Retirement Income Today


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Retirement Income Today

  1. 1. Windward Capital Newsletter704-237-4207 Retirement Income Today You’ve spent much of your life focused on the accumulation of assets and the time has finally come for you to retire. Or you are retired and don’t know how to generate retirement income in today’s low interest rate environment. Retirement calls for an investing strategy that provides income and, at the same time, protects and grows your assets to meet your longer-term needs.You want to make sure that you can live comfortably throughout your entire retirement, while staying protected from retirement risks such as longer life expectancy, unexpected health care cost and inflation. After prioritizing your retirement needs and determining your capacity for these risks, where do you invest? What Investment Options Are Out There? The following are a mix of some of the best investment options for generating income today. These are mostly conservative products great for investing for income today, with a few potential investments that could also provide inflation protection and capital appreciation to diversify your portfolio and protect the value of your investments. 1. CDs (Certificates of Deposit) CD’s are the familiar saving certificates with periodic interest payouts. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are generally insured by the FDIC (the US Federal Government). The term of a CD generally ranges from one month to five years. Pros: CDs can provide a steady income, perfect for retirees in need of cash flow. CD’s are generally insured by the FDIC, protecting investors from the bankruptcy of a financial institution. You have maturity date choices depending on your needs, with the longer maturities earning higher interest. You can set up a CD ladder by regularly buying CDs with varying maturity dates as a steady source of income. Above all, they’re simple and low risk, ideal for the hands-off, retiree investor. Cons: CDs have relatively low interest rates today and don’t provide a lot of income. In addition, with the low rates you run the risk of falling behind inflation. Generally, if you need capital before the CD matures you will have to pay a penalty for the withdrawal although there are new CDs that do allow early withdrawals. 5 Yr CD Rates: Ally 2.11% Bank of America 1.34% Fifth Third 1.25% First Community 1.01% Wachovia/Wells 1.50%
  2. 2. Windward Capital Newsletter704-237-4207 2. Treasury Bonds and Bills Treasury bonds and bills are marketable, fixed-interest U.S. government debt securities with a maturity of 30 days to 30 years. Treasury securities make semi-annual interest payments and the income that holders receive from these payments is only taxed at the federal level. Pros: U.S. Treasury securities are still considered one of the safest investments in the world. Despite the recent downgrade of the United States by the rating agency Standard & Poor’s, U.S. Treasuries still provide a relatively attractive risk adjusted yield. They are very liquid and the interest payments are exempt from local and state taxes. Cons: With the high security come low yields. U.S. Treasuries are subject to price fluctuations depending on factors such as inflation and expected future interest rates. As with CDs, if you need money before the maturity date you may not get back your entire investment depending on changes in market rates. T-Bond Rates: 2 yr 5 yr 10 yr 0.19% 0.91% 2.03% 3. Corporate Bonds A corporate bond is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the company’s ability to make payments, which is typically profit to be earned from future operations. Sometimes, the companys physical assets may be used as collateral for bonds. Pros: Corporate bonds almost always have higher interest rates than U.S. Treasuries. When economic conditions are strengthening or demand is up, prices can rise. They have potential to provide steady income. Cons: Corporate bonds do carry some risk of default with lower rated companies. They can experience price fluctuations so when the economy is weakening, prices can fall. “A” Corporate Bonds: 2 yr 5 yr 10 yr 1.25% 2.95% 3.41% 4. Bond Funds A bond fund is a fund invested primarily in bonds and other debt securities. The exact type of debt the fund invests in will depend on its focus, which may include government, corporate, municipal convertible bonds and other debt securities such as mortgage-backed securities. Pros: Investing in a bond fund provides diversification in a portfolio along with the security of bonds. Bond funds are also highly liquid.
