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Coasting in Retirement Ep 15: Is this as good as it gets? A discussion on fixed interest rates Thumbnail

Coasting in Retirement Ep 15: Is this as good as it gets? A discussion on fixed interest rates

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Episode 15: Is this as good as it gets? Fixed interest rates at decades high

Segment 1 (Show Open): 

Good afternoon everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Here we go. I am your host, Josh Null, along side co-host Michelle Lee Melton, my radio partner in crime, my midnight rider, my Auburn lady help keeping my pea brain on track…Michelle, how are you? Well, I’m excited to back in studio after an extended 4th of July break, back at home in Coastal College’s podcast studio here in beautiful downtown Fairhope, and I’m even more excited about the show we have today, as usual, we have another great show for those of you tuning in! 

Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement living your best life along our part of the coast. If you’re just tuning in to our show, welcome, you’ve listening to what we consider Lower Alabama’s most dynamic and interesting financial radio show. We are here to entertain and enlighten you - this definitely isn’t no infomercial type of show. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 20 minutes past the hour - fan favorite “Michelle with the News of the Week”. 3rd segment, roughly 40 minutes past the hour, you’ll hear a good ol fashioned roast of yours truly with our ”Josh’s Crystal Ball and Big Mouth” piece. So buckle up, we’ve got a lot to get to! 

Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, an independent investment management and financial planning firm with offices in Fairhope and Orange Beach, Alabama. You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com or feel free to give us a call at 251-327-2124. If you missed that, don’t worry, we will repeat our contact info several times throughout the show! 

Alright, let’s start with a question to Michelle as we get to our main topic. Michelle, how much do you pay attention to interest rates? 

First, a short confession about what we are going to talk about today. I have been doing various podcasts and radio shows for several years now, about a whole wide range of investment and financial planning topics, sometimes really complex and exciting money concepts, but not once in all that time have, I been even remotely excited about devoting an entire episode to what most would consider a pretty dry topic – interest rates. That’s right, we’re going to be talking ALL about interest rates today, and here’s why: First, this show is dedicated to the financial needs of those of you listening that are in or near retirement, so it’s not uncommon for you to rely on fixed interest investments, fixed income and annuities for predictable returns, hence the topic fits. Second, interest rates are at their highest point since 2007, about 16 years. And third, and the reason for the show, is we are going to try to solve this riddle: Is this as good as it gets as it pertains to interest rates? Should you be taking advantage of these rate offers by positioning more of your cash into them? We’re going to look at the history of these options and see just how long this music can last, and if does continue, what it means to the rest of your investment portfolios, especially equities, or stock positions?  

There are all kinds of investments and ways to gather fixed interest, but for sake of brevity I am going to stick with the options that are readily available to most investors, and with which I am most familiar with. Some of these options, like bank CDs, are not something I handle in my role as an independent advisor, but since investors will often shop money market funds against CDs, I felt it was important to add them. And since our regular listeners know that Michelle loves her some odd numbers, I decided to keep the list to 5. So let’s get to our list of 5 ways for investors to take advantage of current higher interest rates, then circle back and discuss each more individually. Here we go:  

  • Money Market funds – this is a type of mutual fund that invests in highly liquid, near-term instruments. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (think U.S. Treasuries). Money market funds are intended to offer investors high liquidity with a very low level of risk. Not no risk, as we will discuss, but low risk. Money market funds are also referred to as money market mutual funds. Schwab SWVXX. Current 7 day yield is 4.96%, no min, it has a kissing cousin called SNAXX that pays a little more interest (5.11%) but requires a minimum deposit of $1M. SWVXX holds a variety of commercial paper, notes, repurchase agreements, CDs, etc. Ultra short term, liquidity. Want a little more government securities? There are a variety of Govt Money and Treasury MM available. There are also Municipal bond money market funds, but the yield tends to be less, more in the mid to high 2’s. 

 https://si2.schwabinstitutional.com/SI2/Trading/default.aspx?sAAEAAAEALAAxAAAAADEAAU%3d&tab=research 

