The Herald Bulletin

Morning Update

Local Business

April 18, 2014

'Big Joe' Clark: Understanding the risks within fixed income investments

Retirement is a tricky proposition and sometimes downright confusing. Many assumptions have to be rendered before an individual can confidently leave the workforce.

Addressing life expectancy and forecasting your budget are two obvious areas to consider, but there are more than 23 major assumptions that have to be identified in order to provide reasonable confidence in a decision that will generate an income stream for the next 30 years of life after work.

The issue of understanding income — not to mention inflation, tax rate assumptions, etc. — can also be challenging. Many retirees associate the concept of taking “risk” with the equity markets. However, as 2013 demonstrated, there is also principal risk in the fixed income arena if an untimely liquidation requires you to sell bonds and generate income.

When fixed income matures (a bond comes due), you endure reinvestment rate risk. That is the possibility (risk) that the new bond may have a lower coupon than the one that just matured. This situation can be devastating to an income portfolio.

The year 1980 coincided with the peak of inflation. I wasn’t in the industry at that time, but if I were there is no doubt I would have heard a client state, “Joe, here is my million-dollar nest egg. Don’t lose it!” Had I put the money in certificates of deposit at the local bank in 1980, the return would have been $140,000 per year, as the annual yield on a longer- term CD at that point was 14%!

Before you begin reminiscing, “those were the days,” refer back to the annual inflation rate at that time. But that is another story.

By 1990, yields on CDs had fallen to 5.5% and your $1 million nest egg’s returns would have declined by almost two-thirds, to $55,000 a year. As the planner I could say I had done my job of protecting your nest egg, but it would have destroyed your expected income stream. By 1990 I was indeed in the industry and the fictional example became a living reality.

Text Only
Local Business
  • FEA - HB0729 - Senior Falls Aging safely in the comfort of her home Marilyn Moneyhun said being totally reliant on others is difficult. "Losing your independence is a shock to your system," Moneyhun, 84, said. "You are not in control anymore."

    July 29, 2014 1 Photo

  • NWS - HB0728 - business expansion CB Fabricating makes $2 million investment

    A local business founded in 2006 has invested $2 million in new equipment and a building expansion.

    July 29, 2014 1 Photo

  • Charo Boyd: 'My Social Security' simplifies your life So many people buzz through extremely busy and complicated schedules these days. A smartphone in one hand, a computer in front of you, and a digital task list that never seems to end. In addition, to complicate things just a little more, there’s another event you need to add to your list — National Simplify Your Life week.

    July 28, 2014

  • nws - hb0725 - colts - jc - 4.jpg Colts camp's impact: pricey or priceless?

    Football fever is here and the city is flooded with fans eager to catch a glimpse of a favorite player. But officials say they are unclear what kind of economic impact the Indianapolis Colts training camp has on the area.

    July 26, 2014 1 Photo

  • BIZ - HB0727 - Skill gap 2 Seeking a solution today, not tomorrow Tina Warner-Morton says she wants to open her own healthcare business because it is too difficult to work for an employer with unclear employee expectations.

    July 26, 2014 1 Photo

  • BIZ - HB0727 - Cathy Cupboard Biz Profile Business Profile: Cathy's Cupboard focuses on customer satisfaction Cathy McPhearson opened her first storefront in June, but this is not her first venture into business. “I have always wanted to have my own business,” she said. “The problem was finding what people like, but everyone seems to like candles.”

    July 26, 2014 1 Photo

  • IU Health Ball Memorial Hospital named Level III trauma center The Trauma Center at Indiana University Health Ball Memorial Hospital has been verified as a Level III Trauma Center by an ad hoc committee of the Committee on Trauma (COT) of the American College of Surgeons.

    July 26, 2014

  • Clark, Big Joe mug 'Big Joe' Clark: Beat the market or meet your goals? True or not, my experience tells me that goals – especially when written down – undoubtedly serve as catalysts for success. However, danger arises when a goal does not properly focus on the long term result you expect.

    July 25, 2014 1 Photo

  • DSC_8125.JPG Auction teaches in business, farming

    After 10 years of 4-H, saying goodbye to his animals has become a simple matter for McKennon Heald. But he said he wouldn't be surprised to see some tears from some of the younger participants. He's been there.

    July 25, 2014 2 Photos

  • Anderson, Alexandria and Elwood receive grants to tear down abandoned houses Three Madison County cities — Anderson, Alexandria and Elwood — received state grants that will be used to tear down abandoned, dilapidated houses.

    July 25, 2014

Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide