Using Bonds to Create a Paycheck for Retirement Planning

Jan 27 2015

Article does not represent an endorsement by MOAA.

By Hildy Richelson and Stan Richelson

Author Bio: Hildy Richelson and Stan Richelson specialize in fixed-income investing through Scarsdale Investment Group Ltd., a registered investment advisor. Hildy and Stan authored the award winning and best-selling book BONDS: The Unbeaten Path to Secure Investment Growth, Bloomberg Press, 2nd edition, 2011.


The goal of retirement planning is to replace your earned income with a reliable and consistent stream of predictable income, (i.e., cash flow). This is called the paycheck system of investing, and its goal is to provide you with financial independence. You can rely on a paycheck from bonds to provide you with a secure form of income. High-quality bonds have low risk and low fees and are tax efficient.

The major sources of cash flow to replace or supplement your earned income include:

  • Rental income: requires managing one or more properties;
  • Dividend income: requires predicting the direction of stock values and may result in significant losses;
  • Annuity income: you make the insurance company your heir, and you give up control of your investment; and
  • Bond income: you receive semiannual interest payments and a return of your investment on a specified date.

High-quality bonds can be a good source of cash flow in retirement because, by investing in bonds, you can predict your monthly and annual income, plus bonds require no maintenance. Though the value of bonds will fluctuate just like any other investment, only bonds will return their face value on a specified date. (Face value describes the amount of money or principal you will receive when the bonds come due.)

What is a bond?

Bonds are debt securities. For example, the U.S. government raises cash by issuing Treasury bonds, Treasury Inflation Protected Securities (TIPS), and EE and I- Savings Bonds. Municipalities, federal agencies, and corporations also issue bonds. These bonds are purchased by individuals, U.S. and foreign institutions, and corporations. Tax-exempt municipal bonds are favored by individuals because they might not be subject to federal, state, and local taxes. However, you can purchase all of the other kinds of bonds in your retirement accounts.

Why not purchase a bond fund?

All bonds are not created equal. It’s recommended you buy high-quality bonds to avoid a potential loss. Why not just buy a bond fund? The bond fund may hold low-quality bonds, foreign securities, and derivatives that might result in large losses. Most bond fund or ETF buyers do not look under the hood. In addition, bond funds actually are quasi-equities and, unlike individual bonds, the funds never come due. The funds might also charge high annual fees, as well as burden you with the costs of trading. If interest rates rise, the value of a bond or a bond fund will decline. However, though the value of individual bonds will fluctuate, they will pay their face value when they come due. Read more about this in “Buy Bonds and Not Bond Funds.”

The bond ladder.

A powerful strategy for using bonds in retirement planning involves the creation of a custom bond ladder. Investing in a bond ladder means buying individual bonds that have different maturity dates. For example, you might have bonds coming due each year starting in year five and then coming due in each subsequent year through year 15. In addition, if you need a bigger paycheck for a specific purpose, such as your child’s college education in 10 to 14 years, you can purchase an unequal amount of bonds coming due in those years. The issuer is required to redeem the bonds in the maturity year, thus facilitating your planning.

If you plan on retiring in 15 years, you can establish a bond ladder that integrates your personal account and your IRA and Roth accounts that will mature starting in year 15. You can choose to reinvest the proceeds of your bonds as they come due to create more income or start living off the principal. Reinvested interest payments give you investment growth through the compounding of interest. Knowing you have cash flow from your bond ladder to supplement other sources of income, as well as the predictability of lump-sum payments, can relieve a lot of stress.

Tax benefits of municipal bonds.

The interest income paid by many municipal bonds is not subject to federal income tax. In addition, if you have made you legal residence (or domicile) in a state that has no personal income tax, such Texas, Florida, or the District of Columbia, you would not pay any state or local income tax on your tax-exempt municipal bond income, even if you find yourself stationed in a high tax state.

Benefits of bonds.

