Thought for the day:

Life expectancy would grow by leaps and bounds if green vegetables smelled as good as bacon.                                                                                Doug Larson

If you will read no further:

Some of you missed the article on the Longevity Bond a couple weeks ago click here to copy and read later.

Thought for the week:

I have been reading a lot lately about the coming “pop” of the bond bubble.  Billions of dollars will be lost when interest rates rise as the Fed continues to print more money and buy more bonds.  We common folk who use bonds to protect us from the volatility in the market and provide stable retirement income are going to be the losers.  By turning to dividend paying stocks we can mitigate the bond risk, but we are replacing it with additional stock risk.

The main use of bonds in a portfolio is to provide a stable retirement income; and in some cases we invest the income in stocks to dollar cost average for future additional needs. Consider the annuity (fixed version -VAs are just way too expensive) that can guarantee annual lifetime payments of 6% to 9% or more. Now with those clients who don’t need additional income at this point, you use it to dollar cost average into their managed account.

Your client is a 70 yr old widow in good health.  Cash in those bonds before they collapse and purchase a $150K immediate annuity that will pay 9,750 per year (6.5%) for the rest of her life.  As long as she doesn’t need to spend the income, dollar-cost average it into the managed account to accumulate another $140,000 (assuming you can net her 6%) by the time she is 80; at which time she could annuitized that for about 13,000 per year.  So now she has a tax-favored income of $22,750 (15.2%) off of her original $150,000 that will continue as long as she lives.

If we suffer from extreme inflation and interest rates rise, her deposits into the stocks will expand her total value and her income whenever needed….all this with a fraction of the volatility and risk that exists when all of her money is in stocks and bonds.

No.  I’m not saying do this for every client or with all their money.  For single retired clients, a portion of their money in this strategy, reduces portfolio volatility, improves the rate of return on invested money and increases predictability of results.   The less money your client has to support their retirement the more valuable the annuity element becomes.

Add a MoneyGuard or other long-term care product to the mix and she can protect a greater portion of her legacy to her children and grandchildren as well.