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  1. #91
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    Default Re: Retirement

    Quote Originally Posted by CurlyDave View Post
    There are a couple of ways to look at this.

    If you are getting any kind of pension or SS benefits, advanced retirement and/or financial planners will frequently treat these as "phantom" bonds. I.e. you consider yourself as having fixed income bonds which would produce the same income as your pension or SS, possibly with a discount for the non-reliability of pensions.
    .........
    This is a valid point and one that is argued endlessly on financial forums. Factors to consider:

    How secure is your pension provider? Although the Pension Benefit Guaranty Corporation backs pensions, it is not like FDIC. If you are an early retiree you don't necessarily get all your pension and even if 65 years old, there are caps on the total. Airline pilots of failed airlines and more recently, Delphi employees got a stark reminder of this. The PBGC also does not cover health care benefits (and is nearly broke).

    A second factor is your psychological reaction of a sudden market drop. If you are prone to freak out and sell your stocks, you may get wiped out. Bonds can lose value if interest rates rise suddenly, but not nearly so dramatically and they continue to payout the same income.

    So, the crux of the argument is why take any more risk than you absolutely need to, to satisfy your retirement needs?

    That said, I have a pension and hold 30% bonds, which seems to be a sweet spot with respect to total returns over time, and risk. If my pension fails and the market has crashed, bonds give me 5 or more years to sit out a bad market.

  2. #92
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    Default Re: Retirement

    Quote Originally Posted by Travelover View Post
    This is a valid point and one that is argued endlessly on financial forums. Factors to consider:

    How secure is your pension provider? Although the Pension Benefit Guaranty Corporation backs pensions, it is not like FDIC. If you are an early retiree you don't necessarily get all your pension and even if 65 years old, there are caps on the total. Airline pilots of failed airlines and more recently, Delphi employees got a stark reminder of this. The PBGC also does not cover health care benefits (and is nearly broke).

    A second factor is your psychological reaction of a sudden market drop. If you are prone to freak out and sell your stocks, you may get wiped out. Bonds can lose value if interest rates rise suddenly, but not nearly so dramatically and they continue to payout the same income.

    So, the crux of the argument is why take any more risk than you absolutely need to, to satisfy your retirement needs?

    That said, I have a pension and hold 30% bonds, which seems to be a sweet spot with respect to total returns over time, and risk. If my pension fails and the market has crashed, bonds give me 5 or more years to sit out a bad market.
    My employer had a lot of money held in muni bonds and suffered a tremendous loss when Orange County went under... part of the problem was extra stress when interest rates started to rise. Several million dollars earmarked for Hospital expansion were affected.

    Several of the Physicians also were heavy in these bonds as they were set to retires...

    Whenever I hear bonds I think of what happened around me...

    Orange County's financial disaster was the result of unauthorised trading activity by a man called Bob Citron. He ran the county's funds on an extremely leveraged basis to achieve higher returns. Indeed he had a very good track record and consistently produced, over his peers, on average 2% more returns for his investors, namely schools, special districts and the county itself.

    In December 1994, Orange County revealed that its investment pool had suffered a loss of $1.6 billion. This was due to increasing interest rates courtesy of the Federal Reserve and resulted in the County going bankrupt.

  3. #93
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    Default Re: Retirement

    Quote Originally Posted by ultrarunner View Post
    ..........Whenever I hear bonds I think of what happened around me...........
    Good point - I wasn't clear. When I say bonds, I mean a bond fund, like Vanguard Total Bond. It holds corporate, municipal and government bonds and is extremely diversified. So, if any single bond issue defaults, the loss is spread out over thousands of others.

  4. #94
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    Default Re: Retirement

    You can bad mouth muni bonds, how ever I have done well with them in the past when interest rates were hi and going up, for me it was a license to steal. It is a mater of timing, most people do not understand how the bound market works.

    You go and buy a XYZ $1,000 bound due in ten years paying 5%., that is $50 a year for 10 years and at the end of ten years you get your $1,000 back. You have a $500 return on your investment at the end of 10 years. That 5% interest is called the CUPON rate and never changes.

    A week after you buy the XYZ bounds the interest rates go to 10%. Now you are getting a 5% return in a 10% world. What happens to your bonds?

    A] The value of the XYZ bounds had dropped. How much? Paying 5% in a 10% world, 5/10 = 1/2, therefore the XYZ bounds are worth $500 on the open market. Have you had a loss? Maybe yes, maybe no, it all depends on what you do. Yes, there is a PAPER loss of $500. As long as you hang on to the bounds for the ten years you will get the $500 in interest and your original $1,000 back.

