How to Prepare Your Bond Investments for Your Golden Years
For those stepping closer to retirement, do you know how to manage your bond portfolio? Most people don’t. In fact, despite a volatile market, most people still have a large percentage of their retirement assets in stocks. Conventional retirement planning wisdom, however, tells us that retirement assets should start moving into a bond portfolio within 10 years before you retire.
A bond portfolio, unlike, stocks, provides an investor with a set interest return. The interest could be paid in regular installments, as most bonds do, or paid all at maturity as with zero-coupon bonds. Though stocks may offer potentially higher returns, bonds offer a safer investment environment and way to provide another stream of fixed-income at retirement.
Zero-Coupon Bonds
Within 8 to 10 years of your planned retirement date is a good time to start allocating retirement assets into zero-coupon bonds. With zero-coupon bonds, you buy a set of bonds with a maturity date of 8 to 10 years. During that time, no interest is paid directly, but is compounded so at maturity, you receive a payment of the full principal you paid, plus the compound interest.
An owner of a zero-coupon bond is taxed on the interest, whether received or not. But if purchased through a retirement savings program, you can save on taxes and defer until the bond matures.
Fixed-Income Bonds
Fixed income bonds are those that pay out interest at regular installments. Most bonds pay the interest owed to the owner on a semi-annual basis, but they may also be quarterly or annual payments depending on the issuer. As retirement approaches, bonds may be another vehicle in which to invest retirement assets that provide a fixed income for a set amount of time. For instance, if you purchased a 10-year $20,000 bond at the time of your retirement with a coupon rate (interest rate) of 6%, you would receive $1,200 a year in interest payments paid in two installments per year of $600. And at the time of maturity in 10 years, your initial principal investment will be paid back to you.
Who Issues Bonds?
Bonds may be issues from a number of various sources from both government and the private sector. Here are the most common bond issuers:
- U.S. Treasury Bonds – The U.S. Treasury issues bonds to help pay off the national debt. These are considered the safest type of bond, but offer the lowest interest yield. However, U.S. Treasury Bonds are exempt from state and local taxes.
- Municipal Bonds – Also called “munis,” these are issued usually by state or city governments to raise money for municipal projects, like roads, sewers, or a new baseball stadium. Most munis are exempt from state and local taxes as well.
- Corporate – Corporate bonds are issued by corporations looking to raise capital for specific financing activities. Corporate bonds are more volatile, but are usually rated by rating agencies to aid in assessing risk.
If you are within 10 years of retirement, talk to a qualified retirement wealth specialist like www.kenhimmler.com or retirement asset management company at www.iamllc.biz to get the best advice on how to start allocating your bond portfolio. It may be a good time to start purchasing zero-coupon bonds, or start planning another source of fixed-income at the time of your retirement.
Authored By Kenneth Himmler, Sr.
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