At age 60, an investor may not need 60% of their assets in fixed-income investments. We recommend fixed-income investments based on your liquidity needs, not an age-based allocation.
Knowing that most investors are saving for retirement, we prefer to run a financial plan to determine when an investor needs their savings for spending purposes. We generally recommend using fixed-income investments like individual U.S. Treasury bonds, municipal bonds, and FDIC-insured bank CDs to fulfill a liquidity need that is within 10 years. For example, if you need $10,000 in 2034, we recommend buying a bond that matches your liquidity need in both timing and amount—a 10-year bond with a face value of $10,000 purchased in 2024, maturing in 2034. We do this for rolling 10-year periods, so from 2024 to 2034, investors should buy bonds for spending needs from 2034 to 2044. This is our Henssler Ten Year Rule.
Ideally, this strategy will help an investor avoid selling stocks during a down market. While there are years like 2023 when the market was up 24.23%, there are also years like 2022, when the market was down 19.44%. You cannot predict where the market will be when you need the money, but you do know what a U.S. Treasury bond will be worth when it matures. Furthermore, down years aren’t as upsetting when you know you have money in fixed income that will sustain your spending for 10 years. Investors can wait until the market recovers before selling to fulfill their fixed-income holdings.
During the financial crisis of 2007-2008, we allowed clients to draw down to five or six years of liquidity because it wasn’t an opportune time to sell stocks. Despite the market being down nearly 40%, they had money available for spending because we planned for the need in 1997 and 1998. Once the market began to recover, we purchased bonds to mature for 2017, 2018, etc.
We recommend individual bonds over bond funds or bond exchange-traded funds because we know exactly what the bond is worth at its maturity date. If we buy a $10,000 bond today, we know that the bond will be worth $10,000 in 2034. Our goal with fixed-income investments is to preserve capital, not to achieve growth. Bond funds or ETFs don’t have a set maturity date; therefore, the value of fund shares is unpredictable. Bond funds come with a higher interest rate risk than we recommend when buying fixed-income investments to fulfill a liquidity need. If interest rates rise after you purchase shares, your investment could be worth considerably less than your need. Selling shares locks in that loss.
While your bond portfolio may show a loss right now, we know that when the bond matures, you will receive the face value. When you hold your fixed-income investment to maturity, you will never realize that loss unless the issuer defaults. We view bonds as “safe” investments because we retain them to maturity while purchasing high-quality bonds with government backing. That being the case, your yield to maturity and dollar amount at maturity is locked in at purchase.
While we have used bond funds and bond ETFs during periods of extremely low interest rates to achieve a higher yield, we moved money out of the funds to individual bond and CD holdings when we were able to lock in a rate and maturity date we desired to help ensure the expected amount of money will be available for the client when needed.
If you have questions on how to incorporate fixed-income investments into your financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 1, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
