo 401(k) is exactly that – a 401(k) account for a single person. It is similar to the traditional 401(k) in the sense that you can deposit up to $18,500 into the account ($24,500 if you are 50 years old or more), but given that you act as both the employer and employee, it is possible for you to make additional contributions as an employer, and therefore boost your total contributions. Subject to your income and IRS calculations, the total amount you can add becomes up to $55,000 per year.
Make sure to open your account by December 31st of the year in which you intend to contribute – for instance if you want to contribute for 2019, you have to open your account before or on Dec. 31, 2019.
How much should you save for retirement?
The amount one needs to save for retirement is different for everyone as it is based upon various factors such as age, debts, saved money and assets, and current income. That being said, a general rule is to save around 10% to 15% of your income in a retirement account at the very least. The more you can increase the percentage, the better it will be.
Another factor that is you must consider before embarking on saving for retirement is debt load. If you’re among the freelancers who have high-interest loans (like soft loans or pending credit card bills), you should first concentrate on paying-off and neutralizing said debts before you begin to save. This is because the annual interest you would be paying on said loans would be greater than the returns you would be receiving from the retirement savings.
On the flip side, if you have low-interest debts (like federal student loans or mortgage), you should start saving for retirement right away, whilst making sure than you are also paying your loan debt(s).
In today’s day and age, blended families are on the rise. While they are generally good news for both the parties involved (as well as their children, if there are any), they come with some unique changes and challenges, especially on the legal and financial front. In the case of estate planning, for instance, things can get tight in case the wishes of spouses clash with each other – say, a well-to-do man with 2 children married a relatively wealthy woman with 1 child, the man may want the joint estate to be split equally between the 3 children, whereas the woman may want to each parent to address their child’s inheritance on their own. While the couple should have discussed these matters before marriage, they rarely tend to think what they must do with their wealth once they pass away.
Not only are such kinds of frictions bad, they can have people holding grudges for years, if not decades. The best way to avoid this is to make a solid estate plan for blended families that will honor everyone’s wishes and help divide property equally after the death of the parents.
Here are some tips on how you can successfully work on estate planning for blended families:
Tip #1: Make a disposition of remains – A disposition of remains is a legal document that appoints one individual to make crucial decisions, such as burial. This can be very useful when there is a conflict of opinion between the deceased parent’s children from their first marriage and the surviving partner. In case the deceased has not signed said document before his/her death, the surviving spouse will have complete control over all decisions, and the children will have absolutely no say in any matter whatsoever.
Tip #2: Make sure to spell out the terms of property distribution after your death – Spelling out the terms of how property is supposed to be distributed after your death will help clear the air on how financial matters would be handled, and would help make an atmosphere that is fair for both your surviving spouse (and their children), as well as your children from your previous marriage. Failing to do so will cause your spouse to receive all joint assets, along with total and complete rights to do whatever he or she would like to do with said assets. Such situation can turn out to be slippery, as the surviving spouse may have a greater desire to favor his or her own children.
Tip #3: Use irrevocable trusts – If you are both sincere about sharing your resources equally among your children regardless of their origin, irrevocable trusts are a great way to legally cement your wished and justifications. To do this successfully, you can do either of the following:
- Buy life insurance and name the biological children of the first spouse passing away as the beneficiaries.
- Have the assets entered in a trust upon the death of the first spouse and appoint an independent and impartial trustee who will control how said assets will be distributed. This will prevent the surviving spouse from emptying the trust on their own will.
- Upon their death of the first spouse, give the assets to their biological children, to the stepparent’s detriment.
Tip #4: Discuss the extent of information that children should have upon their biological parent’s death – With matters as sensitive as estate planning, it is important for biological children to not feel that they are being kept out of the loop in any way. For instance, if the biological parent has assets (which the biological children did not know about), and if said assets were passed on to the stepparent, this would make the biological children feel that they were keep in the dark the whole time, which in turn would create a big rift in the fabric of the family.
Investing in stocks is one of the most lucrative option for anyone – when done right, it can help generate a lot of money. That said, many are hesitant to do so, at least in part due to a lack of understanding. Some common ideas that persistently surface for the topic of investing in stock markets are as follows:
Myth #1: Investing in stocks is the same as gambling
This is surprisingly the biggest reason why people tend to stay away from the stock market. Even though investing in the stock market is a science that requires thorough researching, appearances make it seem like it is a gambling ventures where people put in their money by making wild guesses.
In reality, this is completely false. A common stock share represents ownership in a company, giving the holder the rights to claim both assets and a percentage of the profits generated by the company. The problem happens when investors fall into the mental trap of thinking of shares as trading vehicle, that something that they own. Gambling, on the other hand, is a game with random actions and a random outcome. Essentially, it’s just taking money from someone and giving it to someone else on the basis of pure chance. There is no science to it.
Myth #2: The stock market is only meant for brokers and the rich
While there are a few market advisors who portray that investing in the stock market is ideal only for the wealthy and the knowledgeable, this could not be farther than the truth. It is true that the wealthy and the knowledgeable may a greater level of security and ability to mitigate if things go south, but that does not mean that others are not suitable to invest in the stock market, especially in today’s day and age. Thanks to the internet, ordinary people have a much more accessible market and far more information on their hands than earlier. In addition to this, robo-advisors and discount brokerages help people improve their financial status by investing in the market with minimal investment.
Myth #3: Fallen stocks do go back up
This is one of the most dangerous myths of the stock market, and one that many amateur and even some seasoned investors believe to be true. Many do believe that a previously well-running stock that has gone down will go back up again.
In reality this is only a dangerous illusion. Let’s explain this through an example:
- Stock A – a large company whose price per share had reached an all-time high of $100 but has recently fallen to $20
- Stock B – a comparatively smaller company whose price has steadily risen from $10 to $20
Many investors here would prefer to invest in the first option believing that the shares would eventually bounce back to normal. This kind of thinking is as good as trying to catch a falling knife – one would only end up getting hurt. Investors must bear in mind that investing, with its use of technical analysis differs greatly from trading. Price makes up a single part of the entire investing equation – buying companies exclusively on the basis of market price means nothing.
Myth #4: Stocks which go up must also go down
As accurate as the laws of physics are, they do not apply to the stock market. The gravitational force has no effect on stocks whatsoever – stocks go up or down due to internal and external financial and economic fluctuations. One of the biggest examples of stock that has always gone up is Berkshire Hathaway. In the 90s, Berkshire Hathaway’s stock price went from $7,455 to $17,250 per share in less than 5 years. Over 20 years later, their stock is still on the rise at $308,000 per share (as of February 2019). While it cannot be said that stocks on the up will always be on the up, there’s no guarantee that they will go down either – all of this is dependent on the company’s activities and its reflection in the market.
Myth #5: Have a limited amount of knowledge is okay
While it can be said that knowing something is better than knowing nothing, it is important for stock market investors to have a very clear understanding of the concepts involved in the stock market and to do their research and homework when it comes to knowing where they are investing their money. In case the investor does not have enough time to conduct an extensive amount of research, they must hire an advisor who would help them understand what they are doing with their money. While it may seem costly to do so, at the end of the day, it far outweighs the cost of investing in something with little understanding.
Owning and operating a business is no easy task, especially when the cash flow is on the low. While determination, talent and skill can and do make a difference, they are alone not enough to running the business at its best – as a business owner, you need to keep your finances running as well.
One of the best ways to keep yourself from getting shorthanded in the financial department is to invest in other areas. Here are some tips that can help you get started:
Invest in Penny Stocks
Basically, a penny stock is a common stock that can be bought from the market for less than one dollar. While it isn’t the most stable form of investment, it is a worthwhile one – especially for new investors – due to the extremely low amount that is required to invest. If you are new to investing, investing in penny stocks can help you nurture your skills as a beginner investor until you get used to it. Once you are accustomed, you can either experiment with more penny stocks or practice with other, more heavier types of investments.
Make Sure that your Investments Line-up with your Business Goals
To make the best from investments, small business owners must consider how their investments align with the business. As a small business owner, you must keep in mind that the whole goal of investing is to enhance the income earned by your company. You must know that in the event the investment does go south, you will end up losing the money invested, and in some cases may even end up with some kind of liability yourself. Such a situation is difficult to recover from.
While all situations can never be predicted, one can plan well to keep things from going south. For starters, before you make any sort of speculations, you must consolidate your business goals, planning, credit, and financing, and always make sure that the investment you make does not put the core of your business into any kind of dilemma. Additionally, you must always have an informed opinion and never treat investment as anything close to gambling.
Make Investments in Multiple Places
Making investments in multiple places has a very key benefit. Not putting all of your eggs in one investment basket protects you from having to suffer great losses in case any one of your investment ventures fall out. For instance, if a particular stock devalues, you will continue to gain profits from other stocks.
Invest in Mutual Funds
Every investment you make has a certain level of risk and return, and there must be a level of equilibrium between the numbers and overall experience of the investor. If you’re among the small business owners who are only starting out, you are better off making investments with a lower amount of risk. And that’s where mutual fund investments come in.
Large-sized mutual funds have hundreds of stocks that are combined in a single place, with a fund manager who adds money to the fund in order to increase its growth rate. In investments like these, the level of risk is very low, making it a suitable opportunity.
Don’t Use Leverages
While leverages do have a tendency of increasing your profits, they have an equally high chance of diminishing them as well. This makes it much like gambling, which is always bad news for you and your business. In case things do go bad (which happens when you do use leverages), the broker could issue a margin call, which would then need you to invest extra cash to level the deficit even.
Minimize Taxes and Fees
The process of selling and trading in a market often comes with hidden fees and taxes that you must consider, especially as a small business owner. If you don’t track these and keep them under control, these fees will climb up to as much as 30% of all profits, thereby making the whole purpose of increasing cash flow useless. Prior to making investments, you must take a close look at the taxes and fees involved to determine whether the fees are worth for the amount of risks you take.
A living trust represents one’s plans for the future – the better the plans, the more structured one’s life is. That said, sometimes, even the best laid plans can be rendered useless by unexpected changes that happen in life. Changes like this can get you thinking about wanting to change your own plans – and in this particular context – your living trust.
Changing a living trust can be simple provided certain key steps are followed. Here is a guide on how you can go about that:
What type of trust do you have?
In order to understand how changing your living trust would work, you first need to understand the type of trust that you currently have. Trust are of two types – irrevocable and revocable. Irrevocable trusts are meant to be permanent, and therefore are very difficult to make changes to. A revocable trust, on the other hand, is flexible in nature, and can be easily changed or even deleted if necessary.
Why should you change your trust?
There are several reasons why you may need to change your living trust. Some of the most common reasons for this are adding and/or changing beneficiaries in the event of a birth of a grandchild, the death of an existing beneficiary, divorce, change in financial status, change in laws, moving to a state with different laws. Other reasons include a change in intention in how assets should be distributed (for example, if you decide that beneficiaries must reach an age before they inherit the assets), removing or adding a property to the trust, changing the trustee and/or the successor trustee, or making a change in the powers that would be vested in the trustee.
In the event that the sole reason you want a change in your living trust is to add property to the trust, all you need to do is transfer the ownership of that property into the trust by adding it to the trust’s schedule of assets. Given that trusts are set up in a way to readily accept new assets, making amendments will not be necessary.
Changing the living trust
The easiest method of changing a living trust is to fill out a trust amendment form. This is a legal instrument that helps you make changes to your living trust without compromising the integrity and active status of the original document. If the trust in question has been made jointly with your spouse, the agreement of both of you would be required to amend the trust.
Sections to fill out require basic information – the name of your trust, whether or not this is the first change to the trust, previous changes to the trust (if applicable), and a statement of whether the amendment overrides previous changes or will remain in effect.
When writing the change, do make sure state that you intend to make changes to the trust, refer to the relevant paragraph number in the original trust document, and then state how you will change the section. Once you are done, you must sign the living trust amendment in the presence of a notary, and then attach said amendment to the original trust document and its copies.
How to restate the trust
Besides using the amendment form, you can also make changes to the trust by making restatement. Essentially, it is total redo of the trust that allows the trust to remain active while the new document alter its provisions. Restating trusts can be particularly useful if the number of changes you are making are several in number.
Making the restatement involves filling out a trust restatement form, stating the date of the original document, restating provisions, and then incorporating the changes that you intend to make.
