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When bond yields go up, bond prices go down

Question: My dad is now 80 years old but still is working full time concerned that he does not have enough money saved for retirement. In reality, he has a significant nest egg in his TIAA-CREF account.

Given his age, 1/3 of his retirement is invested in a money market fund that does not earn anything. The alternative is putting this money in bonds or inflation linked bonds. However, with rates so low and likely only to go up, I am hesitant to advise him to invest in bonds. Knowing that bond prices will decrease as rates rise, would he not stand to lose money? Please let me know if I am thinking this through properly. Tom, Lausanne, CH

Answer: You're right on the money about what will happen to bond prices if rates go up. I wouldn't lock up his money in longer term bonds to reach for a slightly higher yield at the moment. I don't think he'll get paid enough in extra interest to take the risk that interest rates will go up sharply over the next few years.

Did you watch the Ben Bernanke press conference several weeks ago? While much of the discussion was about the moderate recovery and transient inflation, the Fed chairman made it clear that the Fed will start tightening as soon as the monetary mandarins think it's safe. It seems the only real question is not "if" rates will go up, but "when." By sticking with short-term high-quality investments he'll be able to reinvest the money at higher interest rates down the line.

You're question raises a number of other issues. I'm guessing that your Dad is working for more than money. Work may offer purpose, structure, and conversation during the day. Still, at his age he should spend more of his savings on himself now. (I realize that it's an easy piece of advice to write and difficult to actually accomplish.)

My other thought is that TIAA is a good floating rate annuity. Perhaps much of his money should go into it? I'm not sure, of course. But I would make an appointment with the TIAA -CREF counselors and get their advice. They should be able to help your Dad set up a good portfolio for his age, and maybe encourage him to spend more.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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I agree concerning bonds, and appreciate your careful advice to all inquiries. I would suggest to the inquirer's father that a money market fund is no place for money right now, since it pays exactly nothing. I also agree that the traditional TIAA is a good vehicle with reliable return and safety. But, getting money out of it other than via an annuity is problematic. Certainly, most folks who opt for this would want to be sure and use the "certain" option to transfer any annuity income to a beneficiary.

Like the correspondent's father, my wife and I have most of our retirement funded through TIAA-CREF via a combination of 403b and IRA accounts. They do provide counseling service to those who have substantial amounts of money invested through them. However, that service we have found to be the one aspect of TIAA-CREF that we have been unhappy with.

They style the folks one has to deal with as "Wealth Managers." They want the client to sign a liability release. The fellow we dealt with tried to force us into putting money into every fund they have, including a series of high risk funds (admittedly there would have been relatively small amounts in those, but more than we wanted to risk). He particularly included the newer, higher cost funds they have developed in recent years. He called us repeatedly to ask us to meet with him, and to advise us that we were foregoing important opportunities by not taking his advice.

At that point, we had been using TIAA-CREF for 30 years, had accumulated enough money to feel comfortable by spreading our investments over a few of their funds and avoiding high risk. We were put off greatly by the high pressure style of this "wealth manager," and felt (and still do) that we had been served well by the hands off approach that TIAA-CREF had up to that time taken with directing our money. We use their traditional annuity fund (TIAA), and several of their equity, bond, and social choice funds. All yield at rates that are competitive with other like funds, and have been less volatile than some others. We don't need someone telling us that without money in high risk (junk) bond funds we are foregoing money we should be getting. We are also foregoing risk we don't need.

Thanks.

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