Dear Dr. Don,
I am 67 years old and retired. I rolled my 401(k) into a traditional IRA and locked it up at a bank for five years at 5.5 percent. I have a year left before it matures. Looking at current CD rates has me concerned about where to reinvest the money.
I have $300,000 in the account. I am thinking about putting it into a bond mutual fund when it comes due -- unless CD rates go up between now and then.
I need at least 5 percent interest. This would give me about $15,000 a year in additional income without drawing down the principal. I get about $13,000 a year in Social Security benefits and another $13,000 a year from a pension. Do you think a bond fund would be safe?
-- Rex Rates
Like you, I struggle with where retirees should be invested to get the income they need on their investments without excessively ramping up the risk of their investments. Where you and I may differ is in the notion that the retiree should never touch principal. There are times when it makes sense to draw down principal to meet income requirements rather than increasing investment risk to chase yields.
The concern about investing in a bond index fund is that when interest rates start heading higher, it will cause bond prices to fall. Short term, this would put price pressure on the fund's shares. If you measure safety as risk to principal, investing in a bond index fund designed to track the Barclays Capital U.S. Aggregate Bond Total Return Index will have some price risk.
Speaking of risk, I don't like that you have $300,000 invested in a single CD. I'm worried the deposit exceeds insurance limits of the Federal Deposit Insurance Corp. and the National Credit Union Share Insurance Fund.
A bucket approach to liquidity management can help you get past the need to lock in the $300,000 at an expected yield of 5 percent. With this approach, you keep one to two years' worth of income requirements in liquid funds while investing the balance in investments with a longer horizon. Talk through this option with a financial planning professional.
You didn't say when you started drawing Social Security, but an option for part of the $300,000 is to repay your past Social Security contributions and start anew at your current retirement age. Depending on when you started drawing benefits, this investment could provide you with a bump in annual benefits and offers the additional perk that it would be indexed to inflation.
The Social Security Administration is looking to revise this option, so you might want to check into this now before the rules change.
Depending on your life and financial goals, an investment in a fixed-income annuity could provide the certain income you seek. You need to thoroughly understand the annuity's structure along with any purchased options before signing on that dotted line.
The Bankrate feature "Annuities" provides a primer on the topic, as does my earlier column, "Don't wait to learn about annuity."
Thanks to Edward Lafferty, public affairs specialist at the Social Security Administration, for helping me with this reply as it pertains to Social Security.
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