  • Bank Certificate of Deposits, or CDs - these are a type of savings account typically offered by banks and credit unions. You generally agree to keep your money in the CD for a period of time - usually between 3 to 12 months but can be as long as 5 years, maybe even 10 with some banks, I believe - without taking a withdrawal during that time. If you do withdrawal your money early, you’ll pay a penalty to the bank. Rates from internet – looks like there’s several options in the high 4s to low 5s for 12 month CDs, I don’t recognize a lot of the bank names so I’m assuming their online banks, we will discuss that more in depth later in the show. I did call my local Alabama Credit Union and they are offering 4.5% for 7 months with min $5000.  
  • Multi-Year Guaranteed Annuities, referred to as MYGAs – not Michelle’s favorite, SPIAs, but MYGAs - these are a type of fixed annuity that provide a pre-determined and contractually guaranteed interest rate for a specified period of time, most commonly 2-10 years. MYGAs are often compared to Bank CD's, but remember that MYGAs are offered by an insurance company, not a bank, and therefore are backed by the paying ability of the insurance company, not the FDIC like a CD would be, up to $250k. I did some research and it looks like American National Insurance is still sitting pretty at 5.45% for a 7 year MYGA. There’s even some 2 year stuff sitting at 4.6, 4.7, which is just astonishing compared to where rates where just last year. Make sure to give the surrender period disclosure, typically give you access to 10% per year, etc. 

 https://www.concoursefinancial.com/

  • Treasury Securities, specifically T-bills, T-notes and T-Bonds. I’ll be honest with you all. I’ve taken upteen securities tests at this point in my career and I still get these mixed up, let’s start with a basic definition: U.S. Treasuries are issued by the U.S. Department of the Treasury on behalf of the federal government. They carry the full faith and credit of the U.S. government, which is supposed to make them one of your safer investment choices. Types of U.S. Treasuries includet:
    • Treasury Bills. Short-term securities maturing in a few days to 52 weeks.
      • Example current T-Bill rate according to MarketWatch: about 5.25% on a 1 month and 5.34% on a 1 year 
    • T-Notes. Longer-term securities maturing within 2 to 10 years, they pay interest bi-annually. 
      • Example rate: according to Market Watch, were currently at 3.85% for a 10 year Treasury Note
    • Bonds. Long-term securities that typically mature in 20 to 30 years and pay interest every six months
      • MarketWatch – About 3.95% for a 30 year Treasure Bonds. 
    • TIPS. Treasury Inflation-Protected Securities are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of 5, 10 and 30 years. 
  • Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.
  • When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.
  • TIPS pay a fixed rate of interest every six months until they mature. Because we pay interest on the adjusted principal, the amount of interest payment also varies.
  • You can hold a TIPS until it matures or sell it before it matures.

https://www.marketwatch.com/market-data/rates

  • And then good ol’ Corporate and municipal bonds are debt securities issued by private and public corporations. With corporate bonds, there are 2 broad types: 
    • Investment-grade.  These bonds have a higher credit rating, implying less credit risk, than high-yield corporate bonds.
    • High-yield.  These bonds have a lower credit rating, implying higher credit risk, than investment-grade bonds and, therefore, offer higher interest rates in return for the increased risk. High-yield bonds are often referred to as…junk bonds…but don’t let that necessarily scare you away. You just have to be careful in your selection. 

With Municipal bonds, called “munis,” are debt securities issued by states, cities, counties and other government entities. (ask Michelle about her bond experience) Types of “munis” include:

    • General obligation bonds. These bonds are not secured by any assets; instead, they are backed by the “full faith and credit” of the issuer, which has the power to tax residents to pay bondholders.
    • Revenue bonds. Instead of taxes, these bonds are backed by revenues from a specific project or source, such as highway tolls or lease fees.  Some revenue bonds are “non-recourse,” meaning that if the revenue stream dries up, the bondholders do not have a claim on the underlying revenue source.
    • Conduit bonds. Governments sometimes issue municipal bonds on behalf of private entities such as non-profit colleges or hospitals. These “conduit” borrowers typically agree to repay the issuer, who pays the interest and principal on the bonds. If the conduit borrower fails to make a payment, the issuer usually is not required to pay the bondholders. 