As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.
Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.
Here are 5 best investment strategies that you must consider:
Variable Annuity (VA)
Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.
Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.
U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.
For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.
Certificates of Deposit (CDs)
CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.
As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.
You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.
Individual Retirement Account (IRA)
It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.
Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.
Special Mention: The Wild Card
Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:
- Starting your own business
- Classic cars
- Paintings and fine arts
- Coins and collectibles
- Sports memorabilia
That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.
Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.
Judging by the looks of it, the BP oil disaster (aka Deepwater Oil Spill), despite causing the destruction it did, doesn’t really have anything special about it. After all, it is neither the first nor the last oil spill in the US, and neither is it the largest or the worst by any measure – that spot goes to the Greenpoint Oil Spill, in which over 250 million gallons of oil and refined product was leaked into aquifers under the streets of Los Angeles by Chevron refinery leaked for quite a few decades until its discovery in the late 1970s. It has been estimated that cleaning the mess made by this oil spill will take another half a century to clean up.
However, if we take a closer look, these oil spills collectively cause – and cost – much more than one can imagine. Not to mention the unhealthy “addiction” we have when it comes to keeping the commodity under our control – as the future generations in smog-filled cities as losing up to 1% of their vital lung function annually and weather patterns all over the planet are getting altered by leaps and bounds, we’re waging trillion dollar wars in Iraq as an “exercise” to control more oil, leaving tar sands exposed in Canada, consuming much more energy to extract than deliver in fuel to our tanks, and over and above everything – not being bothered about finding ways of generating energy other than burning the earth’s limited fossilized remains.
From the looks of it, it seems like an endless situation where there’s nothing we can really do. But then, WE CAN.
Believe it or not, we do possess the power of relegate all these “current” events right to the past and let them be a part of the history books. And we can do that by harnessing the power of an idea that was once very instrumental in saving the world.
Back in World War II, Patriotic Americans in thousands had bought war bonds in order to finance the path to victory and end the global tyranny that was the Axis. Why not re-use this marvelous tool again, rechristen them (as “Freedom Bonds” and put an end to this new form of global tyranny that currently exists in our lives?
The logic behind Freedom Bonds is to have the Treasury issue “revenue bonds” and subsequently use the funds collected to build a series of compressed natural gas (CNG) and Hydrogen fueling stations, and electric car charging stations, as well as support infrastructure for utilities and companies and utilities to provide those clean transportation fuels to consumers. That’s not all the bonds can do though – these bonds can help pay for those who are willing to convert their existing gas/diesel vehicle to hydrogen or CNG (just about any bus, truck or car that runs on the road these days can be converted to run on them) and fund American automakers who want to re-tool their assembly lines and make newer, more eco-friendly models which run on cleaner alternatives. They can even be used to finance a variety of fleets of widely-used vehicles such as school buses, government fleets, municipal bus lines, and trash trucks, which have been converted to a more eco-friendly version.
Note, however, that these are “revenue bonds” – marvelous as this plan is, we have no intention on spending even a single taxpayer’s hard-earned dollar directly on them. We plan to “repay as we go,” by repaying the bonds with generous interest, from normal fuel surcharges added to the cost of each fuel. In order to kickstart this system, however, we do need a bond financing mechanism, as the early revenues will be low in comparison to the upfront costs (which will initially be significantly higher). With time and progress, however, these bonds will be repaid in full (with interest) by the future users of vehicles which run on cleaner and greener fuels.
All said and done, we don’t consider using the special T-bills to curb our oil-obsession and tragic spills as the most patriotic part of our plan – that is yet to come.
In addition to the aforementioned, all, i.e. 100% of the billions of dollars that will be used to fund Freedom Bonds will be entirely spent on improving the American job sector. By using the bonds to pay mechanics to convert vehicles, build clean fueling infrastructure, help premier car manufacturers make 21st Century trucks and cars, we will set into motion a one-of-a-kind series of investments which will reap benefits for years to come. Freedom bonds will help create and maintain full-time, permanent and secure jobs which will help America help itself and the rest of the world create innovative technologies which will go on to (positively) change the world and the way we see it.
Believe it or not, every single one of us, at some point or the other, looks at the sordid picture of the Gulf and longs to do something that can change the situation, only to realize that we, as common people are powerless. We know that the available oil is bound to run out soon, despite all the efforts being put in by governments and oil companies to acquire the next barrel for themselves.
Not anymore. Buy buying Freedom Bonds, we can help those in need by making a sound investment that will make this problem the last of its kind. Which makes this – here and now – the best time to buy them.
Life for the baby boomers hasn’t been easy, at least as far as saving for retirements is concerned. They have indeed experienced quite a few hard knocks. However, they now have a sound retirement saving strategy in place – one that can actually be beneficial for the younger generations as well.
A lot has happened in the last 40 years which has pretty much spelt doom for common investment strategies – from sudden busts and booms, periods of deflation and inflation, to sharp rise and fall of interest rates and speculative ventures gone bad. bubbles that ended badly. To top it over, the S&P 500 in this period has stood at an average of 12% a year (a figure that includes both price range and dividends.
While one cannot say that boomers have been stable through all this time, one can definitely say that they have learnt well from their failures. And they are now keen to find ways that will help them save for the rest of their saving years.
According to an American Funds study, 65% boomers reported that they felt smart as investors when they stuck with their investment strategy. In the same study, 6 out of 10 reported that they remain quiet when the market gets volatile. Only a mere 2% say that they feel smart when they make a move that’s bold and risky but well-rewarding if it works.
The younger generations, however, don’t seem to share this sentiment. For instance, only 43% of millennials feel smart when sticking with their strategy, while the rest only feel smart when they attempt to pick a hot stock. The latter’s percentage, here, is almost 6 times more than the boomers.
Baby boomers, however, thanks to their experience, have learnt an entirely different lesson. They’ve understood that good times don’t last long – let alone forever. Thanks to the huge market upheavals following the financial crisis, a mere 16% of boomers believe that they will continue to get their benefits either at the same rate or at a better rate. This is of course a lesser figure that the 31% who believe the same.
