High Yields Prove Elusive
Description
With Treasuries paying rates in the low 2% range, investors have to search far and wide to find better yields
Where can you find yields higher than the Treasury? Find some suggestions here.
Historically, many retirees and preretirees have looked to their portfolios as a potential source of income. In the current environment, finding these sources is no easy task. Ten-year U.S. Treasury bonds yield only 2.2%, and dividend-paying stocks within the S&P 500 are yielding 2.5%.1
But there are opportunities for higher yields that investors may want to consider. Higher yields can mean greater risk, so it is important to understand risk and potential return with any investment.
Potential Sources
When looking for yields that currently exceed U.S. Treasury securities, you may want to review the following:
- As of September 30, 2011, corporate high-yield bonds, as measured by the Merrill Lynch High-Yield Master II Index, generated yields of 9.54%. Keep in mind that the yields of some corporate high-yield bonds compensate investors for default rates that historically have been higher than the broader fixed-income universe.2
- Higher-yielding sectors within the S&P 500 have included Telecommunication Services, which yielded 5.59% as of September 30, 2011, and Utilities, which yielded 4.27%.3 Standard & Poor’s believes that expense control and broadband growth will support dividends for the Telecommunication Services sector. For Utilities, Standard & Poor’s anticipates that higher revenue among electric utilities and expanding gross margins for gas utilities will cause the sector’s dividend yield to be maintained.
- Emerging market sovereign debt, as measured by the Merrill Lynch Emerging Market Sovereign Bond BBB U.S. Dollar Index, yielded 4.65% as of September 30, 2011. Emerging market debt provides exposure to markets where economic growth currently exceeds the developed world while avoiding troubled European markets.4
Yield and Your Portfolio
The following tips may help you evaluate higher-yielding investments at a time when finding yield remains a challenge.
- Review an investment’s exposure to risk as well as its potential return. High-yield bonds historically have experienced higher default rates than investment-quality issues. Keep in mind that bond prices decrease when interest rates rise, opening bondholders to downside risk if inflation increases and market interest rates rise from their current lows. Holding a bond to maturity eliminates this secondary market risk.
- Diversify sources of yield. Relying too much on one or two income-oriented securities can leave you exposed to unanticipated changes in the financial markets.
- Consider your asset allocation. Since yield is available from both stocks and bonds, you may be able to create a high-yielding portfolio within the framework of your desired asset allocation. Within a stock allocation, equities within the S&P 500 Dividend Aristocrats have increased dividends every year for at least 25 years. Municipal bonds may present tax benefits for fixed-income investors.5
The variety of yield sources available presents opportunities to craft an income-generating portfolio suitable for many different risk profiles and time horizons.
Source/Disclaimer:
1Yields are as of September 30, 2011. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, they offer a fixed rate of return and fixed principal value.
2Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. They may not be suitable for all investors.
3Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.
4Emerging markets are generally more volatile than the markets of more-developed foreign nations, and therefore you should consider this increased market risk carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.
5Municipal bonds are federally tax free, but other state and local taxes may apply.
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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Efficient Funding of Long-term Care Insurance
Efficient Funding of Long-term Care Insurance
Over the next 20 years, the number of Americans age 65 years and older will more than double to 71 million, comprising roughly 20% of the U.S. population.
Greater longevity among the Baby Boom generation will also contribute to increased demand for long-term care services; those surviving to age 65 years can expect to live an average of 20 more years. As Baby Boomers live longer, their chance of needing some form of long-term care services will rise as well. Roughly 70% of people over the age of 65 years require some form of long-term care, and more than 30% will receive some nursing home care in their lifetime.
Long-term care is expensive, and the cost is rising every year. Currently, the average annual cost of a one-year stay in a private room at a nursing home in a Virginia metropolitan area is $77,380. Future long-term care will be even more expensive. If costs rise at just 3% annually (a conservative estimate), then 20 years from now a one-year stay in a nursing home will cost approximately $139,757. It’s easy to see how long-term care expenses can threaten or even wipe out your retirement savings and jeopardize any assets you had planned to leave your loved ones.
With the Standard & Poor’s (S&P 500) index returning an average of only 2.72%2 a year for the last ten years and a one-year certificate of deposit returning an average of under 1.0%, it may seem like an insurmountable task to save enough money to fund a retirement and potential long-term care costs.
The experienced attorneys at The Estate Planning & Elder Law Firm can help you come up with creative options to help plan for your family’s future long-term care costs. Let’s take a look at one of the innovative funding solutions someone might want to consider.
Let’s assume that Cheryl, age 56 years and Frank, age 58 years, are a married, working couple with assets in excess of $500,000, mostly in certificates of deposits. Cheryl’s mother has Alzheimer’s disease and has been in a nursing home for the past six years. Cheryl and Frank have seen first-hand how her mother’s nursing home expenses have decimated her parents’ retirement nest egg. To avoid this from happening to them, Cheryl and Frank want to plan ahead for their own retirement.
Cheryl and Frank can purchase a shared long-term care insurance policy that will cost them roughly $4,000 annually if they are in good health. Cheryl and Frank can then take $75,000 from one of their certificates of deposit that is maturing and purchase a Single Premium Immediate Annuity (SPIA) with a “Life with Cash Refund” payout option.
SPIA income payments with specific life insurance companies can be set up to automatically pay the long-term care insurance premiums each year to ensure the policy stays in force for life. Also, beginning in 2010 (thanks to the Pension Protection Act), income payments from a SPIA can fund a long-term care insurance policy. If set up properly, these income payments can be federal income tax free. Thus, using a SPIA to fund long-term care insurance premiums creates not only a tax-efficient funding solution, but also a convenient way to help protect Cheryl and Frank’s lifestyle and portfolio from the high costs of long-term care.
ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C.
If you are interested in having an Elder Law attorney from The Estate Planning & Elder Law Firm, P.C. speak at an event, then please call them at:
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For a review of your financial plan and investment portfolio, contact a financial adviser at Ariba Asset Management at 1-800-808-7488
Over the next 20 years, the number of Americans age 65 years and older will more than double to 71 million, comprising roughly 20% of the U.S. population.
Greater longevity among the Baby Boom generation will also contribute to increased demand for long-term care services; those surviving to age 65 years can expect to live an average of 20 more years. As Baby Boomers live longer, their chance of needing some form of long-term care services will rise as well. Roughly 70% of people over the age of 65 years require some form of long-term care, and more than 30% will receive some nursing home care in their lifetime.
Long-term care is expensive, and the cost is rising every year. Currently, the average annual cost of a one-year stay in a private room at a nursing home in a Virginia metropolitan area is $77,380. Future long-term care will be even more expensive. If costs rise at just 3% annually (a conservative estimate), then 20 years from now a one-year stay in a nursing home will cost approximately $139,757. It’s easy to see how long-term care expenses can threaten or even wipe out your retirement savings and jeopardize any assets you had planned to leave your loved ones.
With the Standard & Poor’s (S&P 500) index returning an average of only 2.72%2 a year for the last ten years and a one-year certificate of deposit returning an average of under 1.0%, it may seem like an insurmountable task to save enough money to fund a retirement and potential long-term care costs.
The experienced attorneys at The Estate Planning & Elder Law Firm can help you come up with creative options to help plan for your family’s future long-term care costs. Let’s take a look at one of the innovative funding solutions someone might want to consider.
Let’s assume that Cheryl, age 56 years and Frank, age 58 years, are a married, working couple with assets in excess of $500,000, mostly in certificates of deposits. Cheryl’s mother has Alzheimer’s disease and has been in a nursing home for the past six years. Cheryl and Frank have seen first-hand how her mother’s nursing home expenses have decimated her parents’ retirement nest egg. To avoid this from happening to them, Cheryl and Frank want to plan ahead for their own retirement.
Cheryl and Frank can purchase a shared long-term care insurance policy that will cost them roughly $4,000 annually if they are in good health. Cheryl and Frank can then take $75,000 from one of their certificates of deposit that is maturing and purchase a Single Premium Immediate Annuity (SPIA) with a “Life with Cash Refund” payout option.
SPIA income payments with specific life insurance companies can be set up to automatically pay the long-term care insurance premiums each year to ensure the policy stays in force for life. Also, beginning in 2010 (thanks to the Pension Protection Act), income payments from a SPIA can fund a long-term care insurance policy. If set up properly, these income payments can be federal income tax free. Thus, using a SPIA to fund long-term care insurance premiums creates not only a tax-efficient funding solution, but also a convenient way to help protect Cheryl and Frank’s lifestyle and portfolio from the high costs of long-term care.
As Rents Rise, Is It Time to Buy?
Description
As the nation’s home ownership rate shows signs of creeping back up, so too does the average monthly rent paid by those who don’t yet own their homes. With that in mind, this article reviews key considerations for those considering making the transition from renter to owner.
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The cost of renting is on the rise. Is now a good time to buy?
The number of Americans who own their home increased modestly during the third quarter, yet remained below the level recorded one year earlier. The seasonally adjusted home-ownership rate rose to 66.1% from 66%; it stood at 66.7% during the third quarter of 2010. The rate approached 70% during the recent housing boom.
The rental vacancy rate rose to 9.8% from 9.2% in the second quarter, although it was down from 10.3% year-over-year. The national rental rate climbed to $1,004 in the third quarter, up from $981 one year earlier.
For today’s renters, low interest rates continue to create an ideal opportunity to purchase a first home. Even if interest rates begin to creep upward, starting out with a solid understanding of mortgages could help you identify the best deals and save you thousands of dollars over the years. For example, if a mortgage has a fixed rate, it means that you’ll pay the same interest rate during the entire life of the loan; the interest rates on an adjustable-rate mortgage may vary from year to year. Here are some additional factors to consider:
- Shorter terms = lower rates, but higher payments. The “term” of a mortgage is the amount of time you have to pay off your loan. For example, a mortgage with a 15-year term requires to you repay your entire debt, plus interest, within 15 years. In general, shorter-term mortgages offer lower interest rates than longer-term loans. But shorter-term mortgages also require you to make higher monthly payments in order to meet the more aggressive schedule.
- Points are up-front fees. Some lenders may want you to pay “points” when you sign a mortgage. A point is essentially a fee equal to 1% of the value of the mortgage. For example, three points on a $100,000 mortgage translates to $3,000. Your willingness to pay points may help you negotiate a lower interest rate, but that decision should depend on how long you plan to own the property, and how long it would take for your lower monthly payments to compensate for the additional up-front expense.
- Prequalifying can give you a head start. Prequalifying for a mortgage, which involves working with a lender before you find a home to determine how much you’ll be able to borrow, has important benefits. It lets you focus on houses you know you can afford, and it may save precious time once you decide to make an offer.
- Debt makes a difference. Lenders look at something called your “debt to income” ratio to determine how much mortgage you can afford. In general, no more than 28% of your monthly income should go toward housing expenses; overall debt shouldn’t consume more than 36% of income. However, lenders have the flexibility to make case-by-case decisions.
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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
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