Sovereign bonds

Sovereign bonds are debt instruments issued by national governments.  They are one of the least risky debt instruments as they are typically backed by tax revenue and the ability of the sovereign nation to issue additional debt.  They usually pay a lower yield than corporate bonds due to the stability and reliability of their collateral.  Keep in mind that not all sovereign nations have favorable credit ratings, and the risk and corresponding yield will vary according to the quality of the underlying collateral.

Many sovereign governments issue what are known as inflation protected bonds, whose value is linked to an inflation related benchmark such as the consumer price index.

Similar to corporate bonds, treasury bonds trade over the counter through financial institutions known as market makers or dealers.

Like any other bond or fixed income instrument, sovereign bonds are subject to interest rate risk.  The interest rate risk of the bond increases as the duration of the bond increases.

Sovereign bonds tend to be the least risky asset class, and accordingly also typically offer the lowest rate of return.  They can provide a valuable addition to an investment portfolio when combined with other asset classes such as common stocks, preferred stocks, and corporate bonds.


Corporate bonds

Corporate bonds are debt instruments issued by private enterprises, and are sometimes backed by tangible assets of the company issuing the bond.  They generally have more credit risk than sovereign bonds due to the fact that they are backed by corporate revenue, which is less reliable than tax revenue.  They tend to have higher yields than sovereign bonds, although this is not always the case.

Unlike common stock and preferred stock shares which trade on an exchange, corporate bonds trade over the counter through certain market participants known as market makers.  Market makers tend to be large financial institutions such as banks, broker dealers and insurance companies.  Corporate bonds typically trade at a level based on internal factors such as the credit risk of the issuer as well as external factors such as interest rates.

Corporate bond holders have a higher claim on company assets and equity than preferred stock holders, and the interest payment on corporate bonds is typically lower than the dividend payment on preferred stock shares.  The interest payment is taxable to the bond holder at the federal, state and local level.

As an asset class, corporate bonds are less risky than both preferred stock shares and common stock shares, and typically offer a lower rate of return.  They are more risky than most sovereign bonds and offer a higher rate of return.


Annuities are tax deferred savings contracts that are usually written by insurance companies.  The owner of the contract makes a payment or series of payments to the issuer or insurer and in return the insurance company promises to make a payment or series of payments to the contract owner in the future.  Although they have a reputation for having high fees, they can be advantageous in a variety of situations, including tax deferral as well as insuring against longevity risk of the annuitant and/or owner.  Unlike qualified plans such as 401K and 403B plans and IRAs, there is no annual limit to how much can be contributed to an annuity contract.

Tax deferral

Annuities allow the contract owner to defer taxes on gains inside the contract until their withdrawal.  When withdrawals are made, they are subject to first in first out (“FIFO”) reporting, in that the gains will be deemed to have been withdrawn first, and will thus be subject to taxes.  The contract owner will be subjected to a 10% penalty on withdrawals if the withdrawals are made prior to age 59 1/2.  Taxes on the gains upon withdrawal can be deferred and paid on a prorated basis by taking withdrawals on a periodic basis.

Management of longevity risk

Annuities provide a way to protect the contract owner against longevity risk.  As an example, consider an individual who, at retirement age, has a lump sum which needs to last through retirement.  If the retirement income strategy is to withdraw income only and preserve the principal, then there are no issues and an annuity may not be suitable or necessary.  However, if the retirement income strategy is to withdraw the lump sum gradually over many years, it is difficult to assess how much should be withdrawn as there is no way to know for how many years the withdrawals will be needed.  An annuity can protect against this uncertainty by making payment until the death of the annuitant.


Trusts provide a way to preserve and protect assets, as well as pass assets to heirs outside of the probate process.  They are frequently utilized in estate planning to minimize estate taxes.  They can also be used to protect assets by moving assets away from the grantor.  Trusts are typically formed under state law, however unlike corporations and LLC’s they are not usually registered with the state in which they are formed.

Trusts usually have grantors, trustees, and beneficiaries.  The grantor contributes assets to the trust and executes the formation of the trust.  The trustee is designated by the grantor, who manages the trust assets for the benefit of the beneficiaries according to the terms laid out in the trust.

A trust can be revocable or irrevocable.  A revocable trust, frequently referred to as a living trust, allows the grantor to retain control of the assets while at the same time allowing those assets to pass outside of the probate process.  A revocable trust typically does not enable the trust assets to avoid estate taxes.

An irrevocable trust, on the other hand, involves the transfer assets out of the grantor’s name and typically causes the grantor to lose control of those assets.  Because these assets are transferred out of the grantor’s estate, they typically avoid estate taxes in many circumstances.

