Treasuries for Senior; Safe or Sorry?

Let’s take a bird’s eye view of today’s investment situation by creating a scenario: You’re a typical retired American saver. You’re 72 years old, and you’ve watched your bank CD interest rate go from 6% in 2008 to a useless 1% today. You live in a modest home, off a modest pension. You were taught by your Depression-era parents to never spend what you don’t have, and to put away funds for those “rainy days” Americans used to speak about.

Back in the 1980s and ’90s, Money magazine and other financial rags often wrote about how seniors could live off the interest of their savings. All it took was to follow “these simple rules.” Remember all those desert island ads in the 1980s? “Saving for retirement is a breeze if you invest with E.F. Hutton.” Of course, E.F. Hutton went defunct right after the crash of 1987.

You now realize how flawed investment advice can cause so much harm. Your $250K nest egg generates only enough income to pay your cellphone and cable bills. Thinking back to the 1980s, those expenses didn’t even exist when you envisioned your worry-free retirement! Now you’re at your wits’ end and you feel betrayed. You need to make money to supplement that disappointing pension. You start listening to investment gurus. You hear Pimco’s Bill Gross trumpet the value of Treasury bonds, keeping in mind that six months earlier he walked around Wall Street yelling “Treasury bonds are dead.” Investment geniuses can change their mind, can’t they?

Because your interest income stinks and your bills are eating into your savings, you look into purchasing Treasury bonds. You hear more investment legends like David Rosenberg and Gary Schilling bark about the value of Treasuries. You finally pull the trigger on an exchange-traded fund (ETF) invested in Treasury bonds. An ETF is like a mutual fund that investors can buy or sell at any time, and they usually charge reasonable fees. The ETF yields around 2.5%, and since you’re buying U.S. government-backed Treasuries, you are confident your funds are in a safe place. You can’t help but wonder why you didn’t make this purchase years ago. Your nest egg is safe and you can now pay your bills with funds to spare. What could go wrong?

Yes, Treasury bonds/investments are backed by Uncle Sam, but this only applies to your principal and interest payments if this 20+-year bond portfolio is held to maturity. Sounds like you’re in like Flynn, right? Not quite, and here’s the catch: it’s called the outside world. If interest rates in the market increase, your bond investment will be worth less. If rates go up, bonds go down and vice versa.  For example, two weeks ago, interest rates spiked over .30%. Your fail-safe ETF depreciated almost 5% within a 10-day period.  What happens if your Treasury ETF has a bad month? Or a bad year? So much for a safe nest egg.

For the last 20 years, all bonds, not just Treasury bonds, have experienced the greatest bond bull market the world has ever seen. Bonds have completely outperformed stocks, and many think we are in a bond bubble. Remember the real estate bubble? Or maybe the internet bubble of the last decade? Bubbles ultimately pop, and investors are left to clean up the mess. Be wary of all bonds, especially U.S. Treasury bonds. Their day of reckoning is on the way. Want an alternative? Buy an old-fashioned fixed annuity. A fixed annuity offers decent rates and limited market adjustments. And if you don’t need the interest, a fixed annuity grows tax deferred. This is my favorite alternative to this bubble-ridden asset class.

Pay-it Forward:

How did we get here? How did our teens become so dependent? Were we just as dependent or did it begin with our kids? What did we do differently from our parents? Did the world really change that much? Did we really need to overly supervise and protect our kids? Did your parents fund your college education? Or did they give you spending money after you turned 18? American families resemble society. If you give or protect too much, people will continue to expect further support. Is the greatest gift you can give your daughter letting her stand on her own two feet?



Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More Posts - Website - Twitter