All said and done, there is a perfect explanation why millennials are more optimistic. Given that they understood the importance of saving much before their boomers counterparts did, they have a bigger edge over them. According to the American Funds study, almost 60% of the millennials began to save for retirement before the age of 25, as compared to only 28% of boomers. That being said, they also tend to have a more pessimistic view of their later lives, thanks to the debt that most of them face, especially in the form of student loans. As opposed to the baby boomers, who believe that they will be happy throughout retirement, millennials do not believe that they will be that lucky.
The study also shows that despite their wise savings habits, baby boomers do tend to have their blind spots. While they do remain committed to low-cost index funds (which are known to produce good results in the long-term), they also leave them vulnerable to sharp short-term downward market moves, which, according to 81% of boomers, is a great matter of concern.
If your portfolio mainly consists of investments and bonds, with stock index funds forming a very low percentage, it is better to stick to index funds. However, half of all generations still fail to understand the problems short-term risk of an index fund – the fact that things can turn real ugly real fast in case the market turns sharply lower, especially during the initial period of retirement.
Any bond’s instrumental characteristic – which authenticates it and distinguishes it from any other – is the entity that has issued it, since as an investor you’re counting on that issuer to have your hard-earned money returned to you.
The following are the most commonly-used types of bonds:
– Investment-grade corporate bonds (high quality)
– Higher yielding corporate bonds (poor), referred to as “junk bonds”
– Bonds that are backed by a mortgage
– Foreign bonds
– Municipal bonds
– Treasury bonds
– Other U.S. government bonds
Investment-grade corporate bonds
Carrying ratings that are at least triple-B from Moody’s Investors Service, Standard & Poor’s – or both (For the ignorant: ratings go with triple-A being the highest, followed by Double-A, Single-A, Triple-B and so forth), investment-grade corporate bonds are issued by financing institutions or companies which have stronger balance sheets.
Although the risk of such bonds defaulting is considered very remote, their yields still score much higher than both agency and Treasury bonds, despite the fact that they are fully taxable – like most other agencies. These bonds, however, tend to underperform Treasuries and agencies during times of economic downturns.
Generally carrying ratings below triple-B, high-yield bonds are issued by financing institutions or companies which have weaker balance sheets. The prices of these bonds are directly related to the health of corporate balance sheets. These bonds tend to track stock prices more closely than their investment-grade counterparts. According to Steve Ward, Chief Investment Officer of Charles Schwab Corporation, high-yield bonds do not provide the kind of asset-allocation benefits that come with mixing high-grade stocks and bonds.
These bonds have a higher face value as opposed to other bonds ($25,000 for such as opposed to $1,000-$5,000 for others). They do, however, suffer from what is called “prepayment risk.” The value of such bonds drop as mortgage prepayments rise to a higher rate – which is why they do not reap rewards from declining interest the way other bonds do.
A rather complicated kind of bond, foreign bonds are of different types. While there are some which are dollar-denominated, most foreign bond funds have approximately 1/3rd of their assets in foreign-currency-denominated debt (Source: Lipper).
For foreign bonds that are denominated by foreign currency, the issuing party makes a promise to pay in fixed interest — and thereafter return the principal amount in a different currency. The size of said payments once they get converted into dollars depends on the prevalent rates of exchange. For instance, if the dollar proves to be stronger than the foreign currency, foreign interest payments get converted into smaller dollar amounts (and vice versa).
The performance of a foreign bond fund depends more on exchange rates than on interest rates.
Popularly known as “munis,” municipal bonds are issued by U.S. states and local governments and their sub-agencies. They are available in investment-grade as well as in high-yield varieties. Although interest for such bonds is indeed tax-free, it does not automatically translate to be being beneficial for everyone. This is due to the fact that taxable yields end up being higher as compared to muni yields in order to compensate investors for the taxes.
Backed fully by taxing authorities, treasury bonds are issued by the federal government in order to finance the budget deficits. Due to having Uncle Sam’s full and official approval, such bonds are regarded as credit-risk free. They do have a critical downside, however, which is the fact that their yields tend to be the second lowest – just above tax-free munis.
However, they tend to outperform higher-yielding bonds during economic downturns, not to mention the fact that the interest on them is exempt from certain state income taxes.
Other U.S. government bonds
Alternatively known as agency bonds, these are normally supplied by federal agencies such as mainly Ginnie Mae (the Government National Mortgage Association) and Fannie Mae (FNM) (the Federal National Mortgage Association). Differing significantly from the mortgage-backed securities that are issued by the same agencies, as well as by Freddie Mac (FRE) (the Federal Home Loan Mortgage Corp.), the yield coming from such bonds are significantly higher than their Treasury counterparts. While they don’t have the full approval of the U.S. government at large, the credit risk for these bonds is considered minimal-to-none. Interest on such bonds is taxable at state as well as federal levels.
Generally speaking, bonds which don’t require too much investment (such as municipal bonds) are ideal for investors. That said, every investor and their portfolio have different kinds and combination of requirements. As an investor, you must consider all the advantages and disadvantages of municipal bonds in order to judge their appropriateness for your portfolio.
The following are the key advantages of municipal bonds:
Interest gained from Municipal bonds is mostly exempt from federal, state and even local income taxes:
Generally, an investor’s marginal tax bracket is the instrumental factor in deciding whether or not to invest in municipal bonds.
As an investor, it is always a good practice to first compare the yield of a muni bond with any comparable taxable bond’s after-tax yield. In order to do so, you must calculate the taxable equivalent yield of the muni bond. And in the event that the municipal bond you plan to invest in is not issued in the state of your residence, you should make the requisite calculation by equaling the taxable equivalent yield with the tax-exempt interest rate divided by one minus the marginal tax bracket. For example, if you are planning to invest in a municipal bond that has a yield of 4.5%, and your tax bracket is 25%, the taxable equivalent yield will end up being 6.0% (obtained by dividing 4.5% with 1 and then subtracting 25% from the same).
Municipal Bonds are available in a variety of choices:
Given that there are over 1.5 million outstanding issues of municipal bonds, one can easily determine the fact that bonds with all sorts of characteristics and combinations are available for investors to choose from.
Municipal bonds have high credit ratings in general:
While there are very few cases of municipal bonds defaulting, it is not entirely unheard of. As an investor, therefore, you must take the time to carefully review the credit quality before you go ahead and invest. In such situations, sticking with investment grade ratings is a good idea, since it indicates that the issuer is financially stable and therefore is unlikely to default.
