When interest rates rise, how severely can retiree bond portfolios be affected?

A lot of retirees are probably alarmed about the drops in the valuations of both stock and bond funds.

  

It’s hard to judge how much bond fund portfolios will be affected as interest rates rise, as there are many different rates.  A quickly look at the Wall Street Journal yesterday showed that many interest indices had varied by almost a factor of 2 in the past 52 weeks.  For example, Dow Jones Corporate had varied from 2.370% to 4.321% over a year (page C5 Money and Investing; it’s well to buy a paper copy once.) .

  

It sounds dangerous to buy bonds when interest rates are low, because a rise will be relatively more.  If a bond had been paying 1% and the prevailing rate jumped to 2%, the value of the bond would have to drop by 50% to pay the same yield.  (Take the reciprocal of the relative percentage increase – it sounds like an Algebra I test problem,)  But bonds are also affected by “duration”.  Long-term bonds are more affected by interest rate swings than short term.

It's significant that people can hold individual bonds to maturity, and bond funds often don't (although Suntrust seems to hold tax-exempt bonds for munis that way in my experience).  I've noticed that a MetLife variable annuity has lost a lot more value in the past week than most bond funds; I don't know why itself, except that one or two fund components of it did were hit unusually hard after Bernanke's remarks last week.

  

I found a few references explaining all this. ICI, Schwab, Fidelity, and USA Today. 

New link provided to me by a visitor today. (2017/4/19)

Retirees need to see infrastructure spending to help bond portfolios

Rick Newman is writing on Yahoo! finance that rising interest rates as imputed by Bernanke won’t help savers, because the rates affected are mostly long term, as in this article. 

The unfortunate effect on retirees is that bond funds drop in market value (because of higher rates and because the Fed and China may not buy as many of them) and higher yields are slow to re-enter, to produce income, because older bonds have to mature.  And stocks drop. Total nest eggs can drop 20% easily, 

The Fed’s action may have been motivated by a desire to defuse a future debt ceiling crisis, which some people say could jeopardized Social Security payments (but we don’t think so, as we have explained recently). 

   

The best policy hope for retirees is for some big infrastructure projects (schools, roads, railroads, communications, and especially hardening the power grid) –  upping the demand for bonds.  Obama might be good for this.

Wall Street throws a tantrum (at retirees?) after Fed chairman tells the future truth

Wall Street threw up a temper tantrum late yesterday (let's say that it vomited), which has continued Thursday, after Federal Reserve Chairman Ben Bernanke “didn’t keep his mouth shut”  (that’s what one friend tweeted) and warned that Fed stimulus would ease as the economy and employment improve.  One trouble is that interest rates are rising slowly as the housing market also recovers.

   

A typical Yahoo! story on “Buy and Hold” is here. 

   

There’s no question that right now there is a lot of irrational emotion in the market.  Bernanke may sound too rosy on jobs, too;  ask Barbara Ehrenreich about her research on low wage workers, who are often retirees.

      

The problem for retirees is that bond go down as interest rates rise, and stocks go down too when the Fed lets up on stimulus.  On the other hand, raw cash in savings accounts may pay a little more again, as may fixed-term CD’s, and interest payments from new bonds will rise.  In recent years, retirees have built portfolios loaded with non-cash instruments with interest rates so low, and some could see their net worth drop quickly in the short run.

   

Oil prices are also lower, as are gold prices (which does not please the rural Doomsday Prepper crowd).

   

The behavior of any specific portfolio on any given day is hard to predict.  Just because the Dow slips a couple hundred points doesn’t always mean that particular portfolios get hurt a lot.  It’s quite variable. 

Later Thursday, Mark Gongloff wrote about the Fed's behavior (after Thursday's 353 point drop in the Dow) in Huffington. here. The rise in interest rates is not accompanied by an expectation of inflation, as it usually would be.  On my own portfolios, Wells Fargo Advisors has marked practically everything (mutual funds, both stocks and bonds) a "buy", as if it thinks everything is now undervalues. 

You can max out on both 401(k) and IRA contributions in the same year

In the days long before social media and even email listservers, my father subscribed to “private” financial circulars by mail, like the Kiplinger Washington Letter, which was quite respected in the 1960’s and 70’s.
     

It’s around on the web, and today I saw a short piece by Kimblery Lankford, “Maxing out on retirement contributions”, link .

She recommends maxing out both your 401(k) and IRA contributions in the same year if’ you’re working and have the capacity to make both.  She writes that you can contribute up to $17,500 to your 401(k) and $5,500 to your IRA, a total of $23,000 to shelter. 