Let’s dive into each category individually. Quick note – while the types of fixed interest investments tend to stay pretty static over the past several decades, the interest rates can and will vary significantly, which unfortunately means that if we mention some of the current available rates, they may not be here tomorrow. That’s part of the reason we’re talking about them – to hopefully answer this question: is this as good as it gets?  

Again, if you’re interested in having that conversation, give us a call at 251-333-5151, or find us at gulfcoastfa.com. That’s gulfcoastfa.com 

Alright folks, coming up next - There’s always a lot going on in the world! Particularly the world of finance- this past week was certainly an example of big news in finance! Every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned! 

Segment 2 - Michelle with the News of the Week: 

Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Michelle and I are going to help you all understand and decipher the deeper meaning of those headlines, or at the very least, provide context. So with out further adieu, here’s “Michelle with the news of the week”!:

1. Michelle: Alright Josh, let’s ease into this using a site we reference often: Investopedia. They have a recent article titled “Money Market Funds: What They Are, How They Work, Pros and Cons”. Seems straight forward enough. Anyhoo, as one can imagine, this article lays out the basics of money market funds in the straightforward and dry language we’ve become accustomed to with Investopedia. I learned from this article that a money market fund aims to maintain a net asset value, known as NAV, of $1 per share, and apparently it’s a big deal if it falls below this level. It’s called “Breaking the Buck”, and has only happened a few times, the first time was when I graduated high school back in 1994, and the other during the 2008 financial crisis, and both times it produced quite a bit of turmoil. So Josh, here’s what I’m looking for from you: please explain NAV in more detail, how money market funds try to avoid breaking the buck, and what this all means for folks looking for a fixed interest investment? 

 Josh: Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the number of shares outstanding. Assets worth $2M, liabilities of $1M, with 100 outstanding shares, with 10,000 outstanding shares, that’s $1M / 10,000 = $100 per share NAV. It’s commonly used as a per-share value calculated for a mutual fund or ETF, and is calculated at the end of each trading day based on the closing market prices of the portfolio's securities. Breaking the buck occurs when the net asset value (NAV) of a money market fund falls below $1. Now, this may happen when the money market fund's investment income does not cover operating expenses or investment losses but normally occurs when interest rates drop to very low levels, or the fund uses leverage to create capital risk in otherwise risk-free instruments. I believe you are correct, it’s only happened twice. Historically money market funds are a safe way to store cash, but because the rates are not constant, once you come out of the higher interest rate environment, it may be time to get back into the market. 

(https://www.investopedia.com/terms/m/money-marketfund.asp)

2. Michelle: Next up Josh, let’s pivot to CNBC Business. This article is titled “2022 was the worst-ever year for US bonds. How to position your portfolio for 2023”. As a history buff, I found it interesting – and a little shocking – that in 2022 bonds had their worst year since…1754!? What? (Counts on fingers)…that’s over 250 years ago! This article also mentions the bond crash that happened during the Napoleonic War way back in 1803, which leads me to wonder if that was one of the reason ol’ Napoleon lost his war. Well, to bring this back to modern times, or at least the 20th century, let’s hear your opinion on what happened to bonds last year, and what the current bond market looks like? 

Josh: Rising bond prices work against existing bondholders because of the inverse relationship between bond yields and bond prices. When yields rise, prices of current bond issues fall. This is a function of supply and demand – why would someone buy your bond for full price at 2% when they can get one paying 3%? These hits the longer term bonds harder – investors don’t know how long the higher interest rates will hold so they discount the bond price the longer the period of time to maturity. What happened last year caught a lot of people off guard – we knew we had inflation, we knew that the Fed uses higher interest rates to fight inflation, but because we had been put to sleep for so long with low interest rates and low inflation, investors of all sizes and styles were caught with their pants down.

(https://www.cnbc.com/2023/01/07/2022-was-the-worst-ever-year-for-us-bonds-how-to-position-for-2023.html)

3. Michelle: Next up Josh, an article from the folks at Smart Alec. Oops, I mean SmartAsset. I’m going to take a guess that the people that started SmartAsset…we’re a little smart alecy themselves and probably had to add the “et” at some point. SmartAsset’s article states “What is a Multi-Year Guaranteed Annuity (MYGA for short)? Definition and Benefits”. I know we’ve discussed annuities often on this show, so there were a couple of words that stuck out to me on this article: surrender period, surrender fees, qualified vs non-qualified accounts, and tax deferred. Can you explain in more detail what these phrases mean in the MYGA space?  

