How Retirees Can Better Build Up Their Fixed-Income Strategy
Retirement is an exciting time to explore your passions with newfound freedom from a 9-5 job. However, this also means you’ll live on a fixed income for an unknown time. You don’t want to run out of funds, so building a fixed-income strategy is essential.Let’s explore a fixed-income strategy, the potential risks, and how to build a nest egg to last as long as possible.
What Is A Fixed-Income Strategy?
Depending on when you retire and your life expectancy, you could live 25+ years after you retire—so you need to be financially prepared with a solid fixed-income strategy. The term fixed income broadly applies to types of investment security that pay investors fixed interest or dividend payments until their maturity date. When investments reach maturity, investors are repaid the principal amount they invested.Types of fixed income include:
Government bonds
Corporate bonds
Certificates of deposits (CDs)
Treasury inflation-protected securities (TIPS)
Money market funds
Fixed-rate annuities
They differ from other investments because the payments from fixed-income security are known in advance and do not change throughout the life of the investments, so they are also less risky than stock options.
Who Uses A Fixed-Income Strategy?
Fixed-income securities are potentially a good fit for conservative investors that still desire a diverse portfolio. Since this strategy offers a steady income stream and is less risky than dealing with the stock market, it can be an excellent option for retirees and those with a lower risk tolerance.A fixed-income strategy is an efficient way to diversify your portfolio, and a diverse portfolio can help reduce investment risk. It seems like a win-win.In addition, as you near retirement, you're likely to move towards more conservative investments as you focus on keeping your retirement savings rather than trying to grow it.
Why Fixed-Income Investments Are A Good Fit For Retirees
Depending on your financial goals for retirement, fixed-income investments may be a very profitable strategy for you. Fixed-income opportunities can offer many benefits to retirees, including:
Income generation: Fixed-income strategies provide a steady stream of income over the life of the investment. Since the payment is stable and reliable, investors can plan for spending, making them ideal for retirement planning.
Portfolio Diversification: As stated above, a diversified portfolio is healthy, even in retirement. By utilizing fixed-income investments in retirement, you can better protect your investment portfolio by offsetting the risk exposure stocks face as the market fluctuates.
Less Volatile: Every investment has some risk, but the interest payments from fixed-income investments can help investors stabilize the risk-return in their portfolio. This is especially crucial for retirees that don’t have another form of stable income.
Guaranteed Income: It's rare for investments to come with a guarantee, but some fixed-income investments do! For example, the US government and FDIC back treasury bonds and CDs. Corporate bonds are not insured; the company's financial viability backs them, so if the company were to go bankrupt, bondholders would have a claim on the company assets.
With limited sources of income, fixed-income strategies can be an excellent option for retirees interested in a less risky investment strategy.
The Risks Of Fixed-Income Investments
There are many benefits of fixed-income investments, but there are also a few risks that investors must be aware of.
Credit and default risk: Corporate bonds have a higher claim on company assets than common shareholders should the company declare bankruptcy, but there's no guarantee your investment won't decrease in value. If you want to sell a bond and the company is struggling financially, you may have to settle for selling for less than face value.
Interest rate risk: This could happen in an environment where the market interest rates are rising, and the rate paid by the bond falls behind—meaning the bond would lose value in the secondary bond market. In addition, since the investor's capital is tied up in the investment, they can’t utilize that capital for a higher-earning investment without taking an initial loss. So if you purchase a 3-year bond paying 3% per year, and those interest rates increase to 4.5%, you are locked into that 3% rate.
Inflation risks: Not even fixed-income investments are immune to inflation. If prices rise or inflation increases, it can eat into the gains of fixed-income securities.
Every investment has some risk to consider, so it depends on the goals and risk tolerance of the investor if the advantages outweigh the potential risks.
Is A Fixed-Income Strategy Right For You?
Based on your financial status and retirement goals, a fixed-income investment strategy could ideally diversify your portfolio and provide a steady income stream. Get in touch with our team of financial professionals to learn more.
