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Investing for Income
A portfolio should have at least 20% of your monies in short and medium term treasury bonds. For a retiree who needs more income and is also collecting Social Security benefits, a portfolio of 40% in treasury bonds is about right. The strategy here is to buy and hold your bonds until maturity. The foundation of these holdings should be safe, liquid government bonds, in particular, intermediate term treasury bonds of 2-10 years. You can put together a so called ladder of treasury bonds. Which means, for instance, you could put equal amounts into treasury bonds due to mature in one year, two years, three years, five years, seven years, and nine years. That would have a average maturity of five years (1+3+5+7+9 divided by 5 equals 5). The next year, when the first batch came due, you would reset the ladder by putting the money into new 10 year notes. Your portfolio would then have an average maturity of six years (2+4+6+8+10 divided by 5 equals 6). Two rears later when the next batch comes due , you'd buy more 10 years. Continuing to buy new 10 years whenever a note matures will keep the portfolio in the five to six year range. Another benefit to laddering is that it limits the need to worry about interest rates especially if the ladder you construct has notes coming due every year. If rates do rise soon after you've bought this year's bonds, you know that soon you will have money coming available to take advantage of the change. The best way to load up on treasury bonds you mean to hold to maturity is to bypass brokers and their fees by using the government's commission free Treasury Direct program. To open an account, call your nearest Federal Reserve Bank or the U.S. Bureau of Public Debt and have them send you an application form. If you need to sell them before maturity you would have to transfer them to a broker and there would be a $50 charge.
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