  3. 3. Windward Capital Newsletter704-237-4207 Cons: There are typically ongoing fees such as management and operating fees which can eat into your earnings. Like individual bonds, bond funds are taxed but since income is distributed unevenly, the tax considerations are less predictable. They have low rates today and have moderate price volatility. Bond Funds: Vanguard Total Bond Market 3.20% Bond Fund of America 3.39% Fidelity Total Bond 3.67% PIMCO Total Return 2.77% Dodge & Cox Income 4.46% 5. Foreign Bonds A foreign bond is a debt security that’s issued by a foreign entity and denominated in a global currency like the US dollar. Foreign bonds can be issued by government entities or foreign corporations located in developed or developing economies. Pros: Diversifies your portfolio away from solely US risk, with the potential for higher yields. For US dollar denominated bonds, it’s a good way to add foreign diversification without adding exchange rate exposure. Cons: Holding any kind of foreign currency adds currency risk. Bond holders may not have the same legal rights in the event of default as a holder of a US bond holder would. Higher yielding developing market bonds can have higher price volatility. Foreign Bond Funds: Templeton Global Bond 5.21% Dreyfus International Bond 1.87% Maxim Global Bond 2.43% Putnam Global Income 6.28% PIMCO Foreign Bond A 5.77% 6. Preferred Stocks A preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders but the shares usually don’t have voting rights. Pros: Preferred stocks usually have predictable dividends and have higher priority over common stock in the event of bankruptcy or liquidation. They have high liquidity compared to bonds and steady income as long as the company does well. As with many equity investments, preferred stocks can offer some inflation protection. When inflation is high, companies may have the ability to pay out higher dividends. Cons:
  4. 4. Windward Capital Newsletter704-237-4207 You forfeit your voting rights and the board can vote to suspend dividends, leaving you with no income that year. There is moderate price volatility related to credit and market conditions. Preferred Stock Funds: iShares S&P US Preferred Index 7.90% PowerShares Preferred 6.77% Wells Fargo Preferred Stock 6.79% PowerShares Financial Preferred 7.16% 7. Dividend Paying Stocks A dividend paying stock is a class of stock which receives distributions of a portion of a companys earnings, determined by the profitability of the company and the board of directors. Pros: Steady income from profitable corporations granted they continue doing well. You receive income while still maintaining potential price appreciation; with non-dividend paying stocks the only way to get income is by selling your shares after a rise in price. Like preferred stocks, dividend paying stocks typically will also have higher dividend payments when inflation is higher. Cons: Dividends are taxed today at 15% vs. your marginal tax rate which could be higher. Equity investments can be high risk and if the corporation has financial difficulty or the stock market declines in value overall, the value of your investments could decline. Dividend Paying Stock Funds: Rochdale Div & Income Fund 3.75% Vanguard High Div Yield ETF 2.82% SPDR S&P Dividend ETF 3.33% First Trust MStar Div Leaders 3.71% Federated Strategic Value Div 3.47% WisdomTree Equity Income ETF 3.57% 8. REITs (Real Estate Investment Trusts) A REIT is a tax designation for a corporate entity investing in real estate or real estate related assets that reduces or eliminates taxes at the corporate level. In return, REITs are required to distribute 90% of their income, which may be taxable, into the hands of the investors in the form of dividends. Pros: REITs have strict rules on how their capital is invested, potentially allowing investors to earn consistent annual returns. As returns are tied to potentially higher yielding real estate investments, yields can be attractive versus fixed income securities. Cons: Only 10% of profits can be reinvested in the REIT so they can be associated with slow growth, or reliant on the capital markets for growth. The real estate market can be volatile and there is the risk of seeing low profits in slow years. REITs are traded as equity exchanges and are
