Preserve Your Wealth & Retire Comfortably


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This ebook teaches you how you can use the strategies of fixed income investing to help ensure you have enough income during your retirement by reducing investment risk so you can focus on more important things during your retirement. I show you how to use fixed income to:

1. Minimize losses to your retirement savings
2. Generate a steady, predictable income
3. Reduce your tax liability
4. Reduce future interest rate risk

It is the culmination of 22 years of professional financial experience helping clients just like you make certain they generate enough income in their retirement to enable them to live the life they’ve worked so hard to achieve.

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Preserve Your Wealth & Retire Comfortably

  1. 1. 1 How do you make sure – 100% sure – that you can live off of your savings for the rest of your retirement? This e-book is the culmination of 22 years of professional financial experience helping clients just like you make certain they generate enough income in their retirement to enable them to live the life they’ve worked so hard to achieve. I am now teaching you how you can use the strategies of fixed income investing to help ensure you have enough income during your retirement by reducing investment risk so you can focus on more important things during your retirement. You will learn how fixed income investing can give you complete peace of mind by providing steady, predictable income – even through the toughest of recessions and the worst economic crashes. This eBook gives you everything you need to gain peace of mind in your retirement by learning how to use fixed income investing to: 1. Minimize losses to your retirement savings 2. Generate a steady, predictable income 3. Reduce your tax liability 4. Reduce future interest rate risk You’ve worked hard your entire life for this moment…. You’ve successfully built your retirement savings…. You’re ready to live the retirement you’ve dreamed, But there’s just one thing standing in your way…
  2. 2. 2 Mission #1 Minimize losses to your retirement savings How much risk is enough at retirement? I can tell you that less is definitely more. I saw people who had worked hard their entire lives only to lose a huge amount of their wealth during the last recession. Just a massive amount – forty percent. Nearly half of everything they’d managed to save over the last thirty years. It was heart breaking. All their hopes, dreams and plans just stripped away, and left totally powerless to do anything about it. In fact, they’re still suffering. Their investment accounts have just recently recovered to where they were before the recession. They’ve actually lost years’ worth of growth opportunity because they were over-exposed to the risks of the stock market. It’s why I do what I do. I’ve seen too many people hurt by the markets just when they’re about to start enjoying everything they’ve worked towards. In good times, the stock market can be great. But it can be disastrous, too. You need to avoid losing your hard-earned money right when you need it most. It’s not about how much you have; it’s about how much you can afford to lose.
  3. 3. 3 Should you choose safety or growth? When it comes to your retirement, safety wins every time. The reason is simple: when you retire, you don’t have another chance to make up for any losses in the markets. Putting your savings on the line simply isn’t worth the risk. It’s all about protecting what you have. Let me give you a very real example. Let’s say you’ve saved $500,000 for retirement. If you’re chasing growth by investing in the stock market and lose fifty percent of that, you don’t have another ten years of working history to rebuild the balance. And there’s almost no chance that you’d be able to get back to your original $500,000 by investing again. In fact, you would have to generate a 200% return to get back to $500,000 if you lost half of your wealth. The money’s just gone, and you’re left to pick up the pieces. The pain is very real. Fixed income investments can give you the stable retirement you’re seeking The great thing about fixed income investing is that you know exactly what the road up ahead looks like. You invest for a fixed period at a fixed interest rate, and you’ve got powerful guarantees that reduce your risk. So, what is fixed income investing? Fixed income investments are made up of different types of bonds and Certificates of Deposit (CDs). Bonds are bought from the federal government, municipalities, blue chip corporations, federal agencies or banks. These types of bonds are some of the safest investments available anywhere. A lot of these bonds – like treasury bonds – are backed by the federal government. Others, like CDs for example, are insured to their full value. So even in the very worst case scenario, if there’s another major financial crash, you’re completely protected.
