WEALTH MANAGEMENT
Retirement Wealth Advisors
Your Financial Architects
www.THEHOLLANDGRP.COM
727.724.3334
2637 McCormick Drive #101
Clearwater, FL 33759
* This material has been prepared for informational and
educational purposes only.
It is not intended to provide, and should not be relied upon for,
accounting, legal or tax advice. Please consult with a professional
specializing in these areas regarding the applicability of this
information to your situation.
Investment Advisory Services offered through Mutual Trust Asset
Management
MARCH APRIL 2017 | TAMPA BAY MAGAZINE 53
Retirement is just within reach, and the
finish line is so close you can smell
it. Before your paychecks stops, you
are probably going to need an income plan
in retirement.
HOW CAN POTENTIALLY
RISING INTEREST RATES
IMPACT YOU?
As retirement nears, a traditional strategy
for many people has been to move from
growth-seeking strategies to conservative,
fixed-income investments. Investing in
bonds — usually a safer alternative to stocks.
Bonds can help you add diversification and
stability and are considered to be less volatile
than stocks. While bonds can be an attractive
addition to a retirement income strategy, they
are not without risk. When rates go up, a
bond’s value will go down, and vice versa.
How can this effect your income plan? Let’s
take a look at a hypothetical example. Keep
in mind that this example is for the purposes
of illustration only.
Meet Bob. Bob retired in 2005 with $500,000
in savings. After determining the amount
of Social Security he would receive, Bob
concluded that he would need to generate
an additional $20,000 a year in income to
live the comfortable lifestyle he desired.
Seeking that additional 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
- 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 his lifestyle.
That’s just one possible scenario. What if
interest rates had dropped down to 2% five
years into Bob’s 10-yr 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 debt at a lower
interest rate. In that case, Bob would be in
the same position of having to purchase a
new bond knowing it would generate less
than half the income of the previous bond.
The only difference is that now he would be
facing this predicament much earlier than
in the scenario where the bond reached full
maturity. DON’T PUT ALL YOUR EGGS
IN ONE BASKET !!!
Do you need income?
One of the features an annuity has is a
guaranteed income stream. Regardless of
what rates do, you continue to receive the
same, steady income for as long as you
live. So, let’s look back at our example with
Bob. Investing his $500,000 in bonds, Bob
experienced the downside to interest rate risk.
What if he had instead used that $500,000 to
purchase an annuity with an “income” rider?
Many riders today offer a 4-6% withdrawal
rate. So, if he purchased his annuity with
$500,000, he could generate up to $30,000 in
annual income for life. Income riders require
a fee - but, they could provide a welcome
income solution. One tradeoff is that, when
you receive income from your annuity you
may see your principal erode over time. If
Bob purchased an annuity rather than a bond,
he could still generate the additional income
he needed, free from the unpredictability of
markets. Annuities come with benefits, but
benefits aren’t free! Annuities are designed
as long-term vehicles, withdrawals are
generally taxable and, if taken before age
59 ½, are subject to a 10% federal tax.
Maybe you should consider an annuity as a
supplement to your income strategy?
YOU’RE ALMOST THERE!