As is the case with every type of bond, muni bonds too have some key disadvantages:
They cannot work with every portfolio-type:
Generally speaking, munis are not ideal for tax-advantaged plans such as 401(k) and individual retirement accounts (IRAs). This is due to the fact that municipal bond interest is exempt from federal income taxes, which means that you as an investor won’t gain anything by placing the bond in a tax-advantaged medium. On the contrary, the interest income, when withdrawn will be subjected to normal income taxes.
Municipal bonds can be redeemed even before they mature:
Having call provisions gives the issuer the power to redeem muni bonds before they mature. That said, the precise provisions vary from one type of muni bond to the other.
As an investor, you should review the provisions very thoroughly before you purchase a bond. Although doing so won’t allow you to stop an issuer if and/or when they make a call provision, it does allow you to purchase bonds with call provisions that are the best for you.
Usually, early redemptions occur when the market interest rates are lower than the interest rate of the bond. While you will the principal and maybe even a premium, the money will have to be reinvested later during a time when the interest rates are lower than what is paid on the original bonds.
Muni bonds remain subject to select taxes:
Although muni bonds are usually exempt from federal (and sometimes even state and local) income taxes, selling the bond prematurely can – and does often result in taxable gains. Furthermore, some bonds pay interest income that is subject to the alternative minimum tax (AMT).
Additionally, one should also consider local and State taxes in the event that the muni bond has not been issued in the state of your residence.
Are you one of the many people who are still holding on to their old Savings Notes (Freedom Shares), H or HH bonds, or E bonds? Maybe now is the time when you can actually do something with those. After all, those bonds no longer earn interest and perhaps are (or are on their way to) causing you tax problems. In fact, you’d be surprised to know that the United States Treasury Dept. says that there are current outstanding U.S. savings bonds that don’t earn interest are collectively worth over $12 billion!
Which brings us to the most important question – how can one know if their bonds belong to this category – and if it does, then what can be done about it?
The best way to find out is to check your old bonds. Originally known as E Bonds, these were issued by the federal government began since the mid-1930s. Issued in a variety of denominations, they were mostly bought by citizens at a 75 percent of face value discount. In simpler terms, an individual paid $75 to buy a $100 bond.
The federal government ceased issuance of E Bonds from June 1980 and replaced them with EE bonds. These bonds calculate the earned interest a bit differently from E bonds, with investors buying then at half of their face value and receiving interest from them bonds once they redeem the bonds.
The bonds keep earning interest till their ‘original maturity’ (i.e. the point when the original price paid for a particular bond and the accumulated interest equal the bond’s face value. Interest payments, however, can – and are extended automatically beyond that point (generally for a ten-year-period), till the time the bond reaches its ultimate maturity, after which it is unable to earn any interest.
This is often where things get difficult. Since actual final maturity dates often vary from bond-to-bond, so it can be confusing. Take as an example, the E bonds which were issued from May 1941. Originally matured as of November 1965, these bonds had 40 years till they reached final maturity. Today, almost all of them are no longer earning interest. Contrastingly, E bonds which were issued from December 1965 and reached original maturity by June 1980, have just 30 years till they reach final maturity. As of today, all E bonds that were issued until April 1975 no longer earn interest. As for EE Bonds – they too reach final maturity in 30 years from their original maturity. Given that none of them are older than July 1980, it is only a matter of a couple of years before they cease earning interest.
Savings Notes, also known as Freedom Shares, were all issued between May 1967 and October 1970, when the Vietnam War was at its height. Much like their Like E/EE counterparts, they were sold at a discount and the interest was deferred until redemption. They too had 30 years to reach final maturity do not earn interest any more.
H and HH bonds, however, are a bit different from the aforementioned. Bought by investors at face value, these bonds pay out interest semiannually and in cash. H Bonds were first issued by the government from June 1952 through January 1957. These reached final maturity in 29 years and 8 months. H bonds issued from January 1957 till the introduction of HH bonds in January reach final maturity in 30 years. As of today, H bonds issued till April 1975 no longer earn interest. That said, HH bonds, which were stopped by the government since August 2004, reach final maturity in just 20 years. Additionally, all HH bonds which are more than 20 years old must be cashed in order to retrieve the face value i.e. the original investment.
TAX IMPLICATIONS ON VARIOUS BONDS:
While there are no state and local taxes levied on savings bonds, one does have to pay federal taxes at the rate of ordinary income taxes.
H or HH bondholders, on the other hand, have to pay taxes on the interest that they receive annually; buyers need not pay when they redeem the last payment (which is actually a return of the principal amount).
With E and EE bonds and Savings Notes, however, bondholders will have to pay taxes on the accumulated interest either when they redeem them, or when the bonds reach final maturity (and have not been redeemed). Said interest income is taxable for the year of final maturity or redemption – whichever is applicable.
In case the bondholder ends up missing this particular time period, and have only recently realized that the E Bonds that they have at home matured years back, they will need to file an amended tax return and might also be subject paying interest and a late penalty. It is always advisable for people in this situation to speak to their financial or tax advisor first.
Any bond investor must have any and all of their investments well-suited to the objectives of the investment, degree of risk tolerance, as well as other personal circumstances. By referring to the following guide and keeping all factors in check, investors can determine the role their bonds have in their portfolio:
#1: Overall objectives of investment
Investors who value growth and have little to no concern for income are looking for better appreciation of capital. Bonds which fulfill such criteria won’t have a major role in their portfolios.
Total return investors, on the other hand need both capital appreciation and income generation in well-balanced proportions. Bonds, therefore, will have a more important place in their portfolios.
Income investors, who prioritize dividend or interest income over capital appreciation, will have bonds playing a very important role in their portfolios.
#2: Time Frame of Investment
The time period in which an investor needs the principal should be instrumental in the process of selecting bonds. Usually the yield increases with the lengthening of the maturity date. In fact, it is this reason why investors tend to purchase bonds that have long maturity dates – so that they can get higher yields.
The investor, however, must be very careful when using that strategy. In the event that they do purchase a long-term bond – and thereafter sell it before it matures, the market value of the bond can get severely affected by changes in interest rate. While it is impossible to control changes interest rate changes, it is certainly possible for investors to curb the effects of said changes by choosing bonds whose maturity dates lie closest to when the principal is required.
