Posted on Sunday, 28th July 2019 by

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Those approaching retirement and retirees often move to more conservative investments to avoid losing what they worked a lifetime to accumulate.  Many federal retirees live on fixed income from their annuity, Social Security, and Thrift Savings Accounts.  We only have a finite time on this earth and the older we get the less time we have for our accounts to recover from market downturns.

Request a  Federal Retirement Report™  today to review your projected annuity payments, income verses expenses, FEGLI, and TSP projections

The current bull market is now the longest in history running 10 years and many forget what it was like back during the dot com bubble in 2000 and again in 2008 and 2009 when the housing collapse dropped the S&P Index 55%. From March of 2000 to September of 2002 the Market dropped an average of 47% and it took 5 years to recover to its previous high. The TSP C Fund dropped significantly during these downturns. The S&P index was approximately 1525 in March of 2000 it didn’t reach and exceed that level again until March of 2013, thirteen years later; the market ran sideways, with peaks and valleys in between.

Those who are early to mid-career, up to your 50s, generally have time to  recover and can take more risks. It’s wise for the older generations to gradually reduce their exposure to the equity markets moving a percentage of their assets to fixed income vehicles: bonds including corporate, treasuries and municipals, Certificates of Deposits and plain vanilla cash. That’s the primary benefit of the Life Cycle Funds, they progressively reallocate your funds quarterly to fixed income (Bonds) as you approach your target retirement date. Many target date funds retain 20% in equities after reaching the target date to help counter the effects of inflation.

Bond funds have their own unique risks. When interest rates rise, bond funds decrease in value. The longer the fund’s bond duration the greater the drop in the fund ‘s value. Typically, the average duration of bonds in a fund indicates how much bond prices may change as interest rates vary. According to Investopedia, “As a general rule, for every 1% change in interest rates (increase or decrease), a bond’s price will change approximately 1% in the opposite direction, for every year of duration. If a bond has a duration of five years and interest rates increase 1%, the bond’s price will drop by approximately 5% (1% X 5 years). Likewise, if interest rates fall by 1%, the same bond’s price will increase by about 5% (1% X 5 years).”

When you purchase individual bonds, you only lose when interest rates rise if you sell your bonds on the secondary market before their maturity date. When held to maturity, there is no duration risk; the full value of your investment including interest is returned to the investor. That’s why financial planners often suggest purchasing individual bonds over bond funds.

A volatile stock market can keep investors, especially retirees, up at night. U.S. Treasuries can offer a safe haven for investors. Some may ask, why should I invest in Treasuries; they are the ultimate fixed income investment guaranteed by the full faith of the U.S. Government. Treasuries are one of the safest investments available and a good place to stash a portion of your fixed income assets. Treasuries and savings bonds can reduce your taxes; they are subject to federal income tax, but not to state or local income tax. The TSP G Fund is invested 100% in special issue U.S. Treasuries that are guaranteed never to decrease in value. For taxable accounts many choose tax-free municipal bonds for a portion of their fixed income investments. However, as with all investments, municipal bonds have their own set of unique risks and rewards.

You can buy Treasuries through Treasury Direct after establishing an account with them however you can’t buy Treasuries through them for your IRA. Banks and brokerage companies will purchase Treasuries for you through the Commercial Book-Entry System for IRAs or for your taxable brokerage accounts.

Many of the larger brokerage houses offer clients the ability to buy Treasuries on the secondary market or initial issue Treasury Bills, Notes, and Bonds just like you now buy stocks and bonds in your account. Fidelity and Vanguard offer this service and don’t charge for the transactions either way. You simply look up the Treasury auction dates for initial issue Bills, Notes, or Bonds of interest and place your order.  You can elect to have them automatically reinvest in a new initial issue treasury at maturity if desired. Investors can also buy Treasuries on the secondary market, from other investors.

Currently short-term notes that mature in as little as 4 weeks to one year are paying almost as much as the 10-year Treasury Bills.  These notes come with either 4 , 8, 13, 26, or 52-week maturities and you can ladder them, so a portion of your cash is available to you each month. If you are looking for a secure place to park a portion of your fixed income assets consider U.S. Treasuries. Each brokerage company’s Treasury purchase process is a little different. Call their fixed income department to become familiar with the process before initiating your first purchase. I called Fidelity and Vanguard earlier this year to make sure I was properly setting up initial issue Treasury purchases.

New issue Treasuries are offered at auction weekly. All bidders will receive the same rate, yield, or discount margin at the highest accepted bid.

I prefer purchasing initial issue Treasuries, they are new Bills, Notes and Bonds issued by the government. They publish a quarterly schedule listing the security type, announcement date, auction date, and settlement date.  To view the current quarterly schedule, click on the “auction schedule (PDF)” link that you will find on the published quarterly schedule page. You must place your buy orders on or after the announcement date and before the auction date arrives. Typically, initial issue short term Treasuries are announced on Thursdays and the auction takes place early the next week, most of the time on Mondays.

Currently, short-term Bill yields are just slightly below the 10-year Note yields. The chart of recent auction results shows that a 4 week Note issued on July 30 yielded 2.14% where the 10 year Bill issued July 15 was 2.34%, just .2% above the 4 week Note yield. After the Bills mature the funds are either returned to your account or you can elect, in many cases, to have them automatically reinvested in new initial issue Bills at maturity. The Federal Reserve may lower interest rates by at least a quarter point this comming Wednesday. If they do, the yield on new issue Treasuries, after that date, will decrease proportionally.

It’s natural to be overconfident in a bull market that continues to impress. For those who would be significantly impacted or distressed if their retirement accounts decreased dramatically, it may be prudent to explore the U.S. Treasury and municipal bond markets. It all comes down to how much is enough for retirement. Increasing your fixed income investments will moderate account fluctuations during extended market downturns.

Request a  Federal Retirement Report™  today to review your projected annuity payments, income verses expenses, FEGLI, and TSP projections

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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

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