Bonds: Many retirees have forty percent or more bond/fixed income holdings in their investment portfolios.  The largest factor in determining your future return from bonds is your starting bond yield. This bond yield is currently quite low.  As of this writing, the Barclays Aggregate Bond index yield currently is 1.48% (Morningstar).  So, over the coming three to five years, you might earn 1.48% plus or minus any appreciation or depreciation in your bond prices.  If and when interest rates go up, generally, your bond prices fall.  If the prices fall due to rising rates, then your net return on your bond holdings for the coming three to five years could be zero.  You might receive 1.48% in yield minus the drop in bond prices.  Any adviser worth their salt would say this is over-simplified, and for the purposes of this article, this is.  This is generally how the math on bonds works.  We are paying a lot of attention to the fixed income investments in our client portfolios right now.

IRA Conversions to Roth: Regarding conversions, you could be saving yourself a lot of taxes through partial annual IRA/401(k) conversions to Roth IRA’s.  A short example would be if you convert $20,000 per year from your Traditional IRA/401(k) to Roth IRA’s between the ages of 62 and 72.  At 72 you would need to start taking Required Minimum Distributions from your Traditional IRA. If you converted $200,000 over ten years to a Roth IRA, you would not have to take required distributions from your Roth account.  If the $200,000 grew to $400,000 over that ten years, this conversion would eliminate an estimated $16,000 in required distributions and likely save you $4,000 per year in taxes going forward (assuming a 25% Federal and State tax).  You would have to pay taxes to make the conversions, but over time you can regain the taxes paid in annual tax-savings and earn tax-free growth going forward. The fact that the current tax law sunsets in four years and taxes go up makes this a hot topic for today.  Conversions to a Roth IRA are powerful in your long-term plans. Every week we make the tax calculations and forecast the long-term growth in our client’s net worth over time. Make sure you get well-informed advice on this.

Social Security Drop: It is projected by the social security trust fund that you will have to bear a 21% reduction in social security income in the year 2035.  With massive government spending over the last year, and a need for more tax revenue by the government, it does not look like the government will be able to channel additional money to the social security trust fund to “fix” the 21% required drop in 2035.  If you are retired and ever inclined to write your Senator or Representative, this may very well be a good time to do so while we have some time to get social security fixed.  With time on our side there are options. Otherwise, the average reduction in income each year for our clients is about $8,000.  What might yours be?

We develop solutions for these challenges that lie ahead each week with our ClearView 360 process that we execute for our clients.  If you do not know what the challenges are, it is hard to plan, so I thought this article was timely.  A little planning goes a long way.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The views are those of Eric Johnston, CFP Financial Advisor and President of InFocus Financial Advisors, Inc. with offices in Georgetown, DE and Salisbury, MD.  These views should not be construed as specific investment advice. Investors cannot directly invest in indices. Past performance is not a guarantee of future results. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Eric is an Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.