Josh: Surrender period – how long until the annuity “matures”, or how long you agree to keep your money with the insurance company per the contract. Surrender fee – how much you pay the insurance company if you pull your money out during the surrender period, usually defined as a % of the premium invested. Qualified vs NQ. Tax deferred – MYGA’s offer tax-deferred growth, even in a NQ setting, which means while you’ll still owe some taxes when all is said and done, you are getting tax deferred interest on interest during the contract period. 

(https://smartasset.com/retirement/myga)

4. Michelle: Alright Josh, in past episodes we’ve referenced articles from one of the custodians you use, ol’ Chuck Schwab. But I believe you can also use Fidelity as a custodian? (Josh answers). Got it. I found this recent article on Fidelity’s site simply titled “Risk of Fixed Income Investing” and as what one would call a “regular investor” to my retirement plan, I found it interesting that something I consider relatively safe would have this long of a list of risks. I get the interest rate risk, because we just talked about how rapidly increasing interest rates played havoc in the bond market last year. But I guess I didn’t realize that bonds also dealt with “pre-payment” and “call” risks. As someone that often uses bond funds in your client’s portfolios, can you explain more? 

Josh: Even though historically bonds, in general, have been considered a safer investment than say, stocks or equities, they still have some risks. We’ve already discussed one of the biggest risks, interest rate risk, but there’s also credit risk, which you would be most typical on a junk bond but every once in a blue moon, a city goes bankrupt, there’s call risk, that would be on callable bonds that have a provision that allows the issuer to call, or repay, the bond early. If interest rates drop low enough, the bond's issuer can save money by repaying its callable bonds and issuing new bonds at lower interest rates. There’s a similar risk to call risk called pre-payment risk, which you would typically see on a mortgage backed bond because people pay their mortgage off early, and then there’s liquidity risk, if you just happened to buy a bond that no one, or very few people, want to buy anymore for whatever reason and now you’re underwater, which happened to several muni-bonds over this past year. 

(https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/fixed-income-investing-risks)

5. Michelle: So for our last article, I’ve got a little confession to make. When you told me last week that you wanted to talk about interest rates for this episode, I thought to myself, how boooooring. Make sure to bring lots of coffee. I even started searching for interest rate articles using the words “suck”, and “boring”, and “put me to sleep”. But despite my best efforts, and the apparently general politeness of anyone writing about interest rates, the best I could do was an article from our old friends at The Motley Fool. Of course, the article title is a snooze fest, it’s called “Interest Rates are on the Rise. What Aren’t Savings Rates?”. To my surprise, this led me down a rabbit hole where I discovered that in general, online banks are offering more interest on their savings accounts compared to traditional brick and mortar branch banks. 3 questions popped up from this article: why are online banks able to pay more interest than traditional banks, how are savings accounts different than the other options we discussed today, and can we please discuss something with a little more…pizazz…next episode? I almost want to talk about crypto again. Almost. Not really. 

Josh: Just a simple google search shows more than online banks savings acct rates are considerable more than brick and mortar, look at page. Savings accts typically don’t have a surrender period or a contract length, so there’s more exposure to the bank if they lock in higher rates for a longer period of time like with a CD. Next episode: How Overstock.com buying Bed Bath and Beyond’s IP and changing their website name is brilliant? They bought the brand's name, online domain, and loyalty program for only $21.5 million. Should we do a episode about how Instagram’s Threads is a dealthblow to twitter? 

(https://www.fool.com/the-ascent/banks/articles/interest-rates-are-on-the-rise-why-arent-savings-rates/)

Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those in or near retirement! Listeners – if you have questions around the topics in our headlines of the week, or questions related to your investment strategy or financial plan, why don’t you give us a call at 251-327-2124 to have a conversation or set up an appointment, or you can reach out to use via our contact page on our website gulfcoastfa.com.

Alright folks, coming up next : Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned! 

Segment 3 – Josh’s Crystal Ball and Big Mouth: 

Welcome back! Your host Josh Null here, along side co-host Michelle. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Sometimes I feel so strongly about something that I talk about it publicly, on the various podcasts and radio shows I’ve had, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth.   Alright Michelle, what’s first?