  

 But to make the $5,500 contribution to the IRA you actually have to “earn money” through work (it can be self-employment) to cover it.  Social Security, annuity and investment payments don’t count.
 
Columnist Michele Singletary tweeted this story today. 

   

Banks help underhanded telemarketers bilk elderly customers

The New York Times is reporting on a troubling trend among banks to participate in telemarketing schemes designed to bilk seniors out of their money.  The news story, by Jessica Silver-Greenberg, starts with an account of a telemarketer called an elderly man in Tidewater Virginia and got him to “update” is supplementary health insurance (for Medicare?)  fraudulently. The link is here.  The bank involved was Zions in Salt Lake City.  No mention of any putative connection to LDS, but this does sound odd and disturbing.

   

I find that landline calls from telemarketers (both to sell and solicit donations) are incessant despite the “do not call” list of the FTC.  But I often hear the line that working in a phone bank is the only kind of job some people can get.  I’ve talked about that on the job market blog before.  The uneven economy simply encourages more desperation by companies. 

Should consumers just not pick up the phone/  Now Comcast Xfinity will display the incoming call number, city of origin, and sometimes name of caller or company on the television screen.  

  

ABC 20-20 one time had reported that a bank in Montana “quietly” encouraged a marijuana business to help keep a farm from going into foreclosure. 

New York Times says, stay the course in maintaining Social Security

The New York Times has a good summary editorial on page A20, “What’s next for Social Security: Benefits are shrinking while retirement needs are growing”,  Monday, link here. 

The Times says that the GOP just wants to cut benefits for those who no longer “need it”, rather than take all the incremental steps to keep Social Security solvent beyond 2035 – raising retirement age, raising payroll tax limits, and the like.

The NYT points out that the effective benefits are dropping anyway, partly because tax rates (effectively) are going up as other income for better-off retirees goes up, and benefits go down as the full retirement age creeps up.

Social Security should be “fixed” by making it actuarially and contractually sound, not by playing God with who needs it.  

Replacing all your teeth in one day with implants and dentures for a new smile -- and you'll "get it" during the process

The ad-sphere has been cluttered  with commercial promising replacing all of one’s teeth with implants – possibly pulling them all day, coming home with a new smile. And there are plenty of potential customers in my age group. 

“Clear Choice” is perhaps the best known of the operations that do this.

Today,. I had this done by a private periodontics socialist and my later mother’s dentist.  The price was probably a bit lower.

I had lost a lot of teeth already, and the uppers were replaced by a  typical removal denture, anchored by the few good teeth lest.  But the lowers are a total non-removal denture, anchored by five implants.  (Actually, that’s how all implant replacements work.) 

One of the interesting aspects was that it was done with sedation.  Valium and Demerol made the two and half hours to do the lower extractions pass very quickly as a blur. Things seemed to slow down with the fitting of the dentures – the exact sculpting, the xrays, and the extra time to test a new process to make a backup copy of the template impressions right in the office. The whole day kept me the there ten hours – overtime.

  

I didn’t know that conscious sedation required ECK monitoring.  So, I “got it”, just like in a disco: the female attendant pulled up my shirt, without consent, and pasted on electrodes.  Fortunately, there were some peripheral areas without much hair, and only three electrodes were required (instead of the usual ten).  But after a backroom break, she had to attach three new ones.  Sedation iv was in the elbow, rather than at the hand or writs, as often in the hospital.  Conscious sedation does require abstaining from food for four hours before the appointment, and doing without food or drink all day.  In that sense, it’s like an all-day outpatient surgery day. 

I suppose we could engage a discussion here why Medicare doesn't cover dental (except for biopsies), and why employer-baaed dental insurance is so weak on "the big stuff".  

Metro subway ad warns seniors on availability of long term care in the future

Last night, on the Orange line Metro in Washington, I saw a billboard ad from the Save our Seniors Coalition (SOS), with website “Care, not Cuts” (link) .  In garish yellow, the ad said that 70% of todays seniors who are 65 or older will need long term care at some point.  “Good luck finding it”, the board says.

Another sponsor of the ad seemed to be the American Health Care Association (link). 

  

I did my part, and purchased a policy from Lincoln near the end of 2011.  There was a phone interview (including a short term memory test), and a doctor’s physical report, but no monitoring.  An earlier home visit from  a salesman (“Greentree”?)  in 2008 had suggested considerable monitoring was needed to purchase a policy.  In 2009 I was also approached by Cornerstone.