You might have even heard us say a time or two that stocks are for growth, bonds are for protection. You may have also heard that as interest rates rise, bond values decline or that rising interest rates are a welcome sign for savers. Without the context of a financial plan, these statements may seem contradictory, even confusing when adding in the Henssler Ten Year Rule—money needed for spending within the next 10 years should be in fixed-income investments while money with an investment horizon 10 years or more should be invested in stocks.
We recently worked with a couple who were hesitant to start buying bonds. The couple, in their mid-to-late-50s, is following the Ten Year Rule and looking to move money for their first few years of retirement. With 10-year Treasury bonds yielding around 3.9%, they felt they could still get more out of a stock portfolio—especially with dividend-paying stocks. However, with the money they’re earmarking for retirement spending needs, the goal is not to maximize return. The goal is protection from the volatility of the stock market.
They quickly countered with the argument that rates are rising, so bond prices are falling. True, if you sell the bonds before they mature. If your $1,000 bond yields 2%, you would have to sell your bond for less than $1,000 because a new $1,000 bond could be purchased with a 3.9% yield. However, per our Ten Year Rule, these investors should be putting money in bonds for each year the money is needed beginning in 2032, the point at which they retire, meaning they won’t need to touch that bond until it matures. Once it matures (assuming the issuer does not default), they would receive their $1,000. They also would receive their semiannual coupon payment of $19.5 (a 3.9% yield) over the 10-year period for holding that bond. Because they would be holding the bond to maturity, they should not lose money on their investment. The only way they may lose money is through inflation, and with the government’s long-term target inflation of 2%, it is likely they still could come out ahead.
For Ten Year Rule planning, we also recommend laddering your bonds to mature when you need the money. For this couple, at ages 55 and 57, we were planning for their expenses at 65 and 67, their target retirement date in 2032. Next year, we would move money from stocks to bonds for 2033, and in 2024, we would buy bonds for 2034, and so on. By 2032 when they retire, they should have 10 years’ worth of bonds that mature over the next 10 years. This bond ladder is designed to ensure they have liquid funds when needed. They should not have to sell stocks, nor should they have to sell a bond before it matures to cover spending needs.
Another piece of advice they heard was to “keep maturities short.” Over the past 12 years, when bonds were at their historic lows, we recommended buying shorter-duration bonds with hopes of reinvesting in a bond with a higher interest rate. The goal remained to hold the bonds until maturity. This strategy was to avoid locking in a low rate. With rising interest rates, you could do the same; however, the end goal of your fixed-income portfolio is not to maximize returns—it’s protection so the money is there when you need it.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the October 15, 2022 “Henssler Money Talks” episode.