Tuesday, December 13, 2011
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Savings Bonds Go Paperless
U.S. Treasury securities date back to 1776 as marketable securities. They were subject to market fluctuation.
It was almost 160 years before then-Treasury Secretary Henry Morganthau, Jr. introduced a brilliant idea. He suggested making non-marketable securities available in small denominations at a fixed interest rate and redemption schedule. They would be tailored to the small investor.
Early savings bonds were called "baby bonds." They were issued from 1935 to 1941 in denominations ranging from $25 to $1,000. These baby bonds sold at 75 percent of face value and paid 2.9 percent interest when held for their full 10-year maturity.
These Series A to D bonds were sold through post offices. Marketing was conducted through direct mail campaigns and magazine advertising.
They were a hit. Approximately $4 billion of these bonds were sold over the course of this program, with the last maturing in 1951.
As the world prepared war, new need arose. The U.S. faced rapidly-expanding debt and inflation was growing. A larger effort was needed to fund our country's efforts.
Introducing the Series E bond. And the beginning of an all-out marketing campaign.
The national volunteer program coordinated our nation's financial institutions, community leaders, volunteer committees and the advertising and communications media to promote the new bond. The program was a success for more than 60 years.
The Series E bond was originally issued for a fixed term of 10 years, but continued to earn interest for 30 or 40 years, depending on when it was purchased. They were sold until 1980 when they were replaced by the current Series EE bond.
Beginning January 1, 2012, savings bonds are taking on a whole new look. No longer will you be able to purchase a piece of paper to stuff in a gift card. They're going paperless!
Purchase bonds directly from the Treasury Department's website. You won't be able to buy them at your financial institution.
Individuals will need a TreasuryDirect account to purchase Series EE and I electronic savings bonds. Just point your browser to TreasuryDirect.gov and select the Open an Account link.
It's easy to open an Individual TreasuryDirect account. All you need is a taxpayer identification or Social Security number, a checking or savings account, an email address and a U.S. address of record.
Your account also enables you to manage and redeem these bonds. You'll be able to convert existing paper savings bonds to electronic, enroll in a payroll savings plan to purchase electronic bonds and invest in other Treasury securities. These include bills, notes, bonds and TIPS (Treasury Inflation-Protected Securities).
You can continue to redeem your paper bonds at financial institutions once matured. Replacements for lost, stolen or destroyed bonds can be reissued in paper or electronic form.
The recipient of a gift savings bond must have a TreasuryDirect account before the bond can be delivered. You can hold it in the Gift Box area of your own account until theirs is setup.
Eliminating paper bonds is expected to save taxpayers $70 million over the first five years.
Year End Financial Tune Up
As the year draws to a close, many of us will look ahead and plan for the coming year. Different events trigger each of us into action. For some, it's wrapping the last Christmas gift.
For me, it's the annual Army/Navy game and awarding of the Heisman Trophy that brings realization of how few days remain on this year's calendar.
And then all those annual lists are posted far and wide. We have the top ten memorable moments, ten news events that changed the world, ten top moments in sports, ten celebrity deaths, ten weather events and so on. We see enough 1s and 0s to satisfy the appetite of any binary code addict.
So without further delay, may I present to you the Top Ten Year End Financial Tips as chosen by this writer. No huge committee oversight to clog down this process.
Two Retirement Rules of Thumb:
I am often asked how much one needs to retire. This is very likely one of the most often asked questions in finance. And because the prudent answer is "it depends," whole industries of consultants and pundits have emerged to try to assist in the answer (for a fee, of course). But isn't there a simple "rule of thumb" to be guided by? Yes there is, so read on.
Some years ago a (fairly well heeled) colleague and I were discussing a particular investment that contained various unknown risks. As usual, he was fretting about the potential "what-ifs." At one point, I joked with him and said, "So what, you can always just take the million bucks you already have and retire." He shot back, "It takes four million to retire." This colleague had already calculated the pile of capital he would need, at conservative investment returns, to generate the monthly income that he was accustomed to.
You should know that his calculation ignored Social Security (SS) - he didn't think it would be around that long - and his modest pension and also accounted for him leaving his entire retirement principal balance to his two sons after his and his wife's death (I always told him he spoiled his children). So based on these criteria, four million was HIS number. And it was prudent, based on those objectives.
Of course, most Americans don't need anything close to four million bucks to retire comfortably, but his point was well taken and has stuck with me. So how about a rule of thumb or two:
Retirement Rule of Thumb #1 - The Leave an Estate Plan (you might also want to think of this as "the spoiled kids rule" or alternatively "the live off the interest rule"): From a moderately diversified investment portfolio, you would be able to withdraw one half of one percent (0.5 percent) per month and very likely never touch your principal. The math wizards will quickly deduce that this equates to a 6 percent per year rate of return. For our mythical one million bucks, that would equate to $60,000 per year (or $5,000 per month). Can you live on that? Add in SS and perhaps a pension, and for many Americans the answer would be "Yes." It might require relocating to a lower cost locale since NJ is a notoriously high tax, high cost and retirement unfriendly state.
Retirement Rule of Thumb #2 - The Don't Worry About Leaving an Estate Plan (you might want to think of this as the "to hell with the kids rule" or "no luggage rack on a hearse rule"): From a moderately diversified investment portfolio, you would be able to withdraw one full percent (1 percent) per month and likely chew through your principal over time, but not at a rate fast enough to reach zero before you die. You need not be a math wizard to deduce that this equates to a 12 percent per year rate of return. Once again, for our mythical one million dollar nest egg, you would earn $120,000 per year (or $10,000 per month). Can you live on that? Even without adding back SS and perhaps a pension, most Americans could easily say "I can live on that." It might not even require the relocation to a lower cost, more tax friendly state (but, hey why not!).
There is a mountain of empirical evidence to support both rules; based on life expectancies, historical investment returns, the business cycle, etc. The rule is easy to apply, and in most cases you don't need a calculator. For example, you are 50 years old, and just received your quarterly IRA statement. It projects that in 15 years (you projected retirement date) your balance should be about $700K, with past returns projected out. You have no heirs, so you apply Rule #2 and determine that you can withdraw $7,000 per month. When you add in your expected SS income and a small pension, you decide this is fine and little if any change in lifestyle will be required.
On the other hand, if you insist on leaving an estate to your heirs you must apply Rule #1. Worse yet, you have always been self-employed and paid only minimal amounts into SS and have no pension. Could you live on $3,500 per month? Certainly not in NJ, but it seems it would be lean even in North Carolina, Tennessee or Florida. Your only choice is to throw the heirs overboard and/or substantially increase your savings rate between now and your retirement date. You get the point.
One can conjure up any number of scenarios. However, the basic premise is that, generally speaking, you won't chew through principal at a 6 percent investment return and only modestly so at a 12 percent return. You can pick points in between and modify any number of other parameters, but the rules will generally hold true. And better yet, you can ignore inflation and taxes since they shouldn't appreciably change the math. I apply these two rules of thumbs all the time. And you can too. Maybe you could even charge a fee...
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