An investment in high-quality bonds will help you sleep at night. You can predict when the principal will be returned to you. You will get interest payments every six months for the life of your investment. You can plan for your future concretely instead of hoping that your investments will have risen in value just at the moment you need to withdraw funds. You can create a tax-free diversified bond portfolio no matter where you are deployed. You will be able to count on a paycheck that you have created.

10 responses so far

Smart Home Purchasing–Part I – Advanced Planning and Building Your Team

Jan 12 2015

housekeysBy Joe Gladden, Veteran Realty Serving America’s Military, Inc. and Susan Wallace, Senior Loan Officer Access National Bank

This the first article in a series regarding “Smart Home Purchasing.” Purchasing a home is a major financial decision and deserves a smart strategy, reliable team, thoughtful planning, the best available intelligence, and good tactics. These precepts should sound very familiar to military officers.

Before we start, we want to offer some insight on the financial environment. For the preceding six years, mortgage interest rates have been at unprecedented lows. Through the Fed’s “quantitative easing bond buying program,” interest rates have been kept artificially low in an attempt to stimulate the economy, in large part through the housing sector. No one has predicted that rates would have stayed so low for so long.

The bond buying program was recently terminated based on economic recovery. And, in a speech in Paris on November 7, 2014, with the expressed intent to mitigate financial markets volatility in advance, Fed Chairwoman Yellen announced the intent to raise the prime interest rate “sometime in 2015.”

Based on this we believe that home mortgage rates will finally increase in 2015 and that this is important “intelligence” for those considering a home purchase or refinance.

Planning and Preparation for a Smart Home Purchase
Build Your Team

When assembling your team to purchase a home, the single most important decision you will make is choosing the right lender early in the process. This may come as a surprise from a Realtor® so we will explain our thoughts on this. While the loan qualification and processing have always been tedious and time consuming, since the “housing market collapse,” it has been become more so by a factor of 10. The Dodd/Frank Act, intended to prevent bad lending practices, seriously complicated the process even for folks with high incomes, low debt, and credit scores north of the 800 mark. It placed the onus directly on the lending institutions, specifically the underwriters, and this equates to mountains of verification.

Why is the loan officer/lender so critical? When loans are not approved in time for the contractual settlement date, or if they are declined late in the process, the purchaser may be found in default which can potentially result in forfeiture of the escrow or suit for specific performance of the contract.

From our experience, the best (least painful) loan experiences occur when a highly knowledgeable, experienced loan officer is engaged throughout the process to settlement. The loan officer may use a processor, but must stay personally involved and accountable through every single step. It should be the same loan officer, not just the one who answers the 800 number, and they must be highly accessible for timely communications. Unfortunately, in some of the better known lending institutions, the loan officer (experience level and knowledge unknown) takes the loan information by phone. The file is handed off to a processor and accountability tends to dissipate. When interviewing lenders, compare interest rates, terms, and fees, but insist on service and accountability by the loan officer throughout the process. If this can’t be assured, then move on to the next company.

Realtors® love to trumpet their sales volume as proof of experience and success. Okay, it’s an interesting data point but it doesn’t follow that the highest volume agent is going to provide you the best possible service. An argument can certainly be made that the highest volume agents may be too busy to provide highly personalized service. In many cases, high sales volume is due to “teaming” rather than actual personal sales and you may sign up with an agent to find that you are handed off to one of their team members at different times for different phases of the process.

Referrals from happy clients and references are the best qualifier of agents.

Like the loan officer, personalized service with excellent communications is the key to a good experience.

Highly professional Realtors don’t “sell you a house.” Rather, they facilitate a very complex (and growing more so) process that helps you find the home you want and then navigates you through the contract process and settlement. They are process oriented, highly organized, and always prepared. In the military we quickly learn never to brief the boss without a ton of preparation. You should expect your Realtor to be prepared for every meeting and home tour. They need to be thinking several steps ahead in the contract process and negotiations. They need to know the market and be prepared to defend their contract offer/counteroffer recommendations on pricing and terms. Accessibility and strong communication skills are a must.

