August Newsletter to Clients

Enjoy this month’s edition that features an explanation of bonds and how they behave plus a reminder to plan how to spend your time during retirement.

I talk a lot about stocks and bonds here and most people understand what a stock is – investors buy shares of a company and price those shares based on what the company’s expected earnings in the future will be. But bonds are priced differently and have different characteristics than stocks. 

As you probably know, a bond is a way for a government, corporation or other entity like a university to borrow money. An investor purchases a bond and gets paid two ways: 1) Regular coupon, or interest, payments and; 2) Repayment of the face value of the bond at the end of the prescribed borrowing period. We at Moneywatch invest in bonds through mutual funds that pool funds from thousands of investors and that buy a variety of bonds. This helps to spread risk.

While the stock market is up so far this year, bond returns are almost flat. That is largely because inflation has helped push up interest rates and bond prices fall when interest rates rise. That’s counterintuitive, I realize. Here is why: All investments have risks and interest rate risk is one of the primary ones with investing in bonds. For instance, if interest rates rise, bonds owned by us may pay a lower rate of interest than the new market rate, making our bonds less attractive to potential buyers and lowering the market price for our bonds. The reverse is true when interest rates decline. 

The good news is bonds serve a dual purpose in our portfolios: 1) They often have a low correlation to stock markets so they aid diversification; 2) They provide regular income in the form of interest payments – we sometimes call these bond yields. The fact that bonds are behaving differently than stocks means they’re doing their jobs and this bodes well for when stocks ultimately decide to decline in value.

While having a solid financial plan is essential, almost as important is the question of “how do you plan to spend your time in retirement?” 

According to the Social Security Administration 65-year olds are living longer than ever – an estimated 18.5 years for men and 21 years for women. That is a long time. Just think, 20 years ago Twitter was invented, Devil Wears Prada was released and Taylor Swift launched her career. So, figuring out what’s really important to you and what lifestyle you want over those two decades is important. And, of course, matching that lifestyle to your financial plan is critical.
 
Experts say there are three phases to a 20-year retirement:

•    Phase One: This is often the travel phase when clients have time and still have their health to experience new places. Spending during this phase can often exceed spending during working years. Additionally, if a person retires prior to Medicare kicking in at age 65, health insurance costs on the open market are almost always more than employer plans;
•    Phase Two: After 10-15 active years, physical reality often catches up with 75-80-year olds resulting in quieter days. There’s still energy to socialize with family and friends but spending tapers off due to less travel and less expensive hobbies;
•    Phase Three: After another 5-10 years retirees typically stay closer to home and sometimes develop more serious health issues. While spending on activities and clothes decline, expenses for caregiver services at home or even assisted living increase dramatically.

 
Thinking intentionally about how you want to enjoy your retirement years and matching that with your financial plan will help enhance your enjoyment and your financial security in the golden years. As always, if you’re interested in talking further – give us a call. 

Thank you for your continuing confidence.