1. Michelle: So Josh, several months ago you stated that rapidly increasing mortgage rates would lead to a significant housing market decline, and that you felt bad for your realtor friends, especially those just getting into their career. Well, according to recent research, despite higher mortgage rates, the housing market remains as competitive as ever thanks to strong demand coupled with tight inventory supply, due, in part, to those who purchased homes in recent years at record-low interest rates staying put. Here locally in Baldwin County, all appearances are that the market is doing just fine, with listings and home prices both up significantly from last year. So, have you changed the opinion you previously stated with your big mouth? 

2. Michelle: Alright Josh you’ve stated on multiple occasions that when the stock market experiences high volatility, combined with gains being difficult to achieve, that many investors will do what is called a “flight to safety” and look for more conservative investment choices. Well, according to recent research by the Investment Company Institute, the total amount of dollars in money market funds has been increasing by roughly $40-80 billions dollars per week, or a total of $5.47 Trillion dollars, and increase of nearly $1 trillion dollars from 2 years ago. So, obviously your crystal ball was correct, but would you mind to provide some context around this news? 

https://www.ici.org/research/stats/mmf

3. Michelle: Let’s talk annuities. I feel we’ve been pretty fair and dare I say…balanced…what are we now, FoxNews! Anyway, apparently we are now Lower Alabama’s source for fair and balanced coverage of annuities. Yippee. Anyway, a handful of years ago you stated that one specific type of annuity would see a significant decline in popularity - Variable Annuities. Well, according to Insurance NewsNet, variable annuity sales are down to their lowest point in 25 years. So I guess congrats on your crystal ball, but can you explain why this is? Because it appears that sales are up across the board for all of the other types of annuities. Why are variable annuities getting left in the dust? 

https://insurancenewsnet.com/innarticle/va-sales-slump-to-lowest-level-in-25-years-wink-inc-reports

4. Michelle: Next up Josh, something that I know for a fact you feel pretty passionate about. It’s an opinion that feels a little jargony to me, so let’s walk our listeners thru it. You’ve stated that once investors truly understood the difference between wirehouse / brokerage advisors and reps of independent Registered Investment Advisor companies, commonly known as an RIA, they would choose the RIA route more often than not. You also stated that people starting their career would start going with an RIA right off the bat so that they had ownership. So, big mouth, we’re you right or wrong?

Josh: Explain the differences, then how RIA firms are absolutely kicking the butt of wireshouse (Morgan Stanley, Merrill Lynch, UBS, Wells Fargo, Ed Jones is a broker/dealer) when it comes to power of story, attracting top talent and gaining assets. However, the power of brand is still strong, and while I don’t have the numbers, the amount of money still going into these types probably still outranks RIAs. That is changing, the future is RIA. But also how you were wrong about people starting a career, they still typically start at a big name, talk about how why you get this, it’s hard it is to start a practice, how you did it arse backwards with no leads, etc. 

5. Michelle: I saved the last one for you to make a prediction, Josh. I don’t think the listeners want to hear you wax poetically about the status of NATO or the future of the ice shelf in Antarctica, so let me get your big mouth pointed in a pertinent direction: what will the next 12 months of Gulf Coast Financial Advisors look like? This will be fun to re-visit this time next year. What’s your crystal ball say? 

Well listeners, I hoped you enjoyed a peak behind the curtain on how I form my opinions and predictions, and more importantly, that I’m willing to admit when I am wrong. Which isn’t very often, but still.   Now, to our listeners that have more questions the various investments and topics we discussed in this segment, we invite you to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com. 

Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, a thank you to our awesome radio station 106.5, many thanks to the provider of our show music, local band Sloth Racer, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well. Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null! 

Disclosure:

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management ("PCWM") and Qualified Plan Advisors (“QPA”). Certain services may be provided by PCIA affiliates. In this format, Josh Null provides general information, not individually targeted personalized advice, and is not liable for the usage of the information provided.  Exposure to ideas and financial vehicles should not be considered investment advice or a recommendation to buy or sell any of these financial vehicles.  This information should also not be considered tax or legal advice. Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.