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, he re’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,
62 TAMPA BAY MAGAZINE
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
| 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