Bond fund for a 72T

L1: Bond fund for a 72T Is a bond fund a good investment for a 72T. I have 250k that I would like to get 12ka year from. I have talked to a broker and he told me I could get 6% from a bond fund with American funds and still have my 250k investment after the 5 year 72t is up.Do you think this could be correct. Not worried about increasing the 250k balance just would like to draw 12k per year for 5 years and still have my original investment of 250k at the end of 5 years.2007-09-27 15:02, By: lj, IP: [71.228.234.92]
L2: Bond fund for a 72TAs long as he said “could” and did not guarantee it, he is probably correct. If your calculations indicate an annual distribution of 12k, that”s only 4.8%. Therefore if the bond fund, probably mostly corporates, produces a total return of 6%, you would even increase your balance some over the 5 year period. I would be sure the fund does not have much mortgage exposure to any less than prime mortgages, nor much exposure to home builders, since some of those bonds could deteriorate into junk and lose value. But basically, there is nothing wrong with having your 72t funded with bond funds. From a tax standpoint, they only kick out dividends taxed as ordinary income, so are actually more appropriate to an IRA than issues that produce large cap gains and qualified dividends. One caveat is that before the 5 years are up we are likely to be back in a rate increase cycle, but you can deal with that later.2007-09-27 17:27, By: Alan S., IP: [24.116.165.60]

L2: Bond fund for a 72TI disagree with Alan”s last comment to an extent. First, I would suggest investing only in Short-Term or Intermediate-Term bond funds. While you will probably generate adequate income to provide the cash flow for the SEPP 72-T calculation, the safety of your portfolio could be at risk. It doesn”t matter what happens to interest rates during the next 4-5 years, BUT if interest rates go up in the year leading up to your 5-year point, then the value of BOND FUNDS will decline. I believe that Long-Term bond funds decline 10% for each 1 point increase in interest rates. I don”t know what the figure is for Intermediate and Long-Term Bond Funds. Second, if you want to “guarantee” your principal, and since you are only looking for about a 5% yield, why don”t you just buy a 5 year CD paying 5 % ? Third, be careful that you get cash flow income during the calendar year, especially between now and 12/31. Fourth, I suggest not investing the $ 12,000 that you plan to take out as your SEPP 72-T distribution (assuming your calculation supports it). This will guarantee the funds for the distributions on whatever frequency you want for the first 12 months. During this first 12 months you would accumulate the interest income to use for the next 12 months, etc. for the 5 years. Fifth, I”ve been investing in Preferred Stocks for several years, and they are paying 7 % if you want/need higher cash flow.2007-09-27 21:34, By: dlzallestaxes, IP: [151.197.32.15]

L2: Bond fund for a 72TAmerican Funds is a very good mutual fund company. However, I am very comfortable saying that 6% for a bond fund is only probable with a junk bond fund. Not what you want. To net 6%, the underlying portfolio would need to produce 6.5-7.0%. That is not short-term, intermediate or quality grade stuff.
Then the discussion moves into the fact that bond mutual funds DON”T guarantee the principal…as indicated by others in repsonse.
Your broker needs to reword his response….or rethink his advice.2007-09-28 08:52, By: JD, IP: [63.162.85.155]

L2: Bond fund for a 72TThe bond fund may be paying a 6% dividend rightnow, but over time the rate will probably decrease. In order to withdraw a constant dollar amount based on the initial6% rate, when distribution rates fall over time, the fund will have to distribute principal to make up the difference. This is a problem with bond funds.
If you could use a brokerage account for your SEPP IRA, then fund ita diversified portfolio of assets, including individual bonds with a specific coupon rate, you might find a better method for managing your account. You may be dealing with a broker who does not have a brokerage account option available to him.
Jim2007-10-03 10:04, By: Jim, IP: [24.252.195.14]

L2: Bond fund for a 72TTo guarantee the rate for 5 years you may have to buy individual corporate bonds that mature 5 years from now. Some of these bonds could be bought at a discount and some would be at a premium but most are close to the par value that would be paid at maturity. The average return for investment grade bonds would be around 5.25 to 5.5 for that quality and duration.2007-10-06 06:31, By: flyitnow, IP: [75.83.76.162]