Today many of us are relying on our personal savings accounts in order to live comfortably once we have retired from the work force. A key component in retirement planning is the 401(k) account. This is money that is taken from your paycheck and invested. The contributions you make to your 401(k) are exempt from federal and state taxes; however, money you withdraw from your 401(k) account must be reported as income.
Many people nearing retirement age may be wondering where they can safely invest their 401(k) money.
Treasury bonds, notes and bills are considered the safest investments. These types of investments are sold by the U.S. government. As a result, they are backed by the government and its "iron-clad" credit rating.
Treasury bills, or T-bills, are purchased at a discounted price relative to the face value. For example, you might spend $999.86 for a $1,000 T-bill. These bills mature over a given period of time, and when they mature, you recoup the difference between what was paid for the bill and the face value. T-bills mature in varying amounts of time. There are four-, 13-, 26- and 52-week terms available. T-bills are sold in $100 increments, the minimum purchase being $100. Keep in mind that interest on T-bills is only paid once the bill matures. You've got to wait out the entire term before you realize the return on your investment.
Relative to the T-bills, Treasury notes, or T-notes, are a longer term investment. T-notes are sold in terms of two, three, five, seven and 10 years. Similar to the T-bills, T-notes are sold in $100 increments, with a minimum purchase price of $100. Interest on T-notes accumulates every six months and T-notes can be sold at maturity or before the term is up.
Treasury bonds are a long-term investment. The bonds carry a 30-year term to maturation. Interest on Treasury bonds is paid every six months. The bonds can be sold before they mature.
These type of financial instruments are purchased at auction and the individual yields for the notes are determined through that process. There are two methods to employ when bidding for Treasury bills, notes and bonds.
A non-competitive bid ensures that the bidder will receive the note he wants, in the amount he wants. The bidder must agree to accept the yield determined during the auction process.
A competitive bid allows the bidder to specify the rate of return he wants on the instruments being auctioned. With a competitive bid, there are three scenarios. If the yield specified is lower than the yield determined at auction, then the bid would be accepted at the full amount. If the yield specified by the bidder is equal to the high yield determined at auction, the bid may be accepted in less than the full amount. Finally, if the bidder specifies a yield higher than the rate determined at auction, the bid may be rejected.
The auction process may seem confusing. The bottom line is that Treasury bills, notes and bonds are some of the safest investments. Each instrument can be valuable depending on how much time you have before you plan to retire. Talk to your broker or banker if you are interested in purchasing these instruments.