Social security retirement benefit

When you decide to take your social security retirement benefit will have a significant impact on the amount of the benefits.  Your “full retirement age”, according to social security rules, will vary depending upon your birth year, between the range of age 65 if you were born in 1937 or earlier, to age 67 if you were born in 1960 or later.  You can take benefits earlier than this, as early as age 62, and receive a reduced benefit amount, or take benefits later than this, up until age 70, and receive an increased benefit amount.  The exact amount of your social security retirement benefit amount can be found on your social security statement, which is sent to you annually by the social security administration.  You can also access your benefit information online at  When you should file will depend on a number of factors including your health and life expectancy and your additional financial resources available to you to fund your retirement.

In many situations a strong case can be made for delaying the taking of social security benefits as long as possible, until age 70, because in many cases this will result in the largest benefit overall.  Of course each individual’s situation is different and a thorough analysis should be done taking into account a number of different factors unique to the individual.  A financial adviser can assist with the process of analyzing your situation in relation to your balance sheet and income statement, to help you determine the option which best suits your needs.

Retirement income planning

Retirement income can be broken down into three general categories: income from investments, income from pension plans, and income from social security.  Of course, many decide to continue working during retirement so employment, self employment or business income may be available as well.

Investment income

Investments can be used to to fund retirement needs by either generating dividend and interest income or by gradually liquidating the assets over the course of retirement.  The main advantage of the first method is preservation of principal, and its disadvantage is that it results in lower income than the second method.  The advantage of the second method is larger income, and the disadvantages include depletion of principal and longevity risk related to the assets lasting throughout retirement.  In certain cases this longevity risk can be managed by means of insurance contracts such as annuities, however such contracts require the policy owner to give up control over the principal.

Income from pension plans

Defined benefit pension plans are another source of retirement income.  Benefits paid are typically a function of age, income received while employed with the company or organization associated with the defined benefit plan, and years of service provided to the employer or organization.  Other factors can also impact the income provided by the plan, including whether or not a spousal survivor benefit is included in the plan.  Pension plan income is advantageous in that there is no longevity risk associated with the benefits, as benefits are in most cases paid throughout the life of the pensioner.  Careful planning should be done with respect to coordinating survivor benefits of the pension plan.  In certain cases, life insurance contracts can be purchased in lieu of activating survivor benefits on pension benefits, however a careful analysis should be done before doing so.

Income from social security

Income from social security is the most common source of income for Americans, providing 40 percent of income for persons 65 years old and older according to the Social Security Administration.  When to file for social security benefits is an important decision and should be coordinated carefully with other retirement income sources in order to maximize retirement income.



Social security – retirement, disability, survivors

According to the Social Security Administration, over half of the elderly in the United States receive more than half of their income from social security, and in 2015 social security benefits accounted for almost 40% of the income of the elderly.  Besides providing old age benefits, social security provides protection related to disability as well as benefits for dependents of a decedent.  We will focus primarily on retirement income benefits in this article.

In order to qualify for social security, you must first acquire 40 credits (if you were born before 1929, you may need less).  You can obtain up to four credits per year, and in 2016 you would have earned one credit for each $1,260 of covered earnings.  So if you had earned $5,040 in 2016, you would have earned the maximum four credits for that year.  Once you have earned the required 40 credits, you qualify for retirement benefits, and the amount of your benefits will depend on your earnings throughout your working life.

The retirement benefit amount will depend upon the age at which benefits are filed for, with “full retirement age” being the benchmark .  Benefits will be higher if taken later than full retirement age, and lower if taken earlier than full retirement age.  Full retirement age will vary depending upon your birth year.  Details of your retirement benefits can be found in your social security statement, which is sent to you annually, and can also be accessed online at

Retirement account withdrawals

Retirement account withdrawals

How should withdrawals be taken from retirement accounts?  Factors include investment style and the amount which is withdrawn each year.  The manner in which  withdrawals are taken from retirement savings account has a significant impact on how long these assets will last.  A common practice in the financial services industry is to use Monte Carlo simulations to estimate probabilities of certain outcomes occurring with respect to how withdrawals will affect the retirement assets over time.  In this article we will illustrate how retirement account withdrawals can have different results by using two simple examples.

Employee pension plan

If you have a defined benefit employee pension plan provided by your employer in the United States, you are one of the lucky ones in that these plans are not offered as often as they used to be.  In recent decades a shift has occurred in the retirement plan landscape away from traditional defined benefit pension plans and toward what are known as defined contribution plans, specifically 401K and 403B plans.  This has resulted in the risk related to funding retirement being shifted from having been borne by the employer to being borne by the employee.  If you are of the relatively few who still has a defined benefit plan, this article will explain some of the basic things you should know related to planning your retirement as relates to your pension plan.