    B] You must sell the XYZ bounds and have a $500 loss because of the market value.

    C] You wish to buy bounds in the 10% world. You may find a sale that needs to unload the XYZ bounds or you may buy a new issue ABC bound paying 10%. Both the XYZ and the ABC bounds will pay the same amount of interest for the money you invest. ABC pays 10% on $1,000 = $100. The XYZ bounds pay 5% on the market price of $500 = $50, buy two XYZ units for $1,000 and you get a return of $100.

    Which would I buy, ABC or XYZ, both pay the same?

    My choice would be the XYZ because at some time, say a year later interest rates go to 7%. Why would anyone pay 10% in a 7% world, the ABC bounds are paid off, you get the $1,000 investment back and all the interest to that date.
    However the XYZ bounds are still paying you 10% on the $500 you invested and that is in a 7% world. You may wish to hold the XYZ bounds for their 10 year life. You get all the interest for those years, $500 and the original face value of each bound of $1,000. You have a capital gain of $500 for each bound at the end of 10 years, taxable.

    Now that is an over simplification but it should give you an idea of how things work.

    Now as bad as a city default is they must pay on the bounds or they will never, never be able to issue bounds in the future. They may not be able to meet the yearly obligations but the interest meter is running and if you can wait it could be a good deal. That is what I did with NYC Mac bounds, bought them at a big discount and put them in a safty deposit box for years. Lots of $$$ on the payoff.
    Last edited by Transit; 02-10-2011 at 04:09 PM.

  5. #95
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    Default Re: Retirement

    I use Vanguard's Short-Term Bond Index Fund (VMMXX). The book I posted about above states something along the lines of short-term bonds having historically had the poorest correlation to stocks. Which is just what I want.

  6. #96
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    Default Re: Retirement

    Quote Originally Posted by Transit View Post
    You can bad mouth muni bonds, how ever I have done well with them in the past when interest rates were hi and going up, for me it was a license to steal. It is a mater of timing, most people do not understand how the bound market works.

    You go and buy a XYZ $1,000 bound due in ten years paying 5%., that is $50 a year for 10 years and at the end of ten years you get your $1,000 back. You have a $500 return on your investment at the end of 10 years. That 5% interest is called the CUPON rate and never changes.

    A week after you buy the XYZ bounds the interest rates go to 10%. Now you are getting a 5% return in a 10% world. What happens to your bonds?

    A] The value of the XYZ bounds had dropped. How much? Paying 5% in a 10% world, 5/10 = 1/2, therefore the XYZ bounds are worth $500 on the open market. Have you had a loss? Maybe yes, maybe no, it all depends on what you do. Yes, there is a PAPER loss of $500. As long as you hang on to the bounds for the ten years you will get the $500 in interest and your original $1,000 back.

    B] You must sell the XYZ bounds and have a $500 loss because of the market value.

    C] You wish to buy bounds in the 10% world. You may find a sale that needs to unload the XYZ bounds or you may buy a new issue ABC bound paying 10%. Both the XYZ and the ABC bounds will pay the same amount of interest for the money you invest.[[[ ABC pays 10% on $1,000 = $100. The XYZ bounds pay 5% on the market price of $500 = $50, buy two XYZ units for $1,000 and you get a return of $100.]]]

    Which would I buy, ABC or XYZ, both pay the same?

    My choice would be the XYZ because at some time, say a year later interest rates go to 7%. Why would anyone pay 10% in a 7% world, the ABC bounds are paid off, you get the $1,000 investment back and all the interest to that date.
    However the XYZ bounds are still paying you 10% on the $500 you invested and that is in a 7% world. You may wish to hold the XYZ bounds for their 10 year life. You get all the interest for those years, $500 and the original face value of each bound of $1,000. You have a capital gain of $500 for each bound at the end of 10 years, taxable.

    Now that is an over simplification but it should give you an idea of how things work.

    Now as bad as a city default is they must pay on the bounds or they will never, never be able to issue bounds in the future. They may not be able to meet the yearly obligations but the interest meter is running and if you can wait it could be a good deal. That is what I did with NYC Mac bounds, bought them at a big discount and put them in a safty deposit box for years. Lots of $$$ on the payoff.
    Looks like a math error?
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