#3: Risk tolerance
Usually, the risk is greater when the return on the bond is high. This is exactly the reason why U.S. Treasury securities (considered to be some of the most stable and risk-proof bonds) carry lower rates of interest than their corporate or municipal counterparts. Before purchasing a bond, investors must be absolutely sure to have completely understood all risks involved.
#4: Desire to minimize income taxes
While income generated from U.S. Treasury securities is exempt from local and state income taxes, it is still subject to federal income taxes. Income generated from municipal bonds is totally exempt from federal income taxes and exempt from state and local income taxes – if the investor is a resident of the issuing state. Income from corporate bonds, however, is subject to both state and federal income taxes.
Investors who invest in bigger bonds generally tend to find ways to have their interest tax-exempted. Investors should, however, know that income tax exemption is exclusively applicable to interest income; any capital gained by selling a bond will still be subjected to income taxes.
#5: Personal Factors
The following personal variables should be taken into consideration when purchasing a bond. Any investor must make sure that the bond they are investing in fulfills these basic criteria by adeqautely answering the following questions:
- What is the price of the bond?
- Is the bond insured?
- What is the credit rating of the bond?
- What is the yield-to-maturity?
- What is the maturity of the bond?
- Does the bond have call provisions?
- What is the coupon rate?
- How is the bond’s interest income taxed?
The role that the bond will play in an investor’s portfolio will be totally dependent on the answers to the above questions.
So, you’ve been working hard and saving well for all of your professional life and are now on the threshold of retirement. Needless to say, the time for you now is to actually enjoy all that you’ve wanted to do so far.
Before you jump on the retirement bandwagon, however, you must ensure that your savings and post-retirement earnings are enough to last for the rest of your life – all while factoring the ups and downs of the market, unprecedented expenses, inflation, and of course, longevity.
However, it’s not as daunting as it may sound at the moment. By remembering the following key factors when making your post-retirement income strategy, you can make your life a smooth and easy one – with no worries of having to come out of retirement to earn. Ever.
Thanks to advancement in science and technology, the mortality rates have down a lot. This makes it quite likely for healthy 65-year-olds today to live until their 90s – or at least their 80s. And if one goes by currently available data, longevity expectations will only serve to increase in the coming future.
This implies that the possibility of people living for 30 years or more after retirement is pretty commonplace. And that needs an equal amount of income to boot. If you do not plan out your strategy thoughtfully, you may just end up outliving your savings and having to come out of retirement, or worse, living on Social Security as a source of income (Given that the average Social Security benefit is around $1,296 a month, one can say that it isn’t enough to cover all needs).
Just because the current rate of inflation is low, doesn’t mean that it won’t fluctuate. Even if it doesn’t, it will surely have a powerful impact over a long time – say, 20-30 years. This can – and does – have a profound effect on retirees, who unlike their younger, working counterparts do not have the option of relying on raises and incentives.
A lower rate of inflation too can have a profound impact on the purchasing power of a retiree. For instance, an inflation rate of 2% would turn what is $50,000 today into $30,477 25 years from now. Looking at this in another way, if you bought something by spending $50,000 today, you would have to shell out $82,030 to purchase the same thing 25 years from now. It is therefore important that you make your plans early and put into factor the effects of inflation in order to be able to maintain your current lifestyle.
#3: Market volatility
Ups and downs of the market can be extremely unsettling when a retiree who is banking upon living comfortably on a fixed amount for the rest of your life. No matter what the circumstances you will need stocks for growth potential, both when you’re saving for retirement and when you have actually retired. By default, the assets you have should be able to last you a minimum of 30 years.
#4: The Amount of Money Withdrawn
Now this one is a no-brainer – no matter how inflation- or market-proof your savings are, they won’t last long if you draw too much. On the other hand drawing too little (mostly out of fear of your savings diminishing) will have an adverse effect on your lifestyle and psychology.
A sound retirement income plan includes recommendations on the amount of money that you can safely withdraw from your savings and still have the confidence in the fact that you won’t run out of money. Believe it or not, planning in this area (or lack thereof) can have a dramatic effect on how long your assets will last.
Elements of a Sound Retirement Income Plan
Now that you know the factors you must consider when preparing a retirement income plan, you should know the various important elements that make a good one.
The following are the basics of a sound income plan for retirement:
#1: Guaranteed income that will take care of daily expenses
The first thing your plan should fully cover is your daily expenses. This covers all the non-negotiable requirements that you have as a human being housing, clothes, food, health care and utilities. Not only should this income be able to last for the rest of your lifetime (30 years or more), it should have sources of income that are stable and do not easily get swayed by external factors.
Generally, there are 3 main sources of guaranteed income:
– Social Security: For most, this acts as a base of income post-retirement. When and how you take money from here has a profound impact on your retirement. While it may be tempting to start taking the money the moment you are eligible (generally at 62 years of age), it can prove to be costly later. Starting at 62 instead of waiting till you reach full retirement age (FRA) will lead to reduced monthly benefits.
– Pensions: While pensions were very common in the past, that is no longer the case. In fact, the U.S. Department of Labor says that only 14% workers today have a proper pension plan to speak of. In the event that you fall among them, you must decide on how you would like to draw the money – as a monthly payment or as a lump sum. In case you are not among the 14%, you can follow certain paths that will allow you to make a pension-like stream of income.
– Annuities: Basically, an annuity is a contract made with an insurance company that pays you a set income in return for an up-front investment that you made. This payment can either be made over the rest of your life or over a set period of time, and is unaffected by market upheavals. Fixed income annuities are of several types, such as a deferred income annuity, immediate income annuity, and fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB).
#2: Growth potential that can fulfill long-term requirements
Aside from the daily, non-negotiable expenses, you will also have other expenses that will cater to your hobbies and dreams (for which you will have time) – such as pursuing a new hobby or going on a vacation or buying a boat. When you construct your income plan, you must make sure that it includes investments that have a potential to grow and try to keep up with the rates of inflation and meet these demands. A good practice in this regard is to use your investment portfolio and pay for these discretionary expenses. That way, you could easily cut back in case the market suffered a sudden downfall.
