What happens when you turn 60 (59.5)? That’s right; you gain access to your taxable 401Ks and non-taxable Roth IRAs.
I’m not a big fan of the 401K system because it is basically a high-yield savings account. We have people turning 60 with a large pot of money and no skills to handle it.
Welcome back to the Bond Investing at Any Age Series (20s, 30s, 40s, 50s), where we protect our principal while generating income.
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Today, let’s ask some basic questions and see what results we need from our money. If we do this right, we can handle our needs while creating generational wealth. Let’s begin.
A couple of earth-shattering questions. For this article, let’s pretend you have $500,000 available after taxes (or withdrawing from a Roth).
Before you touch YOUR money, you want to review a few things about your current situation.
1) Do you have enough cash flow without touching your 401K or Roth? You may have a pension, are still working, or have a paid-off house.
2) Should you just leave your money in a 401K or Roth? If you pass away with money in this account, your heirs must dismantle it within ten years. This situation could be better.
3) Do you need cash flow or security? Are you looking to generate income or have a pot of money around in case of an emergency?
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Don’t be afraid. So many people are afraid when dealing with large sums of money. Here’s one thing I’ll tell you—you’re not an idiot.
You saved the money in the first place; what is there to fear? Literally, the worst thing you can do is take all of your money out and buy a boat or sports car.
Anything outside of those things, and you are heading in the right direction. Surviving in this world is much more than having a pot of money.
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I am a massive fan of “total life investing.” This means living in a small city, paying off your home, having roommates or family mates, starting a garden, building a small creative business, and building a wealth generator.
It’s a combination of all these things that will make you successful in retirement, not just your 401K—but I digress.
Bonds to the rescue. Now it’s time to use bonds to get us to our destination. This article will not use the stock market for our portfolio, only bonds.
Let’s first generate income with our bonds. We have $500,000 to spend on bonds, so where should we place our money?
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Today is the best time to buy bonds in the last 15 years. The yields for five, ten, and 30-year treasuries are near 4%.
Investing $500,000 into a 4% bond will net you $20,000 per year in interest income. That’s $1,667/month. Not a bad chunk of change for having the safety of Treasuries.
Don’t forget that if you sell your bonds, they can decrease or increase in value. Treasuries trade on the bond market, so you will need to understand the bond order of operations intimately.
Pushing for more income. If you need even more income, you can use bond closed-end funds. The best CEF manager resides with PIMCO. I personally invest within their income funds, such as PTY, PDO, and PDI.
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If you can get 10% on your CEFs, you stand to earn $50,000/year or $4,100/month. That’s a giant leap in income and risk. If you don’t like to see your principal in the red, CEFs are probably not for you.
Are taxes an issue? Are you a high-earner? Do you want to reduce your tax burden? If you are retiring, you may want to move to a no-state-tax area like Florida or Texas.
Beyond moving, you can reduce your state taxes by investing in Treasuries. You can reduce your federal tax by investing in municipal bond funds.
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If you live in a place like Florida, you can invest in municipal bond funds and eliminate federal and state taxes. I live in Florida and invest in Nuveen AMT-Free Municipal Fund (NVG), which is completely tax-free in my situation.
So you want it all? Okay, I gave you a lot of random scenarios for a reason. Somewhere between these different case studies is one that works best for you.
I think it’s fair to say that we all want security, access, cash flow, and high income. Let’s put everything together to see what we can create.
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Access: You want to put $50,000 into a high-yield savings account for emergencies and a little cash flow. Today, HYSAs earn roughly 3.5%.
Security: We can earn a little more with a certificate of deposit without entering the bond markets. We can put $50,000 into CDs earning 5%
Security: 5-Year Treasuries are also an excellent place to park some money. We won’t have to pay state taxes on the interest. Today, they earn 4.13%; let’s put in $50,000.
Cash Flow: We want to lock in some good yields for a long time. 30-Year bonds over 4% will always be a good investment (in my opinion). Over 30 years, the interest rate will drop to near-zero percent.
At this point, your 4% bonds will be sitting high on the food chain. You can sell for capital gains if you understand the game. I would put $100,000 into 30-year bonds over 4%. This will give us an annual income of $4,000/year or $333/month.
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High income: There is nothing sexier than monthly CEFs paying you over 10%, just don’t look at the principal.
Anything that uses leverage is subject to massive fluctuations in price, so beware. We have $250,000 to place into our three closed-end funds: PDI, PDO, and PTY. Don’t forget; sometimes, they pay sweet special dividends.
We would receive $25,000/year in dividends or $2,080/month. That is a nice amount of income. Don’t forget to reinvest some of your dividends (25%) to keep this number growing ahead of inflation.
Conclusion. As you can see, you will earn roughly $3,000 per month. Your money is reasonably safe. As long as you don’t try to sell your CEFs in a downturn, you stand to keep your principal steady.
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We achieved a fair amount of income, kept our principle super safe, and have a growth element with 30-year bonds and reinvesting CEF income.
If we do it right, we will have more money in ten years than we do now. Also, don’t forget high-yield bond reinvestment.
We can take the interest from our HYSAs, CDs, and Treasuries and reinvest into more CEFs, preferred shares, dividend stocks, or business development companies.
With high-yield bond reinvestment, we keep our principle safe and can branch out into higher-yielding securities.
Bonds are your friend, but education is your spouse. Educate yourself on bonds, interest rates, mortgages, and the bond market.
If you want a great retirement, YOU need to understand the system. Turning your money over to a financial advisor may leave you stuck in fear. Take control of your financial destiny. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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