Today, the technology factor is critical, and they should be on top of the ever changing technology curve. Listings links that meet your criteria, complete with digital photography and video tours, can now be automatically sent to your email; contracts and all forms can be completed, scan/emailed, and even signed electronically. Facetime and skype can be very powerful tools in interviewing loan officers and Realtors® a continent away. A purchaser living in Germany can complete their house hunting trip in the DC region, return to Germany, and complete the process easily almost anywhere on the planet.

A sidebar regarding technology. Many purchasers start their searched on their own through powerful online sites such as, Zillow, or Trulia. These can be extremely valuable tools, but it is important to understand their limitations which will be addressed in our next post.

A final comment on building your team. Start the process as soon as you think you may be moving to a specific area. Six months out is not too early to interview and screen lenders and Realtors®. And starting the loan qualification process, reviewing listings, early will enhance an informed decision and reduce stress.

We hope this is helpful and that you will tune in for the next article on Finding the Right House to Call Home.

2 responses so far

The Long Term Care Insurance Conundrum

Jan 02 2015


Long Term Care (LTC) insurance. To get it or not to get it. Maybe you are thinking about yourself and a spouse. Maybe for your parents.

You must first understand what it is. LTC insurance pays for services (usually in-home but can also be at a facility) required to care for a person who can’t care for them self. It covers costs associated with feeding, clothing, toileting, mobility problems, bathing, or continence issues.

LTC issues are not covered by any health plans, TRICARE or Medicare. They can be covered under Medicaid (medical welfare) but that becomes its own problem since you have to meet the financial need requirements for Medicaid—in other words you must be poor. For most with a form of pension pay, like military retirees, your retired pay may disqualify you for Medicaid.

Whether to buy LTC insurance is a tough choice for several reasons:

  • One is that the premiums are expensive. If you buy it while you are “young”, it is a lot cheaper but chances are you will paying forever before you’ll ever need to energize it. Most users are well up in years. If you wait until you are closer to the age you’ll need it, it will cost a fortune or you may not qualify for the insurance because of older age health reasons.
  • Two, will you actually need it? There are many statistics about the need for LTC insurance as you age. The older we get, the more likely it is we will need it. Especially since we are all expected to live longer and longer as medical advancements continue to lengthen our ages. Congratulations, you are living longer…but you’ll probably need assistance to live. University studies have indicated almost 70% of people over age 65 will need long term care assistance at some point. By the way, not only seniors need long term care. Younger people may need it as the result of a car wreck, a fall, something hits you in the head, a disease or illness…
  • Three, the LTC insurance industry is in flux. In the earlier years, the insurance companies miscalculated the demand and costs of the benefits. LTC companies have gone out of business, merged with larger companies, or raised their premiums to meet the greater demand from policy holders.
  • Fourth, the scare factor. If you need long term care assistance, it is very expensive. Without LTC insurance, prepare to pay dearly for long term care services. A full-time, assisted living facility can run upwards to $80,000 a year—yikes! Go to this government site to look at the various costs in the country.
  • Finally, which form of insurance do you choose to purchase? Insurance companies are getting creative as they try to best address the long term care needs of people. Choosing the right policy is confusing and there is always the unknown of whether you purchased the right plan until you need to use it.

As is the often the case, it’s those in the middle who get squeezed in this decision. If you have few assets, you may qualify for Medicaid in a LTC situation. If you have plenty of assets, you will pay as you go when a LTC need arises.

For those in the middle, assess your assets and project your ability to cover the costs for LTC services. How long could you pay $25,000 (or up to $80,000) a year without destroying your current life style or your future living standard? What happens if you use up your assets on your spouse’s LTC needs and you are left to fend for yourself? Is paying $2000 to $7000 (a general range) a year in LTC premiums worth the price?

