Will There Be Annuity Legislation and a Bond Bubble in 2010?

If you are a baby boomer nearing retirement, you might feel that the rug is slipping beneath you, and you are right. Whatever we thought we knew about planning for retirement and safe harbors for our money is changing. The closer you get to actually using your retirement money, the more important it is to stay informed and seek professional advice, because what worked for Grandpa may no longer work for you.

The two things you need to become informed about right now are:
1. Is there a bond bubble ready to pop?
2. How will possible 2010 legislation affect Annuities?

Bonds: The Safest Harbor?
Bonds have been considered safe investments for decades. When diversifying an investment portfolio, bonds are often included in the mix as the conservative, income-producing segment, with stocks and Mutual funds considered the growth and riskier segment. We've all heard that the older we grow, the bigger the shift should be toward the less risky options, requiring an increase in bond investments. However, many financial experts today are reconsidering that advice, concerned that the next economic bubble might involve bonds!

MSN Money recently provided perspective regarding the bond market in their January 12, 2010 article "Are Bonds the Next Bubble?" by SmartMoney. According to the article, "investors plowed $313 billion more into bond funds than they took out in the first 10 months of 2009" This was most likely due to the perceived safety of bonds during an uncertain time, and because many bonds yielded an extremely attractive yield in 2009. But those yields dropped to almost half of their 15% high last summer.

What about Government Bonds: Are They a Safe Investment?
If you watch the news, you are aware that the federal government is running a big-time deficit, and that state and local governments might have to hold bake sales to pay the bills. It may take some time for things to turn around in the government sector, which could mean bond holders might need to hold their government backed bonds for decades. Why? Because, while bond interest income might be static, the bond can lose value.

The MSN article also warns, "The 4.7% annual interest that a current 20-year Treasury bond is paying might look good now compared with a bank certificate of deposit, but it will seem mediocre in five years if interest rates rise and banks start offering 7% CDs -- while you're stuck until the bond matures in 2030".

So what would you do if, during the time you are receiving that 4.7% interest income from a Government bond purchased for $100,000, CD rates soared to 7%? Wouldn't you want that higher return? But, what if the value of your bond dropped to, say, 90% of its current value? Would you sell the bond and eat the $10,000 loss for a higher return? This could be a reality, so don't get too complacent about bond investments; better opportunities might be around the corner!

Annuities: Legislation is Ahead!
There are different annuity types and phases. Annuities can be used as a conservative option for accumulating retirement savings during working years, as well as a way to set up a stream of income for retirement, much like a pension. There is possible legislation in the works regarding annuities, that everyone should be aware of.

Matthew Scott's January 13, 2010 article, "Guaranteed Retirement Income Bill Legislation Likely in 2010", in Daily Finance.com, tells us that, due to the staggering loss of $1.3 trillion in wealth due to the recession, and the fact that most Americans are ill-prepared financially for their golden years, Congress is expected to address these concerns in 2010.

According to Scott, "The key proposal to look for this year is the Retirement Security Needs Lifetime Pay Act, sponsored by U.S. Reps. Earl Pomeroy (D-N.D.) and Ginny Brown-Waite (R-Fla.). The act advocates tax breaks for the increased use of annuity products that pay income throughout retirement."

The possible legislation seeks to provide Americans a "higher level of retirement security" through the use of annuities, part of the legislation proposing the exclusion of a portion of the annuity payments from taxation (50 % up to $10,000).

What Would the Annuity Legislation Mean to Me?
In layman terms, if this legislation comes to fruition, part of our tax-sheltered retirement money (IRAs or 401K dollars), will NOT be taxed when taken as annuity income. The terms of that payout, however may be important, therefore, it's important to seek competent advice regarding annuities when the time comes to convert to income.

What to do? Get Professional Advice and Stay Informed!
Professional advice has never been more important to us, but we also need to vet our advisors thoroughly. The time for blind trust is over. Become as informed as possible so that conversations with financial or tax advisors makes sense. Force your advisors to bring their conversations down to your level and if they can't, find a new one. Become as informed as possible! Sign up for an RSS feed of articles from a writer you like on MSN money. Watch Jim Cramer on CNBC's Mad Money! Read an article daily from CNN's personal finance section. Make Motley Fool your homepage! Be a money geek!

This article is not intended to be financial advice, but to stimulate your thinking. This topic is one that many people prefer to avoid because it can be complex. But times are changing in the financial world, and it is crucial that we stay informed, spend our money wisely, and plan for emergencies and retirement adequately. We work hard the majority of our lives and need to be smart trustees of that hard-earned money.

MSN Money
Daily Finance.com