Retirement Bonds
Retirement Bonds – A Safe Bet?
Adding bonds to your retirement portfolio won’t give you the growth opportunities of stocks, but retirement bonds do offer more stability. Bonds are much less likely to lose money than stocks, and so retirement bonds can be a dependable bedrock for your retirement income. Bonds for retirement pay interest regularly, so they provide a reliable, predictable flow of income from your retirement savings.
Many bonds are also reliably secure – US Treasury retirement bonds are almost as safe as cash, and short-term bonds can be quickly liquefied for emergencies or other immediate needs.
Retirement bonds can also provide tax-free retirement income. A tax-free bond usually pays lower yields than similar taxable bonds, but if you are in a high tax bracket, may provide a higher after-tax income.
How Retirement Bonds Work
When you buy retirement bonds, you’re buying a piece of a loan from an investor to the company or government agency that issues the bond. The issuer of the bond pays an interest rate over a set term, at the end of which you get back your original principal.
There are many different types of bonds for retirement, which vary depending on the term of the bond, who issued it, its rating and whether it is insured or offers inflation protection. The basics are straightforward, but the wide variety of bonds available can be complicated to sort through, so it’s worth getting a financial expert’s advice.
Why Retirement Bonds Aren’t Enough
There are some risks involved with retirement bonds, the most significant of which is caused by the same thing that makes bonds attractive – their stability.
Before looking at that risk, let’s consider credit and interest rate risk.
Credit risk is the risk that the issuer of your retirement bonds won’t be able to makes its payments, which is why it is important to investigate how well rated bonds are. US Treasury bonds carry the least risk, while “junk” bonds – which offer a high-yield, but are issued by companies with weak finances – are the riskiest.
Interest rate risk reflects the relationship between bond prices and interest rates – when rates rise, bond prices fall. However, this only becomes an issue if you decide to sell a bond before it comes to maturity.
The most significant risk around retirement investments in retirement bonds is the risk of inflation. Because the yield on bonds is so stable, it may not keep up with rising living costs. With retirement bonds, you have a reliable sense of how much money you’ll be getting for your investment, but the fluctuations of inflation mean you don’t know how much that money will be able to buy.
To keep up with inflation, your retirement portfolio may need to be more than stable – it may need to grow. This is why even the most cautious investors also look to stocks as part of their retirement income plan – take a look at our section on stocks for retirement.
