As we move towards retirement, we want to ensure we have multiple streams of income that can increase over time. They increase by paying us a yield, whether interest or dividends.
Being on a fixed income, especially during periods of high inflation, is the most dangerous thing you can do during retirement. We want to live on a budget, but we also want our income to move higher each year.
A quick example. I want to give a quick example to hammer home this point. Let’s say we live on social security and a pension of $6,000/month.
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We are comfortable because our expenses total $5,000/month, leaving us $1,000/month to save, invest, and spend. However, our gas, electricity, property taxes, and insurance all rise by 30% because of inflation.
Now, we are barely scraping by and making ends meet. We are no longer working, and we have no other way to increase our income. We are screwed.
Retirement Plus. I created the Retirement Plus series (dividends, rents, royalties) to explain how essential it is to supplement your retirement with other passive income sources.
Today I will talk about using bonds to supplement your retirement. We also call bonds “fixed-income” because they are a function of debt. To understand the difference between bonds and stocks, read the article “Debt vs. Equity.”
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Why use bonds? Why do we want to use bonds in our retirement planning? Stocks can give you income via dividends and capital gains.
Bonds, however, usually pay lower interest than dividends and don’t offer capital appreciation unless you are a bond trader. Then why use bonds?
I don’t like to compare bonds to stocks; I compare them to holding cash. You shouldn’t lose the principle when you buy bonds directly (meaning not through an ETF).
Therefore, as the market fluctuates during your older years, you can be confident that some of your nest egg is safe in bonds. Consider them a “peace of mind” vehicle that also pays a yield.
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By investing some of your portfolios in bonds, you can move into (riskier) high-yield products or other alternative instruments in different investing categories.
Types of bonds. Let’s briefly review the types of bonds I talked about recently. This will give you an idea of preparing your fixed-income allocation.
Series “I” Bonds. The US Treasury (via TreasuryDirect.gov) sells Series “I” Bonds. Recently, they have been paying upwards of 7% interest because of their inflation-protection component. Don’t get too used to that high amount of interest.
Series “EE” Bonds. Series “EE” bonds, also sold by the US Treasury, pay little interest but are guaranteed to double in 20 years.
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US Treasuries. There are a few types of US Treasuries divided into maturity timelines. I prefer the 30-year bond. These bonds pay semi-annually directly to your bank account.
Municipal Bonds. The stand-out feature of Municipal Bonds is that many of them are tax-free at the local, state, and federal levels. The best way to obtain them is through bond funds or closed-end funds.
Corporate Bonds. Corporate Bonds offer higher yields than Treasuries, but you take on more risk. The best way to obtain these bonds is through bond funds.
Junk Bonds. Junk Bonds originate from companies that may not have the best credit ratings. They offer higher risk and higher rewards than treasuries and corporate bonds.
High-Yield Bond Closed-End Funds. My favorite way to invest in bonds is through bond closed-end funds. I love PIMCO funds that offer high risk/high rewards and high-yield investing. Warning, these funds are not for everyone.
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Baby Bonds. Baby Bonds are a great way to invest in debt if you can find them. They function almost identical to preferred shares, except you receive interest instead of dividends.
Please read the accompanying articles on these fantastic debt products. I want to cover how bonds can supplement your retirement.
Bonds in your portfolio. Many people try to keep excellent yield and growth throughout their entire portfolio at all times. They switch between stocks and bonds every time the market moves between bear and bull markets.
My philosophy is that I don’t use paper assets (stocks and bonds) to obtain great wealth. These products keep my money from becoming stagnant. However, I invest in a business, real estate, and myself (education) to earn infinite returns.
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This mindset allows me to keep a portion of my money, earning 3-4% without worry. I don’t need every dollar I invest in bonds to make a 9-11% yield. Every dollar has a purpose, and sometimes it’s nice to have upside protection with no downside risk.
Therefore, you can allocate a portion of your portfolio to fixed-income. Your allocation percentage to bonds is your decision—only you can determine your risk tolerance.
Another quick example. Let’s say you have a $1 million portfolio at age 50. You can decide to keep 50% of this nest egg in 30-year treasuries earning 4%.
The other portion you may want to invest in is a dividend growth portfolio paying you 4% and growing at 4%.
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By combining the two, you have growth, dividends, and interest, while keeping 50% of your investments safe from the stock market. Again, only you can decide your risk tolerance and appetite for stock market drama.
Combine for best effects. The best way to use bonds (and stocks) is to combine them with other passive income sources. You can add one rental property, a small automated business, and royalties from YouTube from the above example.
Now, you are protected from various market downturns and can diversify further into more income streams. Think of your passive income as a total package when considering retirement. Don’t fixate too much on the return of one segment of your portfolio.
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Conclusion. The moral of the story is that bonds can give you safety, security, and income. Only you can determine how much protection you need. Do whatever allows you to sleep at night.
If you want to be 90% into treasuries, do that. If you wish to 10% bonds and 90% closed-end funds, do that. Don’t let some random methodologies (60/40 rule) determine your allocation preference.
I love bonds and the security they provide. I am 41 years old and have other passive income sources; thus, bonds are not a massive part of my portfolio.
My favorite investment method is through PIMCO closed-end bond funds (PDO, PDI, PTY). How can bonds help your portfolio and retirement plan?
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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