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Credit Card Reviews: Best Credit Cards for Average Credit
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How to Secure the Bag in 2022
Looking for ways to elevate your life? Check out the tips below to secure your future and your bag in the year to come.
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Credit Card Reviews: Best Credit Cards for Those With No Credit
If you have bad credit, there is a light at the end of the tunnel. Rebuilding your credit doesnât have to be hard. And, surprising to some, a credit card may be the perfect way to get started. It takes credit to build credit. Opening a new credit card and building a perfect on-time payment
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How To Start a Wedding DJ Business in 9 Essential Steps
Want to hone your DJ skills? Or maybe show them off? Wedding DJs are in high demand these days. Industry experts expect 2022 to be the busiest wedding season in 40 years, thanks to lockdown romances and postponed ceremonies during the pandemic. A wedding DJ is the focal point of great wedding receptions. They set [â¦]
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3 Ways to Restore your Financial Footing
2020 has been a year like no other. Whether youâve experienced a job loss or a loss of financial stability, thereâs one thing to always remember: you do have the ability to restore your financial footing. Here are 3 steps on how to bounce back. 1. Create a Plan Itâs self-assessment time! In order to
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What Is Fiat Currency? A Definition + How It Differs From Cryptocurrency
Fiat Currency Definition Fiat money is a type of currency that’s issued by a government and is not backed by physical commodities, such as gold. The U.S. dollar, the euro, and the pound are examples of fiat money. Could you imagine having to carry gold when buying your groceries for the week? Earlier in history,
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3 Investment Ideas for Retirees Right Now
Ah, retirement. Picture long, blissful walks on the beach. Or youâre watching the sunset from the balcony of your cruise ship and thinking: This is it â the way life should be. Then you casually check your smartphone to see how your investment accounts are doing and, gasp! You might not be as rich as you thought were.
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Retirees are facing major headwinds right now when it comes to investing: Troubles in Ukraine, higher inflation and stock market jitters to name a few. If you are in or near retirement and wondering what you can do with your portfolio, here are three ideas I share with some of my clients:
1. Consumer defensive stocks
I want clients to be as diversified as possible. However, I may tilt their portfolio to consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies like natural gas and electricity providers, healthcare providers and companies whose products we use day-to-day, like toothpaste companies or food and grocery stores.
According to the Center for Corporate Finance, a leading finance educator to financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility can mean less upside potential, but it can also mean less downside risk, which I find is what many retirees want â less downside (and hopefully better sleep at night).
2. Bonds for retirees â but not just any bonds
I like municipal bonds for retirees. Municipal bonds are issued by states, cities or local municipalities. There are many types of municipal bonds. General Obligation municipal bonds are backed by the taxing authority of the issuer â meaning the state or municipality uses taxes to pay the interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. A toll road uses tolls as the revenue to pay bondholders.
Interest from municipal bonds is usually exempt from federal taxes (though there may be alternative minimum tax (AMT) considerations for certain types of investors). If you live in the state where the bond is issued, the interest may be exempt from state taxes as well.
I like tax-free interest for retirees for several reasons. Retirees may have other sources of taxable income, such as pensions, annuities or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money out of 401(k)s and traditional IRAs in retirement for required minimum distributions, which are taxable as ordinary income. Having some tax-free interest may prevent the retireeâs income from creeping up into the next higher tax bracket in retirement.
Findings from the 2019 Municipal Finance Conference suggest there is less risk of default with general obligation bonds than revenue bonds. This is because revenue bonds typically depend on the vitality of a project, which is more uncertain than the state or municipalityâs ability to raise taxes to pay for a general obligation bond. For this reason, I may tilt a portfolio more toward general obligation municipal bonds than revenue bonds for retirees.
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Municipal bonds are not without risk. There is no guarantee of principal and market value will fluctuate so that an investment, if sold before maturity, may be worth more or less than its original cost. Like any bond, municipal bond prices may be negatively impacted by rising interest rates. Also, municipal bonds may be more sensitive to downturns in the economy â investors may fear a struggling stateâs economy may be unable to repay the bond.
For these reasons, I like to be as diversified as possible. I may use short-term muni bonds for more principal stability and less interest rate risk. I might also blend in intermediate-term municipal bonds for additional yield. If the portfolio is larger than $250K I prefer to buy individual municipal bonds for greater customization and tax-loss harvesting opportunities.
3. Beyond stocks and bonds
I like to sprinkle in small amounts of other investments. I call these my âsatellites.â Depending on the clientâs financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the diversification and the relatively low cost. I usually only buy small amounts, maybe 2%-5% of a portfolio, to help diversify the portfolio and provide an inflation hedge.
Inflation is a significant real enemy for retirees. Rising prices erode the purchasing power of a portfolio. One nice thing about owning real estate is the owner often can raise rents, which is a hedge against rising prices. I may buy Real Estate Investment Trusts (REITs) which pool together various properties. I may also use Private REITs, which are not traded on the public market, so they are less liquid, for more sophisticated investors. Private REITs are not suitable for everyone, as they tend to carry higher fees, donât have published daily prices, but they often provide higher yield than publicly traded REITs.
For more on fighting inflation see my blog post Could Inflation Affect Your Retirement Plans?
Parting thoughts
Investing in retirement is different than investing while working. In retirement, an investorâs time horizon shrinks â they need the money sooner to live off and thereâs no paycheck coming in to replenish the account. There is also less time for a retireeâs portfolio to recover from a stock market correction. Because of this, I find retirees fear losses more than they enjoy their gains.
Understanding these differences is important for successful investing in retirement. Using these three approaches â shifting slightly more to consumer defensive stocks, using municipal bonds to help prevent further taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities â in my opinion can all help smooth out the ride for retirees.
The author provides investment and financial planning advice. For more information, or to discuss your investment needs, please click here to schedule a complimentary call.
Disclaimer: Summit Financial is not responsible for hyperlinks and any external referenced information found in this article. Diversification does not ensure a profit or protect against a loss. Investors cannot directly purchase an index. Individual investor portfolios must be constructed based on the individualâs financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Â
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