Staggering bonds’ maturities over time protects against interest rate risks.
Bonds can be a source of steady and sustainable income. They’re often used to complement Social Security, pensions and fixed income annuities in the income to expense match-up. Purchasing only quality-rated bonds is a defense against default.
Typically issued by companies or municipalities for capital-raising or expansion, bonds are yet another potential source of sustainable retiree income. As loans to issuers, buyers and holders of bonds are paid interest at known intervals and rates, and are repaid their principal at maturity. Bonds sold prior to maturity are subject to devaluation if interest rates have risen, and increase in value if interest rates have fallen.
Retirees often match up their known monthly expenses with traditional income sources including Social Security, pensions and qualified retirement plan proceeds. Fixed index annuities can fill in the gaps and have many benefits, although liquidity is not among them.
Bonds can pick up the income and liquidity slack, and when properly structured over time, can be an evergreen source of income and protection. Often known as laddering, a barbell approach to bonds (visualize the ratcheting motion of a lift) involves staggering bonds’ returns and expiration dates over time, frequently at five-year intervals. Given that returns and maturities are cyclical, bond portfolios can be considered om a macro level as a portfolio within a portfolio.
Important to consider when assembling a bond portfolio are the issuers’ quality grade and the bonds’ maturity dates. Quality refers to the issuers’ ability to make the stated interest payments and ultimately, repayment of principal. Desirable bonds are typically corporate grade and not rated below Triple-B. Anything less can be considered as “junk” to be avoided. Maturity dates state when the principal is due to be repaid. Long maturities can offer the highest interest rates, though they also have the most time for value fluctuation.
Bonds can be useful in mitigating two of retirement’s biggest risks, longevity – always an unknown – and then sequence of returns, the systematic draw down of assets. In both cases, bond interest payments support ongoing retirement expenses. However, as with other asset classes, bonds alone are not enough, and experts encourage asset diversification consistent with retirees’ risk tolerance and goals.
Syndicated financial columnist Steve Savant interviews retirement specialist Mark Patterson. Right on the Money Show is an hour long financial talk distributed to 280 media outlets, social media networks and financial industry portals.