Zero-coupon bonds pay out at end
Q: What are zero-coupon bonds? — R.L., Cadillac, Michigan
A: They’re regular bonds — with a key difference. With a bond, you lend money, typically to a company or government. When you buy a traditional $10,000 bond sporting a 3 percent interest rate, you’re lending $10,000 to the borrower, and you can expect to receive interest payments of 3 percent per year. (In the past, you’d have had to send in coupons in order to receive these payments.) When the bond matures, you get your $10,000 principal back.
With a zero-coupon bond, you collect no interest payments, but the amount you lend is less than the amount you’ll receive at maturity. Thus, a zero-coupon bond might pay you the equivalent of 3 percent per year by having you lend $7,441 today in order to receive $10,000 in 10 years.
Fool’s School: The 4 percent rule
If you’re approaching retirement, a critical With a zero-coupon bond, you collect no interest payments, but the amount you lend is less than the amount you’ll receive at maturity. Thus, a zerocoupon bond might pay you the equivalent of 3 percent per year by having you lend $7,441 today in order to receive $10,000 in 10 years.
question is how much of your nest egg you can withdraw each year without running out of money. There’s no one-size-fits-all answer, but a common rule is to withdraw 4 percent in your first year of retirement, adjusting for inflation in subsequent years. It’s meant to allow your nest egg to last 30 years.
The rule has some problems, though, and isn’t guaranteed to work as expected. For one thing, it might not provide as much income as you need. Four percent of, say, a $300,000 nest egg is just $12,000. The rule’s effectiveness is also dependent on a cooperative stock market. If the market drops 30 percent right before you retire, you’ll suddenly be collecting much less.
To play it safer, consider withdrawing less than 4 percent annually. If you’re retiring late and expect your retirement to be shorter than most, you might withdraw more than 4 percent annually. In a year when the market drops, you might withdraw less, taking more in years when it booms.
Another way to lengthen the life of your nest egg is to avoid adjusting your withdrawals for inflation, on the assumption that you’ll spend less each year, growing less active as you age. Meanwhile, if you find you’re withdrawing more than your expenses require, cut back on your withdrawals. You might also skip the inflation adjustment if the market is down.
Be sure to re-evaluate your withdrawals and the size of your nest egg as you progress through retirement — especially in the early years. You want to remain on course to having your money outlast you. Don’t be afraid to seek professional advice, either — ideally, favoring feeonly advisers over those with possible conflicts of interest.
Remember, too, that you might well live a long time, and need your money to last more than 30 years. Consider being aggressive in your savings and conservative in your withdrawals, if possible.
Name that company
I trace my roots to Japan in the 1950s, when five companies united to form Fuji Heavy Industries. I took on the name of my most popular car brand in 2017. Meaning “united,” it’s also the Japanese name for the Pleiades cluster of stars. I launched a symmetrical all-wheel drive in 1972, and I plant a boxer engine in each of my cars. My 360 car, introduced in the U.S. in 1968, was called “cheap and ugly,” and claimed to get 66 miles per gallon. My WRX was recently the mostticketed car in the U.S. Who am I?
Last week’s answer
I trace my roots to the 1876 opening of Thomas Edison’s laboratory in New Jersey. I was incorporated a bit later, in 1892, and encompassed the assets of several companies. Over the years, I have been in businesses as diverse as aircraft engines, finance, medical equipment, power transmission, renewable energy, transportation, appliances, water treatment systems, plastics, media and entertainment. Based in Boston now, I recently sported a market value topping $60 billion, but that’s down from more than $270 billion a few years ago. I was one of the original 12 companies in the Dow Jones Industrial Average. Who am I? (Answer: General Electric)
Got a question for the Fool? Send it in the care of this newspaper.