3 Reasons Why Boomers Need Bonds for Retirement Portfolios
For how much most of us are looking forward to someday retiring, the entire subject involves a lot of trepidation too. It can be scary thinking about no longer working and simply hoping you have enough money to live off of for the rest of your life.
This is why it’s so important to consider all your options when it comes to investing for the sake of retirement. While you have a number to choose from, bonds absolutely must be part of your retirement portfolio.
The Case Against Buying Bonds Right Now
If you know anything about the current market, you may have a hard time believing me when I tell you bonds make a smart investment. After all, there are a lot of arguments for now being one of the worst times to buy them.
Short-term interest rates directly affect the value of bonds and, right now, they’re at about 0%. Even 30-year Treasuries will give their owners 3% returns! They could fall to roughly 20% in market price if interest rates increase by as little as 1%. According to many experts, interest rates are about to go up too.
Therefore, it seems pretty obvious to a lot of “experts” that there couldn’t be a worse time to own bonds. Still, if you’re getting close to retiring—or already are—I believe it’s the smart move. That being said, it’s important you know which ones to invest in.
Bonds That Outperform Stocks
While treasuries yields are low, investment grade corporate bonds could provide a reliable alternative for retirement savings.There are three reasons I like corporate bonds for retirement portfolios, even during the current time of low-interest rates.
The first reason I like them is because they are much more likely to payout than stocks are. Companies cut their dividends all the time because of financial issues, and all they have to suffer for it is a drop in stock price (and, perhaps, damage to their reputations).
A company’s bond is obviously higher up on their list of priorities; if they don’t meet a promised payout, they’ll be on the road to default. Creditors can immediately attack and force them into bankruptcy. Therefore, if companies can pay their bonds as scheduled, they almost always do.
The second reason I like bonds for retirement funds is the fact that they mature. Unlike bond funds, on the date of maturity, the issuer has to pay the face value of the bond exactly. Otherwise, once again, they’ll be faced with the prospect of default.
The third reason I like them is the opportunity to create a dedicated investment portfolio that will match your future cash outflows.
You Must Create a Bond Ladder
Now, if you want to use a bond to bolster your retirement efforts, it’s important that you go with a bond ladder approach. This is a collection of bonds with progressive maturity dates. Instead of them all coming to maturity at the same time, then, one happens after the next after the next.
The goal with a bond ladder is to use the returns from maturing bonds to cover your costs of living. This means going with Treasury bonds or high-quality, investment-grade corporate bonds if you value a bit of diversity.
Setting Up Your Bond Ladder
As with any planning you do for retirement, this must begin by understanding what your costs will be. Once you know that, you know how much you’ll need from bonds to help pay for those expenses. Be sure you factor in a healthy estimate for inflation too or you may be in for a rude surprise.
Many investors are underestimating how much the FED could raise rates next several years.Then, just make sure that your bond ladder can last you between three and five years.
While bonds may not seem like the best investment vehicle at the moment, if you’re retired or will be soon, a mid-term bond ladder makes a lot of sense, so long as you take a time to plan it out.