Having a mixed bag of cash, bonds and stocks, that work according to your frame of time, financial position, and market tolerance is a very good place to start. You must execute your strategy carefully though, because while a conservative strategy will lead you to miss out on the growth potential of stocks in the long-term, a plan that is too aggressive may lead to you taking far too many undue risks – which could prove very costly when the market becomes volatile.
#3: Flexibility that can help you refine your plan with the passage of time as much as possible
Quite obviously, the more flexible your plan is, the better it will perform. As a rule of thumb, your plan must be able to adapt to any curveballs it may get. Plenty of things in can happen after you retire – both good and bad – while you may get an inheritance, you may also experience a sudden medical emergency or have your parents move in. If and when such things happen, you must have a plan in place that can cushion you against the financial hardships that you will have to suffer otherwise.
One good practice that helps in this regard is to have income from different sources. Not only will this create a more diversified stream of income during retirement, it will also help you protect yourself against some very important risks like longevity, emergencies, inflation, and fluctuations.
Take for instance, a plan that includes a combination of taking withdrawals and income annuities. While the former is not guaranteed to stay for life, it does offer the chance to control how much money you can withdraw each month. The downside to this is that the money might just run out if you draw too much, live a long life or if the market hits a sudden low. Income annuities, on the other hands are not flexible and have very little potential to grow, but act as a guaranteed source income that will stay for life
It’s a given fact that everyone’s situation – both financial and social is unique, and there is no “one foolproof income strategy” that will suit the requirements of all investors. You must therefore, identify your own situation and requirements, determine the need of growth potential, and then plan a strategy that will best suit your life as a retiree.
To make things easier, you can try following these six easy steps to create a basic yet strong income plan that will serve you well once your retire – and will last as long as you live:
Step #1: Study your lifestyle and situation and make financial as well as personal goals
Step #2: Plan a basic retirement income strategy in order to determine how long your current savings will last, and how you can successfully extend this period while maintaining your lifestyle
Step #3: Determine the following factors
– When you should take the help of Social Security
– The portion of your investment portfolio that you want allocated to a contingency fund, protection, and growth potential
– How your investment portfolio will be managed and who will do the managing
Step #4: Execute your strategy with the right combination of savings and income-producing investments, which will serve to balance your investment priorities and financial requirements
Step #5: Review your savings and investments regularly with an investment professional and always make an effort to refine your portfolio so that to suit your personal and financial requirements.
Step #6: Don’t forget to enjoy your retirement and live your dreams!
In today’s day and age, there is no dearth of good retirement plans. That said, there are some caveats if you really want to benefit from them, the chief among them being the fact that there is no one way to achieve your goals and gain maximum profits.
According to Jennifer Landon, founder and president of Journey Financial Services, there is no such thing as a “silver bullet” when it comes to finding an ideal retirement plan. This is due to the basic reason that any retirement plan which qualifies as “good” is comprised of a combination of income sources that have specifically been structured for the set goals.
While there are more retirement plan options than one can count, here are five options that work best with almost all sorts of requirements:
Quite unsurprisingly, pensions work as the best retirement plans on account of the fact that they ask very little from you. When it comes to pensions, the money is contributed by the employer and funds are managed professionally. All that is left for you to do, therefore, is to keep working till you qualify for it.
That said, it is not a suitable option for everyone. According to Marc Labadie, vice president of CR Myers & Associates of Southfield, Mich, pension plans today are very different than what they used to be. While they are standard for people working for the government and municipal corporations, they are getting decreasingly popular in the corporate sector. Even the pension plans that still stand have become less generous. In fact, many don’t even offer a cost-of-living adjustment, which means that the first payment and the payment of say, 30-35 years later (when you’ll be 90 or 95) will be the same.
Labadie further added that in order to live comfortably future retirees who do have pension plans should make it a point to save additional funds – or move down to a lesser lifestyle.
DEFINED CONTRIBUTION PLANS
Defined contribution plans like 401k or 403b allow you to give your future the kind of direction you desire by allowing you to choose your plan, change the options, make contributions, and over and above all – choose to participate (or not) in the first place. According to several financial, defined contribution plans serves as the best retirement plans – right next to pensions – since the employers who offer them usually match a specific portion of your contributions. Tim Swanson, executive vice president and U.S. head of Citizens Private Bank & Trust, says that in most cases, this turns out to be a dollar-for-dollar match, making an immediate 100% return on the employees’ money.
Needless to say, the biggest upside to such plans is having your contributions automatically deducted from the paycheck – thereby saving you the hassle of making an extra effort to save and/or invest. The downside, however, is that there is a limit to how much you can contribute. For instance, the limit for people under the age 50 (as of 2015) was $18,000, whereas the same limit was increased by $6,000 for people over 50 (and only in terms of catch-up contributions).
While some employers do offer a Roth 401k option, which tax the funds you contribute upfront, most 401ks are conventional and require you to pay taxes when you make withdrawals.
Funded with taxed money, Roth IRA refers to an individual retirement account which will give you the opportunity to grow and make withdrawals – without paying taxes. According to Swanson, one of the best retirement plans (that he himself usually recommends) is to sign up for a 401k and then do a Roth IRA – in the event that they can afford it. Doing so will allow them to get a plan that is well-balanced and permits them to pre-tax contributions to the employer plan as well as after-tax contributions to the Roth plan – both at the same time.
Roth IRAs also come recommended for the younger savers, regardless of whether their plans are sponsored by their employer. Labadie says that it is very advantageous for the young saver (who literally is several decades away from retirement) to pay taxes today at a known rate today, see it grow tax-deferred, and finally pay out as tax-free – when the tax rate is unknown.
All said and done, Roth IRA too is not a viable option for all. Whether or not you’re eligible and how much you can contribute depends upon your modified adjusted gross income and tax filing status.
GUARANTEED INCOME ANNUITIES
Annuity refers to an insurance product which permits you to invest in the present day, and receive a guaranteed income stream in return from the time of your retirement. You get the option of receiving your payments per month, quarter, or year, or even as a lump sum.
Annuities are of several different kinds. There is the single-premium immediate annuity (SPIA), which allows you to invest and then trigger the income immediately (though it is currently not a popular option due to the low rates of interest). Also available is the deferred-income annuity (DIA) that has a cash-refund option. This is a much more popular option due to that fact that it allows you to control the time when you can trigger the income stream and gives you the options to not annuitize at all – if you don’t need and/or want it.
