The Treasury Note Retirement Plan

A few weeks ago, I wrote an overview of what treasury notes, bonds, and bills are and how they work. In the discussion, I dropped this little tidbit which turned out to be alluring to a few of my readers:

I know of at least one person with several million dollars sitting in treasury notes; he lives rather well off of the coupon payments and still has enough left over to occasionally buy more bonds, which enables him to keep up with inflation. He plays a lot of golf, incidentally.

Let me give you an example of how this works. Let’s call my friend Bill. Bill has taken all of his money and invested it in six $500,000 treasury notes. He bought them all at face value one month apart, and they each have a coupon rate of 4.625%. Every month, then, Bill receives a coupon payment from the federal government on one of these notes in the amount of $4,625. This is more than adequate to cover Bill’s living expenses, so he keeps rolling the excess into more treasury notes every few months as a hedge against inflation, and when a note finishes, he uses that amount to buy another note immediately.

Obviously, Bill set this up for himself over a long period of time and he did it in the days before great retirement accounts for individuals. He kept his money in a bank at first, but he realized that once his balance was sufficiently large, there were better opportunities to earn money without risk than a 0.5% savings account, so he purchased a treasury note, kept rolling the income over into more treasury notes, and added contributions over time. When the coupon payments added up to enough for him to retire, he did so.

4.625% is a pretty poor return… The return that Bill gets is based on what the government offers as a coupon rate over time and is also affected by market fluctuations. I won’t go into a lot of detail here except to say that when interest rates are low, Bill’s returns are low, and when interest rates are high, Bill’s returns are high. Thus, when rates are low, he only buys shorter term treasury notes (2 years), and when rates are pretty high, he buys longer term ones (10 years).

However, Bill knows that his investment will always make money, no matter what. His investments are backed by the federal government, and while the value of his notes might fluctuate, they’ll always bring in enough for him to live on. He buys longer term notes when the rates allow him to live large and buys shorter term notes when the rates aren’t so good, and over time, he’s beating inflation.

What about income tax? Treasury notes are completely exempt from state and local income taxes, so Bill files a “zero” return every year locally. For the federal tax, he just pays normal income tax on any income generated, as it’s not considered capital gains. Thus, his taxes each year are done in about fifteen minutes: how much did he bring in from his bonds, minus any deductibles he might have, then look up the number, write a check, and send it in.

What about his estate? His will is really simple, too: the face value of all of the notes is added to the estate with very little muss or fuss.

Basically, Bill’s finances are extremely simple and his income is very stable and will last in perpetuity. The expense up front is pretty high, but for a plan that lets you live as long as your body survives, it’s a good one.

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