Tuesday, April 15, 2014

Losing Hope on Early Retirement

I had some hope that interest rates would rise enough to be able to retire at the end of this year, when I will have five years of service to the State of Idaho.  (There is a very modest pension for five years of service.  This isn't California!)  But it turns out that interest rates are not rising, and have even been falling slightly.

My goal for retirement was never to play golf, or watch TV.  It was to do stuff that really matters: concentrate more energy on public policy, history and teaching.  But that stuff doesn't pay (unless you are doing it for the left).  I am beginning to think that I just need to invest in municipal bonds at current miserable interest rates (typically about 4.8 to 5.1%, unless you want to get risky with Puerto Rican munis), and enjoy life a bit more now, in the hopes of perhaps retiring in another couple of years.

I am hoping that there is something that I have missed: some investment that is relatively low risk, relatively low volatility on income stream, and pays net taxes about 6% or better.  Any suggestions?

UPDATE: This article suggests that the dominance of a couple of really big bond firms may cause dramatic collapses in bond prices when the bond rally comes to an end -- really soon:
The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.
Of course, rapidly collapsing bond prices means dramatically rising bond yields.  Maybe that would be a good time to be buying.

UPDATE 2: A friend who made a few hundred million some years ago tells me that if the fat cats have a secret on this, they aren't sharing it with him.  He is surprised at how long interest rates have stayed low.

UPDATE 3: My 0.01% friend used the term "fat cats" to describe the people upslope from him economically -- the billionaires.  This is a reminder that "fat cat" is a very relative term.

I should mention that the 4.8% - 5.1% yields that I was discussing are:

1. Municipal bonds -- not bond funds.  You buy them, and if worst comes to worst, you hold them to maturity.

2. They are generally long-maturity bonds that are callable before maturity.  There is usually a significant yield bonus with callable bonds, because it is likely that they will be called before maturity.  If they get called in five to seven years, instead of maturing, big deal: you have earned a better return in the meantime, and it is hard to imagine the economy is going to be dramatically worse off five to seven years from now, unless we are in Mad Max territory.  (That could happen.)  Just make sure that if you buy callable bonds that you look not just at the yield to maturity, but the yield to worst.  If you buy a bond above par, and it gets called at par two years from now, you may have a disappointing return -- potentially even negative.


James B. Shearer said...

The markets aren't perfect but they are pretty efficient. Lots of people are looking for bargains so they are hard to find. One thing to be wary of is fake bargains, there are various schemes that are likely to boost yields for a few years but then will have a bad year and lose all your excess returns and more.

If you are a real expert in some obscure area like buying tax liens there may be opportunities but there will also be pitfalls that a novice is likely to learn about the hard way. In general you aren't going to find a lot of free lunches.

James B. Shearer said...

... typically about 4.8 to 5.1% ...

Where are you getting that much? Is that the SEC yield? I checked Vanguard, their regular muni fund is yielding 3%, their high yield fund 3.3%. Add .2% for fund expenses and this corresponds to yields of 3.2%-3.5% on individual bonds. I wouldn't expect to get more than this without substantial risk.

Vanguard's utility fund is yielding 3.5%. The dividends are taxable but should be (at least mostly) qualified so you would get a break on your federal taxes.

StormCchaser said...

You aren't going to get 6% without a huge risk - whether in stocks or the bond market. Arbitrage links those two markets (and all others). Because of the Fed's lousy policies, bonds and stocks are strongly correlated (unlike normal). You may have noticed that if the fed hints at raising interest rates, stocks crater. But when they actually do raise them, bonds crater (principal down, yield up).

I'm retired, sitting on my cash, and pissed! Anything that isn't a huge risk is paying less than 1% (3%

if you can hold it for 10 years): See http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield.

Bonds are fairly straight forward - you can find calculators online. The price of the bond is inversely related to the interest rate (less so as the term shortens). So if you by a 30 year bond and the interest rate doubles, you lose half your principle!

Put another way, when yields go up, those who hold bonds lose. You can't buy bonds and then get better when the yields go up - quite the reverse.

I wish I had better news, but 6%? Not a chance!

Clayton Cramer said...

James: Not bond funds, but actual municipal bonds. Some are TVA, some are various state and city municipal bonds, and these are all 30 year maturity bonds, many of them callable. If you want to live dangerously, Puerto Rico has some insured general obligation bonds with yields above 6%. If they were not insured, I would not even consider them; because they are insured, I would not put more than about 5% of portfolio into them.

Clayton Cramer said...

I should mention that bonds that are callable usually have higher yields, because of the danger of being called before maturity. A 30 year bond that might be called in 5-7 years can still be a pretty decent choice if you expect the economy to improve in the meantime. (And there seems little room to go but up, unless we descend in Mad Max land.)

hga said...

The markets aren't perfect but they are pretty efficient.

Echoing StormCchaser, we're in a period of serious "financial repression" so there's no telling how long the establishment will be able to keep the Federal Government's borrowing cost low low low, and e.g. probably negative real interest rates for holding cash (after inflation and taxes).

Potentially a very bad time to retire, unless you're really sure you and yours can make it in something edging towards "Mad Max" territory. For medical reasons I call the worse case I plan and prepare for "Argentina".

StormCchaser said...

I'm no bond expert, so take the following as just my reading of things...

As to the PR bonds.... the interest rate always reflects a mix of perceived risk and general rates of return. So if a bond is paying higher rates than the market, it's more risky - insured or otherwise. It's the free market at work.

With a 30 year bond, you are betting against inflation. Also, if you have to liquidate before maturity, you are betting that yields won't go up. If they do, you have to sell it at a price depressed enough that the yield matches the market.

Agree with hga - hard to retire.

James B. Shearer said...

... but actual municipal bonds. Some are TVA ...

TVA bonds are federally taxable so aren't directly comparable to most municipal bonds.

Clayton Cramer said...

That actually makes sense. Thanks.