If you are closing in on retirement, now is a good time to learn more about the proper place for bonds in your nest egg, particularly on the income generating side.
Asset Allocation Comes First
A relatively easy way to arrive at reasonable allocations of stocks and bonds is to use a couch potato portfolio. On aspect of these portfolios is that many of them do not require you to change allocations as you get older. You merely have to re-balance periodically.
While you are considering a bond allocation, do not overlook the possibility of using bonds as part of your retirement emergency fund. We use I-Bonds for that purpose as well as for inflation protection.
Factors to Consider in Building a Retirement Portfolio with Bonds
Municipal bonds and funds are becoming attractive again for fixed-income investors. Because so many state and local governments are in financial trouble, it is important to diversify and to look for lower risk municipal bond funds. Many experts suggest that if you buy individual munis, you should spend most of your money on bonds having durations of five to 12 years. This will pay you tax-free income with moderate interest rate risk if you decide to sell the bonds before maturity.
Certain corporate bonds can be attractive for retirement as well, particularly if they are not callable and you can afford to hold them until they mature.
Be careful about purchasing bonds on the secondary market. The commissions and fees charged by brokers on the secondary market can be mysterious and excessive. Therefore, it can be safer and cheaper to buy bonds when they are issued.
To compare bond pricing on the secondary market, try using investinginbonds.com.
Try to diversify into different bond types. A core holding (approximately 40% of your bond portfolio) could be a total-bond market mutual fund or ETF.
A second allocation – perhaps 10 percent to 15 percent – could be in a Treasury Inflation-Protected Securities fund such as iShares Barclays TIPS exchange-traded fund (TIP). If you think significant inflation will arrive soon and stick around for a while, a larger allocation in TIPS would be justified.
The other component of your bond allocation could be an exchange-traded fund that invests in corporate bonds. One example is the iShares Investment Grade Corporate (LQD) fund. Just be careful about a fund that has large exposure to bonds issued by financial institutions.
These are not set-and-forget allocations, at least not compared to the couch potato or lazy man portfolios. Keep an eye on things regularly, particularly if you are investing in individual bonds.
Good luck building bonds into your retirement portfolio. Please let me know of any ideas or recommendations that you have in this area.
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