  4. 4. 4 Putting retirement investments back into the bigger picture This might sound strange from a financial advisor, but I think the less time you spend being concerned about money the better. Retirement is about making the most of life: spending time with family, taking up those hobbies you always had in the back of your mind, exploring new places or basking in the sun. And this means having complete peace of mind. If you know for sure that you’ve got a steady income and all your wealth is protected, you can get on with what really counts – living a good life. Wealth preservation is the key to a safe, stable and pleasant retirement. We know from experience that the potential downsides simply outweigh any gains you might expect. Losses could lead directly to a very negative impact on your day-to-day life. Reduce your risks The last thing you need when you retire is to worry about what might or could happen right around the corner. So we think you should be aiming for low-risk investments. Wealth protection is the name of the game. Holding a portfolio of individual bonds through to maturity is unaffected by stock market movements and interest rate changes. While everyone else is running around worried about stock market volatility, you can relax and avoid the mayhem that often comes with investing in the stock market. There are market prices for individual bonds and these do change over time. However, if the investor holds the bond to maturity, he/she will be unaffected by the bond’s price changes. Historical evidence also clearly shows that investment-grade bonds with triple “A” (AAA) ratings are amazingly safe investments.
  5. 5. 5 If held to maturity, there is almost no chance of AAA rated municipal bonds defaulting. There is also less than a one percent chance of default on high- grade corporate bonds. Certificates of deposit are completely risk free because they are insured. Treasury bonds and those issued by federal agencies are backed by the federal government. Both of these types of bonds offer lower yields than municipal and corporate bonds, however. In practice, you are able to reduce your risk by diversifying your fixed income investments across different types of bonds, corporate sectors, and geographic location. Mission #2 Generate stable, predictable income The first thing you need to do to calculate your ability to afford your retirement is to look at your cash flow and figure out how much money you need each month or year to afford the lifestyle you want. Safe, predictable fixed income investments fill the gaps of your income needs that aren’t covered by Social Security, pensions and other sources. Because bonds can have fixed terms with fixed-rate rates of return, you know for sure that you will get that money regardless of what happens in the stock market. You create your own annual income Fixed income investments allow you to build portfolios that provide a very specific amount of income -- income that’s essential in meeting your retirement lifestyle needs. The fixed terms of bonds and similar investments allow you to “ladder”. With laddering, you stagger the bond investments so that they mature every year.
  6. 6. 6 For example, if you needed a yearly income of $20,000, you would plan out your investments so that you had $20,000 worth of bonds maturing every year. This eliminates the need to watch your investments, worrying as prices go up and down. You can simply get on with what’s important – making the most of your retirement. An example of how to create the retirement income you need Here’s an example of how you would build a bond portfolio to meet your annual income needs: Let’s assume the following:  You need $20,000 per year in extra income starting in 2015  You currently have $600,000 in investable assets  Inflation is 3%  You have a time horizon of 8 years  Internal rate of return = 3.6% The cost of CDs and bonds in this portfolio is $160,000. The remaining $440,000 will be used to purchase equities using no-load index funds and exchange traded funds (ETFs) for growth and as a hedge against inflation. Year of Maturity Cash flow needed adjusted for inflation Coupon Interest Principal Portfolio cash flows 2015 $20,000 $5,544 $15,000 $20,544 2016 $20,600 $5,004 $16,000 $21,004 2017 $21,218 $4,428 $17,200 $21,628 2018 $21,855 $3,809 $18,500 $22,309 2019 $22,510 $3,143 $19,700 $22,843 2020 $23,185 $2,434 $21,000 $23,434 2021 $23,881 $1,678 $22,500 $24,178 2022 $24,597 $868 $24,100 $24,968 $177,846 $26,908 $154,000 $180,908
