How Fixed-Income Strategies Help You Meet Your Retirement Income Goals

Preparing for retirement is a balancing act. You want to enjoy your hard-earned money today while being thoughtful and strategic about how you’re preparing for the future. With so many options available, you may wonder what the right income strategy is for you. Here is a look at a common source of retirement income called fixed income and how it can play an essential role in helping you feel secure in your ability to live comfortably in retirement. 

What Is Fixed Income?

Fixed income is broadly used to describe the types of investment securities that pay investors, like fixed interest or dividend payments. The payments or interest are paid until the investment reaches its maturity date. Once the maturity date is reached, the borrower repays the principal amount the investor initially invested. 

If this sounds familiar, it’s because a bond is the most common type of fixed income. Most investor portfolios typically consist of the three main asset classes: equities (stocks), fixed-income securities (bonds), and cash equivalents (money market funds, treasury bills, etc.).

During periods of market volatility, bonds provide stability because their interest rates stay the same throughout the bond’s lifetime. For example, if you purchase a $20,000 bond with a 10-year maturity date and a coupon rate of 3%, you would receive $600 per year over the next decade. You would be given your original $20,000 back at the end of those ten years. That 3% does not change throughout the ten years, no matter how the markets fluctuate. 

When Does It Make Sense to Utilize a Fixed-Income Strategy?

The advantage of incorporating fixed-income securities into your portfolio is that you know exactly how much you will make on your investment. For this reason, conservative investors find fixed-income investments essential to their overall investment strategy. Bonds help their money grow and diversify their portfolio without taking too much risk.

But who is considered to be a conservative investor? Typically, those nearing retirement need to reduce their exposure to the markets and shift a more significant portion of their portfolio to “safe” investments like bonds. You may have heard of the standard 60/40 rule, which indicates that a moderate investor should have 60% of their portfolio in stocks and 40% in bonds. But as you near and enter retirement, you and your financial advisor may find it prudent to adjust the ratio to best suit your needs.

Finding a good balance is vital in retirement, as you want to protect what you’ve already worked hard to build while maintaining some growth opportunities. 

Why Fixed-Income Strategies Work Well for Retirees

There are a few reasons why fixed-income investments play an essential role in preparing for retirement. Here are a few benefits of incorporating them into your portfolio:

Income Generation

When you transition to retirement, it can be tough to forego a steady paycheck. But the good news is some fixed-income strategies do an excellent job of replacing that paycheck from an employer. They can offer a steady stream of income over the life of the investment, allowing those in or near retirement better build a spending plan and accurate budget. 

Reduced Volatility

Every investment has some form of risk. However, the interest payments from fixed-income investments can help investors stabilize the risk-return within their portfolio. This is why diversification is so important, especially for those nearing retirement. Putting all of your eggs in one basket (stocks) puts your portfolio in a vulnerable position. But by spreading the risk across various assets with different levels of stability, you’re minimizing the impact a market downturn will have on your portfolio.

Guarantees

It’s not common for investments to come with a guarantee. Most investments come with a warning that performance is not guaranteed. However, some fixed-income investments do offer guaranteed returns, such as a fixed annuity.

Potential Risks of Using a Fixed-Income Strategy

Every investment carries some form of risk. While that includes bonds, the risk associated with them tends to be minimal — which is why the return rate is relatively low compared to other forms of investments.

How the Type of Bond Affects Risk

Within the world of bonds, however, investors will face varying levels of risk depending on who they choose to buy from. The most common types of bonds include:

• Government or U.S. Treasury bonds
• Corporate bonds
• Municipal bonds (also called munis)

Because treasury bonds are backed by the full force of the federal government, they are considered the safest investment to make. The chance that the federal government will default on its loan is virtually zero. But keep in mind that because the risk is low, the interest will also be low.

Corporate bonds are usually the “riskiest” bond type because the chance a company will fold and default on its loan is higher. Companies will often issue corporate bonds if they need the capital and don’t wish to (or can’t) secure a loan from a bank. Unlike stock, you will not own a stake in the company if you purchase a corporate loan. Corporate bonds do, however, 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. 

Municipal bonds are issued directly from a state, county, city, or local government. They are typically issued when the governing body wants to raise money for a specific goal, like improving schools, building bridges, fixing roads, etc. 

Interest Rates

In an environment where interest rates rise, the rate paid by the bond may need to catch up. As a result, the bond would lose value in the secondary bond market, and you may have trouble selling it. In addition, since your capital is tied up in that investment, you can’t put it toward a higher-earning investment without taking an initial loss. 

Inflation

Bonds are typically an effective way to grow your money at a rate that matches or (in an ideal world) beats inflation. But when inflation runs high, it can eat into the gains of your fixed-income securities. For example, if you bought a bond with a 3% rate of return but inflation is up around 8%, you’re future buying power is falling behind because inflation is outpacing your returns. 

Other Strategies to Consider

While fixed-income investments can help bring stability to your future retirement income, it’s essential to diversify your assets in retirement. Doing so can help minimize your tax obligations and balance income security with growth opportunities.

Other common strategies for creating steady, tax-efficient income in retirement include:

• Contributing to a Roth 401(k) or Roth IRA
• Making after-tax contributions to your 401(k)
• Doing a Roth conversion
• Boosting contributions to your taxable brokerage accounts
• Adding to your Health Savings Account (if eligible)

Creating the Right Retirement Income Plan for You

When helping our clients prepare for retirement, we develop a custom retirement plan that includes a variety of strategies and tools — including those mentioned above. 
If you want to make the most of your time leading into retirement, you need a plan reflecting your unique goals. We can help you review your current standings, build a timeline, and prepare for the retirement of your dreams. Feel free to reach out to our team today.