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Need Some Income Now - with Flexibility?

Need Some Income Now - with Flexibility?

| July 01, 2020

Executive Summary - 3 Ways to own Bonds

  1. Traditional Bond Ladder traditional benefits but might require $250,000 investment
  2. Individual bonds in a Unit Investment Trust (UIT) can be owned in dramatically smaller amounts with potentially similar risk and income
  3. Bonds in multiple bond funds using a Dynamic Model offer much broader categories of diversification for potentially higher return and, in the models mentioned, 3 different levels of risk, each perhaps a bit more risk than the UIT.

Needing Income Now and Wanting Income Now are NOT the same

  1. If you need income now you have bills to pay, mortgage or rent, utilities, food to buy, etc.
  2. If you can't meet these needs, depending on how bad things are, you might be faced with bigger disruptions
  3. A smaller disruption would be having to pay penalties to get out of something you own that can't be liquidated without penalty

All investing involves risk. Often "doing nothing" also involves risk.

  1. CDs paid 5% many years ago.
  2. Which sounded pretty good until you did the math on inflation at that time, which might have been 8% or more.
  3. So you were -3% instantly. 
  4. Loss of purchasing power is still loss.
  5. And sometimes the most insidious because it is hard to see initially, but its effects can be for years or even decades.

Waiting won't help - Here's why

  1. Liquid every business day
  2. Small income is unarguably better than smaller income
  3. Ideas shown below are all 100% liquid every business day at that day's market value
  4. So if something with higher income does become available, you can change penalty-free the next business day
  5. You are not locked in

Investor Education NOT Recommendations

  1. As previously mentioned, I only make specific recommendations to individual clients (or couples) after I understand their specifics including a preliminary (no-cost or obligation) verbal document review.
  2. Everyone's situation is different
  3. So the phone consultation is no-charge no obligation

https://www.secureretirementadvisorsllc.com/blog/phone-conversation-no-charge-no-obligation-for-a-potentially-interested-cli

Advantages & Disadvantages of some Bond Choices

Individual IG (Investment Grade) Bonds in a Ladder

Advantages:

  1. Absent default, return of principal at maturity. (Capital Preservation)
  2. Predictable and known interest payments typically twice annually from each bond
  3. Liquid every business day at that day's market value.

Disadvantages:

  1. Current historically low interest rates
  2. Large-ish dollar amount required
  3. Market value fluctuates before maturity
  4. Re-investment risk. When bond matures new bonds might only be available at lower interest.

Page from Eaton Vance Bond Ladder Sample -  See Entire Document Attached Below:

Individual IG (Investment Grade) Bonds in a UIT - Unit Investment Trust

Advantages:

  1. Absent default, return of principal at maturity. (Capital Preservation)
  2. Predictable and known interest payments typically twice annually from each bond
  3. Available at much lower dollar amount than Individual Bond Ladder

Disadvantages:

  1. Current historically low interest rates
  2. Liquidity provided typically by Sponsor in secondary market for entire UIT, not individual bonds. i.e. can not be "partially" liquidated.
  3. Market value fluctuates before maturity
  4. Self-liquidating. Bond ladder above will have a manager who replaces a maturing or called bond with a new bond. By contrast, UIT will return principal to owner and so the total asset value of UIT decreases until it zeroes out.

 Page from First Trust UIT: See Entire Document Attached Below:

Multiple Bond Mutual Funds using Dynamic Modeling

Advantages:

  1. Potentially higher income
  2. Diversification - dramatically more bonds in several more bond categories owned in the mutual funds
  3. Potential capital appreciation in addition to income capturable by the client.
  4. Liquid every business day at changing market value.

Disadvantages:

  1. Potentially higher risk
  2. Potential capital loss.
  3. Mutual fund works differently than individual bonds held in Ladder or UIT. Bonds not typically held to maturity so return of principal does not apply.

 Page from PIMCO Model: See Entire Document Attached Below:

PIMCO Model Portfolios

  1. PIMCO communicates model changes to Financial Advisor
  2. Typically 4X per year once each quarter PIMCO might recommend changes in both the percentages of each fund as well as adding or dropping funds into or out of the model based on PIMCO's judgment of current market conditions.
  3. FA uses his / her normal process with each client
  4. Changes (if any) made in clients' (Fiduciary) best interest
  5. Further detail in document attached below

The information provided is not intended to be tax or legal advice, and my not be relied on for the purpose of avoiding any federal tax penalties. In general, the bond market can be volatile and bonds may carry interest rate, inflation, credit and default risks. Income from bonds may be subject to federal and/or state taxes. The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. The content is derived from sources believed to be accurate. There is no guarantees any investment or strategy will meet its intended objective. To determine which investment may be appropriate for you, consult with your financial, tax or legal professional.

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