Q: I have about $70,000 invested, mostly in corporate bonds. I depend on Social Security and need the extra income from my investments. Recently, I lost about $7,000 when bonds in a bankrupt company were redeemed. I can ill afford any more surprises. My bonds currently pay in the 6 to 7 percent range. Should I continue with them or invest elsewhere? Since I grew up during the Depression, by nature I'm somewhat leery. Still, I don't intend to put money under a mattress.
- M.B., Arizona
A: You should investigate what you own, but other than that stay put, says Cal Brown, a certified financial planner in Manassas, Va. Check the credit quality of the bonds you still hold. You should only own "investment grade" bonds - those rated B+ or better.
While lower-quality bonds tend to pay higher interest rates, this can be a trap, he says. Remember that bond values and interest rates have an inverse relationship. So if rates rise, a bond's value on your monthly statements will decline. But if you own quality bonds, there is nothing to fear, Mr. Brown says. You'll continue to receive interest payments until they mature, and then get their full value.
Brown likens your situation to owning a rental property if real estate values decline. If you have a good solid tenant who keeps paying the rent, it doesn't matter what the real estate market does as long as you're getting your income. So focus on the quality of the bonds in your portfolio, and don't worry about rising interest rates.
Q: I want to buy term life insurance with the payout going into a trust for my three children ages 3 to 9. I want a trustee to pay out what's needed for their living expenses, education, etc. Do I need to set up a separate trust for each child or just one in my name? In the latter case, can the beneficiary spend whatever amount he or she wants?
E.E., via e-mail
A: You don't need to fiddle with separate trusts for each child, says Michael Clancy, a financial planner in Shelby Township, Mich. Simply set up a single trust naming the three children as
beneficiaries upon your death.
One of the benefits in establishing a trust is that you appoint a trustee to make discretionary distributions of money and property. The trust also spells out how distributions are made. The trustee - either an individual, a trust company, or bank - decides when and how much money your children receive under those conditions. The discretion given to the trustee, says Mr. Clancy, can be as broad or narrow as you wish.
Unless your children have the power to name themselves as trustees, Clancy doubts they'd be able to spend whatever they want. Rather, they would have to request a distribution from the trustee. If the trust is drafted property, the trustee may not necessarily need to pay a child directly. Money for higher education, for instance, could go straight to a college.