Barry Kane and John Fernandez, financial advisers with PaineWebber, spoke about fixed incomes to a group of seniors last Monday. The talk was strictly Bonds 101, but before it was over, annuities came into the picture, because many seniors hold annuities instead of bonds.
The Los Altos Senior Center holds monthly meetings on different subjects of concern to seniors. Chaired by Ruth Kroehler, last month's subject was fixed incomes.
"Anybody who has investments that pay a monthly income should have a review of their portfolio by a financial analyst, because it is free," said Kane. "If you make changes in the portfolio to receive a better return, there may be a charge."
"Seniors need to diversify their investments," Fernandez said. "You need different investment products to control inflation and bonds are one of the fixed incomes for seniors."
Municipal bonds, issued by state and local governments, provide income that is exempt from federal tax. The interest paid, usually twice a year, is exempt from federal tax. A California municipal bond is also exempt from state and local taxes if you live in California.
Kane explained to the seniors, "If someone is in the 28 percent federal tax bracket, a municipal bond yielding 5 percent provides the same after-tax yield as a corporate bond paying 6.9 percent, but you pay taxes on the corporate bond interest."
"These days, munis offer yields that are 85 percent to 90 percent of pretax treasury yields," said Fernandez, working at the Menlo Park PaineWebber brokerage. "That makes municipal bonds the better buy for more people further down the income-tax bracket scale."
Investors over the last five years have snubbed municipals and treasuries in pursuit of the equity markets and returns averaging 30 percent. Because of that, municipal bonds are cheap right now and offer a good value.
"I would give up a penny on the dollar so I could sleep at night," Fernandez said. "That's why not everything good is good for seniors."
Although bond funds are very popular right now, both financial advisers mentioned bond funds are not always a good investment for seniors.
"Bond funds vary on the rate of return and fluctuate because of the interest rate," Kane said. "Pure municipal bonds provide a definite year-after-year return until the maturity date. There is also a yearly fee for the fund managers."
Zero coupon bonds were also not recommended for seniors because of the annual taxes on the gains expected at maturity. They do make an excellent investment for a grandchild who expects to go to college.
When asked about asset allocation: "PaineWebber does not believe in an asset allocation ratio that meets everyone's goal," Kane said. "We sit down with a client and offer a percentage according to risk and monetary return."
As to annuities, neither advisor expressed an opinion; but preferred that individuals have a financial house analyze the specific annuity because each offers special features that may not be advisable today.