Finding Fixed Income Investments for Retirement

February 7, 2023
For retirees living on a fixed income, building an investment strategy that diversifies risks to ensure a stable income is essential in building your retirement plan.

Fixed income investments may help stabilize your portfolio and provide more predictability instead of uncertainty. Products like bonds may help hedge against the market's dramatic swings because they're less likely to feel the impact of volatility. This kind of investment may also help generate steady returns you may rely on to cover expenses, such as health care, while preserving the assets you've built for retirement.

If you're entering or already in retirement, market volatility can have a material impact on your portfolio if you withdraw funds on a regular basis, according to many retirement and annuities professionals. But fixed income may help dampen volatility. Essentially, a downturn in the stock market won't necessarily hurt your fixed income holdings the same way it hurts an equity portfolio.

Let's take a deeper dive into four aspects of fixed income.

Bonds for fixed income retirement planning

1. Goals of fixed income products

Fixed income investments may have several purposes for those nearing retirement or already retired:

  • Preserve wealth. Although prices may fluctuate and return of principal is not guaranteed, the end goal of fixed income investments is to receive the full-face value amount when your investment matures.
  • Generate income. Investments may provide a steady stream of income to help supplement your other income or help fund your retirement.
  • Diversify your portfolio. Diversifying your investments across asset classes may reduce the risk exposure for your overall portfolio. However, diversification and asset allocation do not guarantee against investment loss.
  • Manage interest rate risk. Although the risks of not receiving interest rate payments—or worse, never getting your money back—are quite real, the most everyday risk with these securities is potential loss of value from interest rate changes. A bond ladder with staggered maturities is one way you can try to manage interest rate risk in both rising and falling environments and limit exposure to interest rate volatility.

2. Advantage of bonds over dividend stocks

When the stock market booms, many investors begin looking to dividend-paying stocks instead of bonds for their income. This isn't necessarily a bad idea, but it typically exposes investors to higher potential risk. Companies can cut stock dividends or even cancel them entirely, meaning there's no guarantee of income. A bond, especially a U.S. government bond, is much more likely to pay the income that’s promised when you purchase it.

In addition, relying on dividends from stock holdings means exposing yourself to more of the stock market's turbulence. Although retirees may feel they need stock market investments to help protect against inflation and provide growth opportunities, it's worth questioning whether this is the best place to go for income. Keep in mind that bonds typically do not share the same gains that the stock market sees.

3. Risks of bonds

Bonds do carry risks, including the possibility that the bond issuer might default. The more risky the bond, generally the higher the coupon rate, meaning you get a higher yield on your investment. Less risky bonds, such as U.S. Treasury bonds, tend to pay far lower yields than some types of corporate or municipal bonds.

When considering a bond, remember to do your research. Check what the ratings agencies have to say about it and how they rate them. Know the risks, including that of default. Bond prices tend to have an inverse relationship to interest rates. One risk of holding a bond is that, if interest rates rise, the bond's value would likely decrease. If you hold the bond until maturity, you'll still receive the full principal and full coupon rate, but if you have to sell the bond before maturity, you could lose money.

4. How to create bond ladders to diversify investments

Retirees don't necessarily need to let interest rate fears stand in the way. One approach that may help protect against rising rates (which typically accompany falling bond prices) is to diversify your bond portfolio by building a bond ladder of short- and long-term bonds.

By holding longer-term bonds, you may be able to benefit from higher interest rates. Shorter-term bonds mature sooner, which could give you flexibility to reinvest if rates rise in the future. Thus, a bond ladder is designed to diversify across time horizons to provide a balance of flexibility and yield.

The bottom line

When volatility rattles the markets, making your nest egg last a lifetime may become more of a challenge.

Many investors still need to grow assets through other investments, such as stocks, but you might want to double-check your portfolio allocation. The optimal mix depends on a lot of factors, including your age, other assets, and spending needs, all of which you should consider discussing with a financial professional.

There's no such thing as an investment without risk. But fixed income investments have the potential to help those in retirement generate income over the long term and minimize the risk that comes with market volatility.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.

All expressions of opinion are subject to changes without notice in reaction to shifting market, economic, and geopolitical conditions.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

Investors may experience a gain or loss due to the prepayments and receive back their investments prior to maturity.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance, and financial circumstances.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.