There’s a new sheriff in town!
As the nation watches the inauguration proceedings for President Biden, we’re entering a new season for our country and your retirement.
It’s already clear that Biden’s approach will be very different from the previous administration — both in terms of policy priorities and the rhetoric for how those policies are communicated.
Here at Rich Retirement Letter, it’s our job to look at how the leadership in Washington affects your savings, investments and ability to truly live a Rich Retirement.
And while I want to help you set up a retirement approach that takes the least amount of effort so you can focus on the things that really matter in life…
There are times when we need to pay special attention to shifts in the market so you can protect your retirement.
Now is certainly one of those times.
And today, I want to warn you about one particular investment that you’re very likely holding in your retirement account that could cause significant damage to your wealth.
The Ticking Time Bomb That Will Destroy Retirements
A couple of weeks ago, I had dinner with a wealth manager here in town.
Larry is a friend of mine, and we get together regularly to talk about markets, retirement strategies, tax issues and sometimes life in general.
At our last meeting, I asked Larry what he thought about Treasury bonds heading into the new year.
“You know Zach, all of my clients hold Treasury bonds in some shape or form. We either help them buy individual bonds or put them in funds that invest in bonds. It’s been a great way to preserve wealth and manage volatility. I don’t see us ever changing that strategy.”
I was shocked.
“So you’re not worried about rising interest rates causing these bonds to lose value? And you’re fine with the paltry interest rates that your clients currently receive from these bonds?”
I realized that I needed to lower my voice when one of the other customers at a table near us looked over. I can get a bit passionate about some of the advice wealth managers give to their clients — especially when I feel like retirees are getting bad advice.
“Zach, these bonds have worked just fine for us for years. Our clients have been happy. Why would I change?”
I like Larry as a friend. And I do think he has his clients’ best interests in mind.
I also know that he has a stubborn streak. And if I were to try to convince him that Treasury bonds weren’t a good investment, he’d simply dig in his heels and our dinner would be pointless. So I let the issue go.
But today, I want to explain to you why these investments are so dangerous. And hopefully, you’ll take my advice and make some changes to protect your retirement.
Riskless Returns… or Returnless Risk?
One of the reasons wealth managers like Larry love to put Treasury bonds in customer accounts is because of the safety these bonds are supposed to provide.
If you buy a Treasury bond, you’re guaranteed to get your money back when the bond matures. Because even if all hell breaks loose, the government can still print money to repay its debts.
Since these bonds pay interest and have “no risk,” wealth managers often talk about how these bonds give you riskless returns.
That sounds like a great deal!
But in our world today with low interest rates, massive government spending and the prospect for inflation on the horizon, Treasury bonds are much riskier than they appear.
You see, if you’re holding a 10-year or 30-year Treasury bond, you can be sure that you’ll get your money back when these bonds mature. And at today’s rates, you’ll even get a 1.10% yield on a 10-year bond and a 1.84% yield on a 10-year bond.
But is that yield enough to keep up with inflation?
(Apologies for my outburst, but this is something I feel very passionate about.)
If your retirement has a big position in 10-year or 30-year bonds and you’re counting on the “stability” and “safety” from these bonds helping you out, you’re in trouble!
As inflation picks up, your yield on these bonds won’t change. You’ll still get your paltry 1.1% or 1.84% over time.
Meanwhile, your retirement expenses will skyrocket — possibly leaving you without the ability to pay for your needs.
That’s no good!
(And unfortunately, it gets even worse…)
Don’t Count on Your Treasury Bonds for an Emergency…
Another reason wealth managers like Larry help their clients invest in Treasury bonds is because they believe the money can be accessed any time a customer has a financial emergency.
Need to replace a vehicle? Sell some of your bonds to finance it.
Unexpected medical bills? Let’s take some money out of that bond fund.
It all works as long as the price of your bonds stays relatively steady.
But unfortunately, the climate for bonds is changing right before our eyes.
As interest rates start to tick higher (and we’re already seeing this start to happen), prices for Treasury bonds are moving lower.
This is extremely important for you to understand.
When interest rates move higher, bond prices must move lower.
That’s because new buyers of Treasury bonds will only purchase them if they get a higher yield over time. And since the bonds still mature on the same date and pay the same amount each year, the price must trade lower so new buyers can get a discount.
So think about how that affects your retirement if you’re holding these bonds.
Not only will inflation cause your expenses to rise while your bond investment still pays the same amount…
But the current price for your bonds will trade lower. And this means if you need to sell your bonds to cover expenses, you’re going to have to sell at a discount and lose money on the transaction.
So instead of getting “riskless returns,” you’re taking on a lot of risk with virtually no return to show for it.
That’s a horrible situation.
Sell Your Treasury Bonds — There Are Better Solutions
I urge you to take the non-traditional step of selling any Treasury bonds that you have in your retirement account. The same goes for any long-term Treasury bond funds that you may be invested in.
Short-term bonds and bond funds are a bit less of a risk because they’re not tying up your money for as long. But both still leave you in a vulnerable spot.
By selling these bonds, you’re sidestepping the risk of rising interest rates correlated with the new Biden administration’s spending plans and the inflation that we should see picking up.
And you’re also freeing up cash to invest in new opportunities that can profit from rising inflation.
Yesterday, I told you I would share a new off-Wall-Street investment opportunity for your retirement.
But I got a bit fired up about your risk with Treasury bonds, and I want to make sure you really get the message about the danger to your retirement.
So we’ll save the discussion of your next investment opportunity for tomorrow.
For today, go ahead and start getting out of your Treasury bond positions. Do it while there’s still time and before these bonds trade any lower.
Please protect your retirement against this risk so that we can keep your capital handy for much better opportunities.