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.
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