WEALTH MANAGEMENT You’re almost there! Retirement is SO within reach, and the finish line is so close you can practically smell it. You’ve worked your whole life to get to this point, and now…you’re ready. Ready for a guilt-free tee time or a mid-morning yoga class. Ready for long lunches with friends and attending every one of your grandchildren’s soccer games. Ready to travel to see and explore all of the things you’ve waited all this time to experience. But are your finances ready, too? Working with an independent financial professional to take an in-depth look at your retirement savings before your paychecks stop can help you create sound financial strategies for the days ahead — helping you reach the goals you’ve been working toward in retirement. So, here’s a question: How can potentially rising interest rates impact you? As retirement nears, a traditional strategy for many people has been to move from growthseeking strategies to more conservative, fixed-income – preservation strategies. Many people choose to switch from investing in the stock market to investing in bonds — a safer alternative. Bonds can help you add diversification and stability to your overall retirement strategy and are commonly considered to be less volatile than stocks. In fact, as interest rates have generally declined since the early 1980s, many bonds have provided solid long-term returns. However, while bonds can be an attractive addition to an overall retirement income strategy, they are not without risk! In fact, if you’re counting on bonds to help you save for retirement or to generate retirement income, you could find that their value has decreased when it’s time for you to cash in or reinvest in another bond. Bonds fluctuate in value in direct correlation to changes in interest rates. When interest rates go up, a bond’s value will go down, and vice versa. How can this play out in your retirement income plan? Let’s take a look at an example. Remember, this is a hypothetical example, it is not based on any specific product or service; it’s for the purposes of illustration only, so you shouldn’t look at it as a representation of past or future results. There is no guarantee that following this example would result in similar return or performance. With that in mind, meet Bob. Bob retired in 2005 with $500,000 in retirement savings. After determining the amount of Social Security he and his wife would receive, Bob concluded that he would need to generate an additional $20,000 a year in income to live the comfortable lifestyle he 62 TAMPA BAY MAGAZINE | NOVEMBER/DECEMBER 2016 and his wife desired. Seeking that additional retirement income, Bob used his $500,000 to purchase a 10-year bond. The interest rate was 4.5 percent, which meant that Bob could generate $22,500 in annual income from the interest he earned, keeping his principal intact. This was a great solution for Bob, at least until the bond matured. When the 10 years were up, Bob had to reinvest his $500,000, only now interest rates had dropped to 2 percent. That meant that if he reinvested in the same 10-year bond, he’d only be able to generate $10,000 in income each year— less than half of what he was earning before. Coupled with the impact of inflation over a 10-year period, this loss in income could result in a significant change in lifestyle for Bob and his wife. That’s just one possible scenario. What if interest rates had dropped down to 2 percent five years into Bob’s 10- year bond period? Bonds generally have a “call period.” That is a period of time during which the issuer of the bond can “call,” or buy back, the bond for the purchase price plus any accrued interest. In Bob’s case, when the interest rate dropped from 4.5 percent to 2 percent, the issuer generally has the ability to call the bond in order to reissue the debtat a lower interest rate. In that case, Bob would be in the same position of having to purchase a new 10- year bond knowing it would generate less than half the income provided by
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