Bonds At Your Stage of Life
Your Stage of Life - Retirement: Investing in Your 60s
- Investment Goal Preserve Capital
(your most likely primary financial goal at this point)
- Investment Horizon Short (Immediate Access to Funds)
(how long until you need to access your cash)
- Risk Tolerance Very Low
(how much risk you feel comfortable taking)
During retirement your main investment focus is ensuring your financial security. Most financial advisors say you'll need about 70 percent of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. Your investments and your pension or other retirement savings plan or account, if you have one, will have to make up that amount.
When thinking about bonds, think about:
- Maximizing your lifetime income. The right kind of bond investments for you will depend on your life expectancy, your tax situation, and the amount of risk you can afford to take. High yield and longer-term bonds may have higher coupons, but they also can put your principal at risk if you need to sell the bond before it matures and the issuer’s credit quality has declined or interest rates have risen. Consider a balanced bond fund where you can supplement your regular income with a percentage of your earnings while still maintaining enough capital in the fund to outpace inflation.
- Guarding against inflation. Retirees living on a “fixed income” can lose purchasing power if inflation increases. In general, interest payments and principal on an inflation-linked bond rise along with any significant increase in consumer prices. As a result, the amount of your income that should stay represents equivalent purchasing power. In the UK, for example, British “linkers” are tied to the Retail Price Index and are adjusted with an eight-month lag. At maturity, you get the higher of the original face value or the inflation-adjusted amount. Another way to guard against inflation is to keep a small percentage of your portfolio invested in stocks for their greater growth potential.
- Spend from taxable income first. Remember that if you’re in a position where your cash assets won’t cover ongoing or one-time expenses, you will want to dip into your taxable investment accounts first. Taking money from a tax-advantaged retirement plan can have tax implications and early withdrawal penalties. Keep an eye on bond maturity rates in your portfolio and consider cashing those out and retaining a portion before rolling the sum into another vehicle when they mature.
- Leaving a legacy. If you want to preserve your assets so they can be passed on to future generations or your favourite charity according to your wishes, you may want to establish an estate plan. Be sure to consult a lawyer and an accountant so you understand all the legal and tax implications.