Month: July 2014

Retirees often have the bulk of their portfolios in bonds, which tend to offer stable income. But you shouldn’t assume they’ll always perform well, thanks to the possibility of interest-rate increases.

As you may recall, the U.S. Federal Reserve Board (Fed) reacted to the 2008/2009 financial crisis by keeping interest rates near all-time lows to stimulate consumer spending (which is key to any economic recovery.) But interest rates can’t stay low forever, and the Fed has indicated that they’re poised to increase rates, perhaps as soon as 2015.

That may be a problem for bond investors. Generally, bond prices move in the opposite direction to interest rates. Higher interest rates drive bond prices down, and vice versa.

Why? Say, you buy a newly issued $10,000 bond when interest rates are at 8 percent, so your bond yields 8 percent, or $800, annually. But after your purchase, the prevailing interest rate increases to 9 percent.

Now a newly purchased $10,000 bond yields $900 annually. If you wanted to sell your bond, nobody would pay you $10,000 to get $800 interest when the going rate is $900. You’d most likely have to reduce your price.

While the threat isn’t immediate, it’s not too early to consider how to try to protect your bond portfolio from this possibility. For example, you might consider moving your bond investments to mutual funds that invest in floating-rate loans or Treasury Inflation Protected Securities (TIPS).

Your advisor can help you determine if any of these investments are appropriate for you.

In today’s challenging economy, many people who aren’t yet of retirement age may want to withdraw money from their Individual Retirement Accounts (IRAs.) It’s generally a good idea to keep your IRA assets untouched until you can withdraw them penalty-free at age 59½, but if you need to make an exception, you’ll want to do so while avoiding tax implications, if possible.

The bad news? Typically, an early withdrawal from a traditional IRA is considered income, and taxed at your regular income-tax rate. Additionally, you may get hit with a 10 percent penalty. Depending on your tax bracket, that could add up to more than one-third of your money.

While it’s virtually impossible to avoid paying income tax on the withdrawal, you might be able to avoid the penalty by taking advantage of these exceptions:

• You can withdraw the money penalty-free to cover medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) for any tax year.
• You can also withdraw the money to cover health insurance premiums, but this is only penalty-free if they’re used to pay the premiums for you, your spouse, or your dependents when you are unemployed.
• And you can withdraw the money penalty-free to cover higher education expenses for you, your spouse, child, stepchild, or adopted child.
• Additionally, withdrawals taken as substantially equal periodic payments (SEPPs), which are annuity-like IRA withdrawals you take at least annually, are penalty-free. But, SEPPs are available only under certain circumstances.

Many of these techniques are complicated. For example, in regard to SEPPs, you must continue taking the exact amount of the SEPP for at least five years, or until you reach age 59½, whichever is later. As a result, you should contact your advisor for professional advice before using any of these strategies. He or she can tell you what will work best given your individual financial situation.