One takeaway from the table is that for holders of high-quality short-term bonds (like US Treasuries) it is now difficult to envision an environment where returns for the next 12 months could be negative.
Even if Treasury bond interest rates were to climb to 8% (from today’s 5%), the 12-month return would still be positive for holders of short-maturity bonds. This is because: 1. Short-term bond prices are less sensitive to interest rate movements; and 2. Income from coupon payments more than offsets the negative price adjustment.
For holders of longer-maturity bonds, an interest rate decline would translate to big gains.
But interest rate risk cuts both ways. If rates were to climb by another 1.5 percentage points or more during the next year, it would mean additional losses for holders of intermediate and long-maturity bonds.
The pain for current bond holders has occurred as prices have fallen to adjust to higher interest rates. But the good news is that higher interest rates offer protection against future interest rate increases and price declines. And higher interest rates mean more yield, and therefore more income.
The Income Piece
The pleasure related to bonds is that investors now can reinvest at higher interest rates (compared to the recent past) and therefore earn more money over time.
To put this into perspective, if you invested $100,000 into the 1-Year Treasury in January 2022, you would have collected $500 in interest by the time the bond matured one year later.
Today, if you purchase a one-year Treasury note, you’ll earn about 5.5% in interest, which, on a $100,000 investment, translates to earnings of $5,500. In the span of just under two years, the expected return on short-term Treasuries has increased 11-fold.
This income component of bonds is the straightforward part of the bond puzzle.
The Whole Puzzle
The tough part is that investors holding bonds as part of a balanced portfolio have experienced losses as interest rates climbed. This has unquestionably been painful.
The good news is that you can expect to receive a lot more income from your bond investments, and this income helps to mitigate the downside of interest rate risk.
The bottom line for bond investors: taking some degree of interest rate risk is reasonable for most investors, most of the time. The amount of risk each individual investor should take depends upon their personal circumstances and market conditions.
At this point, given current market conditions, a prudent approach is to err on the side of caution.
Today, one-year Treasury notes yield about 5.5%, and 10-Year Treasuries yield 4.9%. Though the yields are close, the interest rate risk is very different. Some of the better deals, and higher yields, are currently in short-term bonds.
Investors get paid to wait and see how the inflation environment, and the interest rate environment, will unfold in the months ahead.
The Catch on Catch-Ups: 401K Update
SECURE 2.0 was a package of legislation signed into law in December 2022 as a follow-up to the Setting Every Community Up for Retirement Enhancement Act of 2019 (aka SECURE 1.0).
There has been some confusion since the passage of SECURE 2.0 regarding the new treatment of 401(k) contributions for older workers.
Upon passage of the legislation, it was assumed that beginning in 2024, employees who are 50 and older, and whose annual pay exceeds $145,000, would need to make catch up contributions only to a post-tax Roth 401(k). Currently, the maximum allowable 401(k) contribution from employees is $22,500, and the catch up is $7,500, for a total of $30,000 for employees 50 years and older.
The administrative aspects of this impending change caused concern by the administrators of 401(k) plans. The IRS recently provided guidance to clear up the ambiguity. Now, the IRS Is giving two years of administrative relief so payroll providers and others have extra time to implement the change.
For employees who are 50 and older, if your income exceeds $145,000, you can continue to make your catch-up contributions into a pre-tax (traditional) 401(k) account in 2024 and 2025.
Starting in 2026, catch-up contributions for 401(k) plans will need to be made after tax and directed to a Roth version of the 401(k).
It’s a Wrap: Finishing Up College Applications
Our colleague and college specialist Donna Cournoyer contributed the following update for college planning.
Admissions Applications
Some congratulations are in order if you’re helping a high school senior through the college application process: you’ve made it this far.
There have been college visits, checklists, discussions, applications, essays, and life sprinkled in the mix over the last year as college admissions activities and “to-do” lists have ramped up, especially this fall.
While the upcoming decision time can be emotionally challenging – given that choosing a college is one of the biggest financial decisions many families will make – this busy, stressful fall phase of active work is almost done!
As many schools have an early action or early decision date of November 1 or November 15, your student may have already submitted many of their applications. If this is the case, it’s a good idea to ride that momentum and finish up with any pending applications soon.
Encourage your student to complete their remaining applications on their school list.
Even if a college has a rolling deadline, or an early 2024 deadline, it is best to apply as soon as possible.
While the expected notification dates of acceptance vary from school to school, it’s good to know the following: the earlier your student applies, the sooner admissions staff likely will read the application and send out notification. College financial aid staff typically review applications for financial aid after acceptance.
The FAFSA: Free Application for Federal Student Aid
While the Department of Education has yet to release the opening date of the FAFSA application for the 2024-2025 academic year, it is still expected to open in December.
The fact that the FAFSA form is opening later for this year only, due to major changes in the form (it usually opens on October 1 for the following fall) is more reason to complete it as soon as it is released.
Schools will have a shorter timeline to review applications and prepare offer letters.
It is my recommendation that every student complete the FAFSA form.
Even if you think your student will not be eligible for need-based aid (free grants and scholarships), you and your student should complete the FAFSA form. Some schools will offer a free grant or scholarship even if your student doesn’t qualify for need-based funds, just because the form was completed.
There are also some schools that require completion for merit scholarships (awarded by admissions based on the student’s admissions application).
How to Get a Jump on Completing the FAFSA Form
Create your FSA ID
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Create your FSA ID here: Create FSA ID
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Get updates and FAFSA information here: Federal Student Aid
- Both student and parent will need to create an ID
- You can take these steps now and keep credentials in a safe place until the FAFSA opens
Gather required information to reference when completing the FAFSA, including:
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2022 Federal Tax Return - in most cases, you will be required to give consent to the IRS and use the (FTI) Federal Tax Information-Module. Eligibility will not be calculated without consent. This is consent for tax information, NOT to contribute to college costs.
- 2022 W-2’s and 1099’s
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Account Statements - Checking and savings accounts, brokerage accounts
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Child support received - if applicable
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Social Security #’s - be sure to double check these- it is a common mistake to transpose numbers or use the wrong one
Once your student finishes their applications, hopefully your whole family will be able to find time to relax and enjoy the holidays!
And, as a reminder, be sure to check your email regularly for notifications from the schools.
100 Is the New 65
There are many facets to longevity.
A philosophical (and perhaps scary) part is that it raises issues associated with our own mortality. A promising development is that doctors and scientists are discovering new approaches that increase the likelihood of living longer and healthier lives.
A practical component is that longevity is a key input into the financial planning equation. A longer life implies a greater need for resources to support that life.
I’ve previously recommended Dr Peter Attia’s book Outlive: The Science and Art of Longevity.
For this month, journalist Wiliam J. Kole provides other viewpoints on longevity, in his book The Big 100: The New World of Super Aging.
Chapters include:
- How Science Lengthens Our Lives
- The Luck of the DNA Draw
- Growing Old in a Youth-Obsessed Society
- Exceptionally Old, With Extreme Influence
- Who Will Care for Us, and Who Will Pay
For those of you who’d like a more in-depth preview, or prefer listening to reading, you can hear Kole discuss his ideas on longevity, and provide some interesting anecdotes, in the October 20 edition of WBUR’s On Point podcast entitled: 100 is the New 65: The New World of Super Aging.