Welcome to Get Smart about Investing. Understanding the different types of bond funds is pretty straightforward. Basically all bond mutual funds differentiate themselves based on the types of bonds they invest in.
- The first distinction is who’s the issuer of the bonds that the mutual fund is investing in. Are the bonds from the US government or from a municipal government, or from corporations? Mutual funds that invest in corporate bonds usually have more risk than those that invest in government bonds. But they also have greater potential for higher returns.
- The next distinction is what type of bond maturity the mutual fund company uses. Do they invest in short-term or long-term bonds? Again, long-term bond mutual funds tend to have a higher risk than shorter-term funds, but also have more potential to grow.
- Lastly, what’s the investment quality of the bonds they’re buying? Mutual funds that invest in the highest-quality bonds are known as investment-grade funds. Mutual funds that invest in lower quality bonds are referred to as junk bond funds or high-yield funds. Again, I would only recommend investing in investment grade bond funds.
In many cases, the name of a mutual fund can show you the different types of bonds the mutual fund company is investing in. For example, the Dreyfus New York short-term Tax Exempt Bond Fund. The name of the fund is Dreyfus - that’s the name of the company that’s sponsoring it. But let’s break it down further. The name indicates, this fund only invests in short-term bonds. And the New York tax-exempt title indicates that they invest in municipal bonds from that particular state. This would be appropriate for a New York resident with a short-term investment need, looking for tax-free interest.
So you always want to decide: “am I investing in a government bond mutual fund or a corporate bond mutual fund? Am I investing in a long-term bond fund or a short-term bond fund? Some funds are combinations of each of these. Also, “am I investing in bonds that are investment grade or of lower credit quality?” Those three questions will always come up and I want to make sure you really understand them.

I’m Greg McGraime and Now You Know!

Filed under "Investing by Greg McGraime" by gmcgraime

Welcome to Get Smart about Investing. Today we are talking about Social Security. What is social security? Social security is a program the government created to provide a basic level of income to workers when they retired. Basically, part of the taxes that you have paid each year go into the social security system and because of the contributions you have made, the government “promises” so to speak, to provide a basic level of income to you, when you retire.

Let’s look at how it works. Everyone has what is called a full retirement age, which is somewhere between 65 and 67 years old, depending on when you were born. If you were born after 1960, for example, your full retirement age is 67. Your full retirement age is the age you can receive what’s called your full social security payment. Let’s say the full payment you were supposed to receive was $1,500 a month. Everyone has the option of collecting social security earlier or later than their full age. You can start collecting as early as 62; or you can delay collecting until 70, as well as anywhere in between. The benefit of collecting social security early is that you start receiving payments three to five years earlier than you would have otherwise. The disadvantage of taking social security early is that you end up receiving a lower benefit each month for the rest of your life. If you were going to receive $1,500 a month at age 65 or 67 and you elected to start receiving it at age 62, perhaps you would only receive $1,000 a month. If you waited until 70, you would be able to collect a higher amount each month.

Social security is the biggest source of income for today’s retirees. When social security was created back in the 1930s, you could not collect it until you were 65. Guess what the average life expectancy was back then? 63 years old. That’s right. Most people never would have received social security. It was just meant as protection in case you lived into your late 60s or early 70s. The social security system is straining for reasons similar to the strains pensions put on corporations. People are retiring earlier and living significantly longer. In regard to retirement income from social security, the average person who was collecting social security in 2006 received approximately $1,000 per month or $12,000 per year. Now that’s something, but it’s not a lot of money. If you don’t have a pension and you are used to living on a lot more than $12,000 per year, the rest of your income has to come from somewhere, most likely from your investments.

I’m Greg McGraime and Now You Know!

Filed under "Investing by Greg McGraime" by gmcgraime