  5. 5. Windward Capital Newsletter704-237-4207 subject to equity market volatility. REITs: AMB Property 3.10% Colonial Properties Trust 2.90% Duke Realty 6.10% Taubman Centers 3.10% Essex Property 3.00% 9. Mortgage-Backed Securities A MBS is a type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities pay periodic interest payments and principal payments based on the payment rate of the underlying mortgages. You are essentially indirectly lending money to home buyers or commercial real estate owners. Pros: The interest rate you receive on an MBS is among the highest of fixed income securities that are guaranteed by the US government. They are highly liquid and can be easily invested in through MBS funds. Many MBS’s are guaranteed by US government agencies so they are low risk investments as well. Cons: They have no tax benefits and are taxed by federal, state and local governments. Although they have higher returns than other securities, they still fall short historically of the returns earned on stocks. When rates drop, MBS’s typically get paid off early, so the investor’s high rate of return is cut short early. When rates are low, there is an extension risk. If rates rise, homeowners will stick with their lower interest mortgages through the full term, leaving you with low return. MBS Funds: Vanguard GNMA Inv. 3.20% Barclays MBS Bond 3.32% Fidelity GNMA Fund 3.13% JP Morgan MBS 4.60% T. Rowe Price GNMA 3.95% 10. Annuities An annuity is a financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Pros: They provide a steady stream of income, sometimes for a lifetime, helpful for retirement planning. Some offer inflation protection and adjust to the current cost of living. With fixed annuities, the value of your annuity is guaranteed to be at or above the value of your original
  6. 6. Windward Capital Newsletter704-237-4207 investment. Cons: With annuities you are sacrificing higher returns for certainty. Annuities typically have lower returns and are also inflexible. Be wary of the contract terms; once you buy a contract your capital can be tied up in that annuity so review carefully. Annuities: (62yr old, 10 yr, NC, $100,000) Fidelity 1.92% Hartford 2.65% 60yr old male, lifetime, $200,000 Pacific Life 4.60% 11. TIPS (Treasury Inflation Protected Securities) TIPS are treasury securities that are indexed to inflation in order to protect investors from the negative effects of inflation. They offer semiannual inflation adjustments where their par value rises with inflation. They can be bought directly through the government or through a mutual fund and are exempt from state and local taxes. Pros: They offer steady interest pay outs and are extremely low risk since they are guaranteed by the US government and have built in inflation protection. Cons: Due to the high stability and security from the insurance and inflation protection, TIPS have very low yields. TIPS 10 yr 20yr 30 yr 0.66% 1.42% 1.73% 12. Municipal Bonds Municipal bonds are debt securities issued by a state, county or municipality typically used to fund expenditures for schools, roads, airports and other infrastructure. They typically have semiannual interest payments and many muni’s are exempt from federal, and in many cases, state and local taxes. Pros: Like other types of debt securities, municipal bonds offer consistent income with relatively low risk. The credit risk of muni’s depends on the municipality issuing the debt and any guarantees that may be associated with the muni’s. Many municipal bonds are tax free which makes for a good investment for those in higher tax brackets. Cons: Unlike treasury bonds, muni’s are not US Government risk. Due to their tax exemptions, they have low yields. Also, their fixed interest rates make them vulnerable to diminishing value in the event of rising interest rates and inflation.
  7. 7. Windward Capital Newsletter704-237-4207 Municipal Bonds: 2 yr 5 yr 10 yr 0.39% 0.97% 2.06% Depending on your personal risk tolerance and financial needs, all of these investments could have a place in your portfolio. Each has their strengths and risks which need to be considered to construct a winning portfolio What are your concerns? Inflation? Returns? Security? Here are some suggestions on each: Top Inflation Protecting Investments to Help Maintain the Value of Your Portfolio · REITs · TIPS · Dividend Paying Stocks · Preferred Stock Funds Top Earners to Boost Returns · Preferred Stock Funds · Foreign Bonds · Mortgage-Backed Securities Top Safest Investments to Protect Your Nest Egg · TIPS · T-Bonds · CDs Creating a balanced portfolio of these and other investments is the key for success in generating consistent retirement income today and into the future. For additional information, please contact Windward Capital: (704) 237-4207 or The investment alternatives presented are not appropriate for every investor. Individual clients should review the terms and conditions and risks involved with specific investments with their Windward Capital Financial Advisor. Any information presented about tax considerations affecting the investment options is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Windward Capital does not provide tax, accounting or legal advice. Clients should review any planned financial transactions that may have tax, accounting or legal implications with their own tax, accounting or legal advisors. Windward Capital is a leading provider of financial advisory services. We are an independent Registered Investment Advisor, registered with the State of North Carolina. This information should not be construed as investment advice. It is presented for informational purposes only and is not intended to be a specific offer by Windward Capital.
  8. 8. Windward Capital Newsletter704-237-4207