  7. 7. 7 As you can see in the above table, we’ve created a portfolio that starts yielding $20,000 in income in 2013 and increases at least 3% per year to keep up with inflation. Mission #3 Reduce your tax liability Taxes can eat up a significant portion of your income in retirement. Your 401k, Social Security, and other income are all subject to federal and state taxes…EXCEPT FOR income earned from municipal bonds. Municipal bonds have the benefit of being tax-exempt in the state where you reside. This means even more money in your pocket, when you need it the most. Taxable bonds are used strategically in fixed income portfolios because they provide higher rates of return, but you usually put them into tax-wrapped individual retirement accounts (IRAs) and 401(k)s to minimize your tax exposure on gains made on these investments. What you’re essentially doing with sophisticated fixed income investing is reducing taxes by reducing your taxable income. Given that up to 85% of your Social Security benefits may be subject to federal taxes, it’s important you make sure that you’re not paying more than you need to. Finally, there’s a new 3.8% Medicare tax that’s due to start in 2013. If you’re in a high income level of $200,000 or more this will have an impact on you. Investing in tax-free bonds, however, frees your income from this additional Medicare tax because the bonds are not subject to the proposed Medicare tax.
  8. 8. 8 Mission #4 Protect yourself from future interest rate risks Nobody can predict the future, but you can protect yourself from the future if you know how. Building bond ladders allows you to “immunize” your bond portfolio from the very real risk of rising inflation rates. How does a bond ladder work? You take a portion of your bond portfolio maturing at the end of every year. If interest rates go up, you take the money you receive at year’s end and reinvest it at the newer higher interest rate. So while the cost of living may get more expensive with inflation, you can protect income by essentially cancelling out the effect of higher cost of living due to inflation, because you’re now earning a higher return on your fixed income investments. Lower your investment costs If you buy individual bonds, you pay a commission (called a “spread”) which is only paid once, if the bond is held to maturity. Typically, these are very reasonable expenses, varying between 0.2 and 2 percent. A bond “fund” is a pooled portfolio of bonds but without the predictable characteristics offered by individual bonds. With a bond mutual fund, you’re paying a fund manager as much as 2 percent every year, and there may additional commissions and costs when sold. Since this can significantly eat away at your returns, and because fund managers usually don’t hold bonds until full maturity, we tend to avoid bond mutual funds entirely.
  9. 9. 9 But don’t bonds have lower returns than the stock market? On average, yes, but remember the name of the game is wealth preservation, not wealth accumulation. It is far better to be 95% certain of a 5% gain than 50% certain of a 10% gain. Historically speaking, stocks have outperformed bonds over the long run, on average, BUT, let’s take a look at the past decade. As you see in the below chart, the Total Bond Market Index actually outperformed the Total Stock Market. Name Ticker Inception Date Worst 1 Year Return 10 Year Avg. Return (as of 3/31/12). Vanguard Total Bond Market Index VBMFX 1986 -00.76 in 1999 5.51% Vanguard Total Stock Market Index VTSMX 1992 -37.04 in 2008 4.92% Not only would you have significantly reduced your investment risk, but you would also have come out ahead. This isn’t guaranteed to happen every time, but this example shows that when it comes to investing for your retirement, investing in stocks doesn’t necessarily produce higher returns. The final takeaway If you take one just one thing away from this e-book, your investing goal for retirement should be about preserving your wealth and building a steady annual income that meets your lifestyle needs while reducing your risks.
  10. 10. 10 I hope this overview of how you can use and benefit from fixed income investing for your retirement was of value to you. While the exact mechanics of building the right fixed income portfolio are more detailed and complex than what can be succinctly explained in this book, the scenarios and outcomes outlined here are very real. I encourage you to think more about how fixed income investing can help you achieve your retirement goals. I am happy to answer any of your questions and can be reached at Happy Retiring…. Russell D. Francis, CPA, CFP® Portland Fixed Income Specialists, LLC is registered as an Investment Advisor with the State of Oregon Department of Consumer and Business Services. All information contained in this ebook concerning investments is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can be made only in states where Portland Fixed Income Specialists, LLC is registered or an exemption from such registration is available, and no new account will be accepted unless and until all local regulations have been satisfied.