Let me state the obvious. The world is not fair. Some of us are born into wealth, catch the proper break, or win the lottery. The top 1% of wealthiest people are set, and this message may have little relevance. For the rest of us, or 99% of the population, we might be asking, “What’s my number”? What net worth does it take to be financially comfortable in retirement? Also, there is a specific part of the population that has no desire to retire, as work provides all the gratification they want in life. So, now I’m probably appealing to only 98.9% of you. I also realize that “the number” may fluctuate over time. For example, between my son’s wedding and a new home address with new furnishings, my number has crept higher. Congratulations to those who are financially stress-free, but most of us work our entire lives to reach this ultimate financial goal – our number.
Consider the long journey it takes to reach your number. It may not be so simple to achieve. Realistically, we are likely to have a narrow window to attain this number. A typical career start has entry-level earnings with minimal discretionary income. As we mature, a significant portion of our discretionary income may be spent on purchasing cars, a house, furnishings, and other essentials of life. During the next stage of life, income is allocated to schools, clothing, camps, vacations, and children. Between the ages of 23 and 53, our lifestyles typically dictate the distribution of most of our discretionary income. The greatest window of opportunity to financially shape our retirement occurs late in our careers, after our children have grown, when earnings have peaked, and many of our hard assets have already been accumulated. If this life pattern ensues, you may have roughly 15 years to shape and distinctly contribute to your retirement.
What we cannot plan is the exact point at which the economic cycle happens to be when we reach our best earnings and savings potential. Throughout our lives to this point, lower interest rates can benefit us by leveraging our purchasing power and allowing us to obtain more. However, now that larger portions of income are dedicated to growing our retirement fund, higher interest rates may be ideal. If only we could map out our timing, purchases, and interest rates. It is easy to see how extraneous factors can make this process more difficult than a straightforward pen-and-paper strategy. So, where are you?
Generational wealth and levels of net worth are very real principles that may affect the way you need to invest in your future. The current market and the changing degree of risk we are willing to take mature along with us. We are subject to uncontrollable variables, making it essential to identify the optimum viable path to our financial goal. Where you are in life’s cycle (at the start of your career, middle age, or near retirement) and where the economic cycle (high or low interest rate environment, inflation, and/or political/geopolitical outlook) may be substantial factors in strategic planning.
In the early stages of financial maturation, growing wealth can be the primary focus, which may weight growth assets (such as equities, businesses, MLPs…) more heavily than wealth preservation assets (like fixed income). As we mature into our later years and near retirement, individual bonds can become the cornerstone of wealth preservation. We’ve made it, let’s not lose it. What is particularly notable right now is that fixed income, under our current interest rate environment, can offer a dual benefit. It remains a critical wealth preservation tool, offering significant income opportunities resulting from the current elevated rates. This may be cliché, but "a bird in the hand is worth two in the bush.” Over nearly the last two years, investors have had the opportunity to lock into yields and therefore income levels that were not obtainable during the prior 17+ years. Locking into rates for more extended periods with individual bonds is a strategy that mitigates market risks and offers identifiable benefits.
This strategy is so timely and effective that we plan to dedicate a client-facing webinar on August 12 to outline it. Your Raymond James financial advisor can discuss fixed income options tailored to your unique goals, as well as set you up to participate in the August webinar, titled A Generational Shift in Wealth; Are You Prepared? Exploring the Role of Fixed Income and Individual Bonds in Portfolio Planning.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