If you’re close to retirement with no substantial savings in place, you should consider real estate as a viable retirement-planning option. According to Landon, while anyone can choose to opt for real estate as a retirement plan, it serves best for the 50-60 age bracket since they are the ones who need to prioritize their income-producing options.
Landon says that it is best to opt for the investment that will give them the most of their money. Real estate, for more reasons can one can – and does give this opportunity by creating a decent – yet constant income stream.
When it comes to making real estate your retirement plan, it is always recommended to purchase the property with a lump sum in order to avoid the complications and hassles of debt during retirement. You should also set apart some money for taxes and repairs.
The only downside of real estate is the fact that property management is an active process that requires constant working and involves ongoing and real risks. And that may turn out to be bothersome for some people. That said, once you weigh the pros and cons of real estate together you will realize that it might just prove to be a better option than most.
Putting a plan in place that can generate enough money to support you after retirement can be tricky at best. Not following the right plan…or rushing into something may just sound the death knell for all of your hard-earned savings.
Here are five great ways in which you can generate good income during your retirement. They’re no “get-rich-quick” schemes, and will need quite a bit of involvement; however, the rewards will be worth it in the end.
TOTAL RETURN PORTFOLIO
Constructing a portfolio of bond and stock index funds (or working with a financial advisor who does this work) is a fantastic way to create a stable source of income post-retirement. The portfolio, which is created to help you achieve a respectable long-term rate of return, allows you to additionally follow a specific set of withdrawal rate rules which will typically permit you to draw 4-7 percent a year. It will also allow you to increase your withdrawal in relation to inflation.
The logic that underlies “total return” is that you, the investor, are able to target a 10-20-year average annual return which exceeds – or at least equals your rate of withdrawal. While you may be targeting a long-term average, your returns can – and does deviate from said average every year. Therefore, in order to follow the investment approach successfully, you should maintain a diversified allocation that is independent of the yearly portfolio fluctuations.
This approach is best-suited to experienced investors, who are well-versed with the art and science of managing money and making timed, disciplined and logical decisions. It can also be taken by people who can – and are willing to invest by hiring an advisor who is experienced in using the approach.
RETIREMENT INCOME FUNDS
This is a special type of mutual fund, which automatically distributes your hard-earned money across a diverse portfolio of bonds and stocks by owning an assortment of other mutual funds. Specially constructed to provide a single package that can accomplish all needs and fulfill all objectives, these funds are managed with the sole aim of producing a stable monthly income, which is then distributed to you, the investor.
Funds vary in type on the basis of their objective – while some produce high monthly income use principal to fulfill their payout targets, others produce a low monthly income amount but have a more balanced approach as regards preserving principal.
The greatest advantage of a retirement income fund is for you to have the ability to control your principal amount and be able to access your money anytime you want. However, you must know that this comes with a catch – withdrawing amount from your principal will lead to a proportionate decrease in your future monthly income.
RENTAL REAL ESTATE
Quite unsurprisingly, rental property can – and does act as a stable source of income. Make no mistake, though – it is neither a get-rich-quick scheme nor a passive involvement where you can sit and earn while doing nothing. Owning and managing real estate is a proper business in itself, and will never generate proper income if it is not treated as such.
Rental real estate will include several different kinds of requirements – both intended and unintended – in terms of money, time and most importantly, involvement on your part. Therefore, you must factor-in any and all expenses and other things that may be required to maintain the rental property. You should also consider a definite time-frame for which you will own and maintain the property, and consider the vacancy rates (given that no property can remain occupied 100% of the time).
Unsure where to start? Try reading books on investing in real estate, talk to retirees who work as experienced investors, or join a club that specializes in real estate investing.
Simply put, a bond is made when you loan your hard-earned money to a municipality, corporation or government. The bond, which is set to mature at a specific date, will earn the lender a specific amount of money (paid by the borrower) for a specific period of time until the bond matures, which is when the principal is returned to the lender. For many retirees, this interest income (called “yield”) which received from a bond (or a bond fund) can act as a stable source of income.
Bonds are of several types, each of which indicates the time-period before maturity and the level of financial strength of the bond’s issuer. Besides short-term, mid-term, and long-term bonds, there are floating rate bonds (which have adjustable interest rates), and high-yield bonds (which have low ratings but pay high coupon rates). Bonds are also available individually and in packages.
A bond’s principal value fluctuates with change in the rate of interest. For instance, a rising interest rate environment leads to decrease of existing bond values. While this principal fluctuation won’t matter if you plan on holding the bond to maturity, it will if you own a bond mutual fund and wish to sell it and use the funds for living expenses.
You should definitely buy bonds if you’re looking for small but stable income – and a guaranteed principal after a certain amount of time (i.e. once they mature). But if you’re trying to get high returns, or making gain on capital appreciation, you should consider other options.
Savings Notes/Freedom Shares were a kind of promotion which were issued between May 1967 and October 1970. Introduced by President Lyndon B. Johnson in February 21, 1967, SN/FS were offered to help serve the dual purpose of funding the rising costs of the Vietnam War (by increasing sales of U.S. Treasury) and helping citizens save their money and secure their future.
Issued on a discount of 81% of the face amount (for instance, a SN/FS with $100 face value was purchased for $81.00), Savings Notes/Freedom Shares were sold exclusively with Series E bonds and had an original maturity term of 4½ years. They were available in denominations from $25 all the way up to a $10,000 maximum size. These non-transferable, definitive security bonds reach their ultimate maturity after thirty years from the date issued.
Interest earned on savings note should be reported for Federal income tax purposes for the year in which the note gets redeemed, is disposed of, or reaches final maturity – whichever comes first. The note owner too can choose to report earned interest as it accrues annually; however, this decision must apply to all the accrual-type securities of the owner.
When the savings note is redeemed, interest on the same is paid as part of the current redemption value. Those savings notes which are unredeemed and/or un-matured accrue interest at the guaranteed minimum investment yield or a variable, market-based rate (like Series E and EE bonds) – whichever is higher. A savings note could be redeemable with a financial institution or The Federal Reserve Bank during any time.