Learn more about LTC insurance on our MOAA web site with our LTC Insurance Primer. MOAA members check into our MOAA benefit, the Long Term Care Buying Service below. Check the Federal Long Term Care site if you are a federal/military employee or retiree. Other LTC information sites are, the American Association for LTC Insurance and this Consumers Report magazine article.

For MOAA members

ltc_coverDon’t forget the MOAA LTC Buying Service. Call 1-800-698-7943 for details, or visit MOAA’s Long Term Care webpage for more information.

You also have access to MOAA’s Understanding Long Term Care publication as a free download with your PREMIUM or LIFE membership!


6 responses so far

Financial Adviser Standards—Fiduciary or Suitability

Nov 18 2014

shutterstock_38823016Financial services are unlike most other consumer products or services. You never really know if you bought the right product or if you are getting the proper service. In addition, you may not even know how much you are paying for the product or service.

This frustrating consumer situation is the basis for arguments about the standards financial people abide by. The two standards are “fiduciary” and “suitability.”

Fiduciary—a person or company charged with the responsibility of managing assets for the benefit of a client. The fiduciary standard requires the adviser to put the client’s interests above their own. States have laws that mandate what fiduciaries can and cannot do with a client’s assets. Most laws declare that it is illegal for a fiduciary to invest or misappropriate assets for the fiduciary’s gain.

“Well, isn’t that the standard of most professionals?” No. This is…

Suitability—offering investments or money management that is considered appropriate for a client by making recommendations that are consistent with the interests of the customer. So the financial person must make suitable recommendations to their clients. This allows a professional’s or firm’s best interest to be the priority as long as the client gets something that is suitable for his/her needs.

The bottom line is a person under either standard could work in your best interest or burn you. A consumer should have the expectation that a fiduciary will best protect you but know your financial professional well either way. There are sales people and there are advisers. Know the difference.

As most things in life, it is buyer beware. It comes down to the person you are dealing with in the financial industry. No laws or government can protect consumers from someone looking to make a buck off you or cause you harm.

As a financial professional, there are many options available to me to accomplish a financial objective for you. How would you know whether I’m recommending “the best” solution for your objective? How do you define “the best” versus my version of best? Generally speaking, be wary of quick solutions, guarantees, high costs and commission based products.

Read our two-part article on shopping for an adviser:

  1. Shopping for a Financial Advisor? Some of the larger points.
  2. Shopping for a Financial Advisor? Some finer details.

Ask your financial professional and the firm their standard. Know the right questions to ask and don’t be shy about it. I wanted my clients to know the who, what, where, when and how. Accept ownership over your accounts.

financialplanninguidecoverMaking smart financial decisions is not always as clear as we would like it to be.  Whether you are buying a home, considering investments, starting college planning for your children, or other life decisions, the MOAA Finacial Planning Guide has the answers you need. FREE download or hard copy for LIFE and PREMIUM members of MOAA.

No responses yet

Save Taxes! Improve Your Retirement Too!

Oct 23 2014

Recent news from the IRS and SSA will affect your ability to save more in tax deferred and tax free accounts starting in 2015.  And as a bonus you’ll be able to reduce your current taxes if you so choose.  Here is a summary:

  1.  401(k), TSP and 403(b) elective contributions will increase to $18,000 from $17,500
  2. Catch-up contributions to these accounts for those age 50 or older will increase from $5,500 to $6,000
  3. So, if you are 50 or older you’ll be able to contribute a total of $24,000 to these accounts next year
  4. Unfortunately, IRA contribution limits are not changed.
  5. Several other employer plan limits have changed.

iStock_000003513487XSmallOn a related note, up to $118,500 of earned income will be subject to Social Security taxation (up from $117,000). If you’re a high income earner you’ll pay about $93 extra in Social Security taxes.

Tax laws and rules are constantly changing make sure you stay on top of them.

No responses yet

« Prev - Next »