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The "R' Bond
Old 09-21-2009, 09:03 AM   #1
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The "R' Bond

Bloomberg article:Save Your 401(k) From Next Lehman-Style Meltdown: John F. Wasik

Interesting article that mentions a proposed new type of government bond.

I tend to agree with the following quote because it fits where I am in life.

"It’s time for a change. Market risk gets painful really fast once you hear how much your future living standard eroded due to unnecessary market losses. That’s an oft-sung ballad that sounds harsher the older you get"

Save Your 401(k) From Next Lehman-Style Meltdown: John F. Wasik - Bloomberg.com
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Old 09-21-2009, 09:15 AM   #2
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The Treasury Department hasn’t provided details on this bond yet. If it isn’t linked to the stock market and the principal is guaranteed, your retirement plan could buy them automatically and you could even predict how much money you would have in the future.
If the R bond survives the twisted intrigues of Washington and Wall Street, it might become one of the most useful financial products since the fixed-rate mortgage.
I'm not against innovation, but if there are no details yet on what this is, how can anyone predict retirement plans will want to buy them automatically? I love the quote "it might become one of the most useful..." But then again it might not. Until anyone knows what it is, how can anyone make predictions?

I do appreciate the link. Maybe I can do some research and find out more.
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Old 09-21-2009, 09:55 AM   #3
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I'd be interested to see the details of such an "R" bond, how it's different than other government bonds and how it could fit into retirement planning. But right now it is, as we'd say in the software development business, "vaporware."
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Old 09-21-2009, 10:04 AM   #4
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"Even though conventional bonds are part of the solution, you still face interest-rate, credit and inflation risk from holding them. When interest rates go up, you could lose principal in all but consumer price-indexed bonds. A more easily accessed, principal-guaranteed vehicle is needed."

Makes you wonder why I-Bonds aren't the answer here. Just mark out the I and put an R in its place and you have no interest rate, credit or inflation risk for these new retirement R-Bonds.
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Old 09-21-2009, 10:14 AM   #5
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If there's "no" risk, there's not likely to be much reward...
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Old 09-21-2009, 10:23 AM   #6
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If there's "no" risk, there's not likely to be much reward...
Kinda like I-bonds.

Then in 20 years when everyone realizes they kept buying R bonds yet still don't have enough to retire, they will look at returns on stock investments and wonder why they accepted paltry real 1-2% returns for so long on R bonds.
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Old 09-21-2009, 10:25 AM   #7
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If there's "no" risk, there's not likely to be much reward...
Not in this environment. But thinking back a few years, those I-bonds that were issued with a real yield of 3% and higher were about as close to a free lunch as one can expect to find.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 09-21-2009, 11:12 AM   #8
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I tried looking for more information on the 'R Bond'. The only hit I got was
Administration explores 'R bond' as option for retirement accounts - Investment News
and it doesn't say much besides
"Administration officials are discussing the exact details of these R bonds, such as their interest rates, maturities and minimums, he noted. These bonds ideally would provide individuals with a source of secure, steady returns that would protect their initial investments."
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Old 09-21-2009, 12:15 PM   #9
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Any 401K could offer a TIPS fund today. That seems like as much risk protection as the gov't can offer (maybe even too much).
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Old 09-21-2009, 12:19 PM   #10
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Any 401K could offer a TIPS fund today. That seems like as much risk protection as the gov't can offer (maybe even too much).
As long as the government can manipulate define the calculation of the CPI, I think the risk to the government remains manageable.
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Old 09-21-2009, 12:27 PM   #11
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Kinda like I-bonds.

Then in 20 years when everyone realizes they kept buying R bonds yet still don't have enough to retire, they will look at returns on stock investments and wonder why they accepted paltry real 1-2% returns for so long on R bonds.
I'm shocked, shocked I tell you that so many on this list are skeptical of a government financial instrument.
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Old 09-21-2009, 01:50 PM   #12
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E bonds in the 80s were an excellent savings tool. They were tax deferred, had a maturity of 30 years but could be cashed without penalty after 5. They paid the higher of your going in rate, or a floating rate that as I remember was about 90% of 5 year treasuries (and during these years real interest rates were quite high).

It was really an excellent instrument, but today's administrations have preferred to save the good deals for the Goldmans of the nation, since they give better campaign contributions.

I still have some paying 8% and sure wish I had more.

Ha
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Old 09-21-2009, 03:13 PM   #13
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I wonder if these "R Bonds" are the Ghilarducci plan raising its ugly head once again....

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Old 09-21-2009, 04:08 PM   #14
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Could the proposed R-Bonds simply be a "G-Fund" for the masses?
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Old 09-21-2009, 04:21 PM   #15
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E bonds in the 80s were an excellent savings tool. They were tax deferred, had a maturity of 30 years but could be cashed without penalty after 5. They paid the higher of your going in rate, or a floating rate that as I remember was about 90% of 5 year treasuries (and during these years real interest rates were quite high).

It was really an excellent instrument, but today's administrations have preferred to save the good deals for the Goldmans of the nation, since they give better campaign contributions.

I still have some paying 8% and sure wish I had more.

Ha
I agree. There have been several times that government issues have been bargains. E-bonds, I-bonds and Tips all had attractive rates when first issued.
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Old 09-21-2009, 10:36 PM   #16
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Any 401K could offer a TIPS fund today. That seems like as much risk protection as the gov't can offer (maybe even too much).
TIPS funds have principal values that change over time based on the vagaries of the market. Hence your principal isn't protected over the short term (only at maturity). They are subject to interest rate risk. I bonds, er ah, R bonds are not - they would be redeemable at face value any time after some initial penalty period. Or so it seems.
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Old 09-22-2009, 08:36 AM   #17
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While this is not an "R Bond" it is an "R Fund". Might be worth looking at a bit (from Putnam).

Putnam Plugs Absolute-Return Strategies Into Retirement Funds - Bloomberg.com
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Old 09-22-2009, 09:35 AM   #18
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TIPS funds have principal values that change over time based on the vagaries of the market. Hence your principal isn't protected over the short term (only at maturity). They are subject to interest rate risk. I bonds, er ah, R bonds are not - they would be redeemable at face value any time after some initial penalty period. Or so it seems.
Yes, I-bonds give you a guaranteed surrender value. Someone saving for retirement can also use them instead of TIPS, so I'm still wondering what these "R-bonds" would that neither TIPS nor I-bonds do today.

I only mentioned TIPS because I'd choose them before I-bonds for a tax-sheltered investment. I'd say that since retirement savings are long term, the market flutuations in TIPS prices aren't much of a penalty compared to the better coupon rates.

My concern is that anything that's better for the saver than TIPS (or I-bonds) is going to have some sort of subsidy from the gov't. Potentially, it will be in the form of assuming a risk, rather than paying out cash every year. So it will be sold as "free" until the reckoning comes and it costs the taxpayers a trillion or so. But I'm probably just cynical. Maybe someone has a design that really makes sense.
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