Investing in fixed income is a great choice for retirees seeking stable returns and a way to increase their monthly earnings. With fixed income savings, it’s easy to rely on a stable income stream every month, so there’s no need to pull off assets when short of cash. That’s why a lot of people, particularly retired people, consider investing in fixed income.
Fixed Income Explained
A fixed-income fund is an investment which gives the investor the same amount of interest payment per month, guaranteeing the initial principal’s eventual return at maturity. Fixed income investments are very different from variable-income securities, where the monthly payments can change because they are based on some varying measure such as short-term interest rates.
Unlike variable-income investments, fixed income investments are ideal for those who are retired. Essentially, it is a contribution to a steady and reliable stream of income, therefore knowing how much the fund will pay out in advance is more predictable. In most cases, fixed-income funds are made for retired men and women that need to cover their monthly expenses. Payments made each week, quarter, or year are all options that are available depending on the chosen service.
Usually, investors use more than one fixed-income fund to avoid risks, diversify their portfolio, and be able to come up with a steady flow of cash. It is also possible to leave some money in a variable return fund but also get a stable income. Besides that, there’s the option to reinvest some returns automatically to increase payments down the line.
Types of Fixed Income Funds
- Municipal Bonds [1]:Local municipalities can issue bonds in the United States in the same way that the federal government can. Municipal Bonds are low-risk investments and they are tax exempt.
- Government and Agency Bonds [2]: Government bonds from wealthy countries are usually low risk, but be careful if looking into bonds from markets that are in developing countries, as these are not always the most stable.
- Treasury Bonds [3]: ]: The treasury bonds sold by the U.S. Government are both low risk and low reward, which means that they may be stable, but won’t necessarily be getting monthly returns that are as high.
- Corporate Bonds [4]: When companies want to raise funds, they often issue corporate bonds that have high returns. However, corporate bonds can also be high risk, so be careful and be conservative.
- Mortgage-backed securities [5]: ]: If looking for a significant return on fixed income investments, look for banks that are selling mortgages on the open market.
- Certificates of Deposit (CD) [6]: This is the most easily accessible fixed-income investment. It is very low risk, but, it is an option that will give low returns as well.
- Preferred Stock [7]: To raise funds, some corporations will issue preferred stock notes that can later convert into common stock once a specific period of time has passed.
Why Fixed Income Investments Are a Great Choice
Anyone who is close to retirement or who is already retired should consider fixed-income investments. The main benefits include:
- A Stable Fixed Income: A stable fixed-income stops the withdrawal of capital based funds when short on money.
- Tax Exemptions: Some fixed-income investments are tax-exempt so there’s no need to worry about an increase in taxes
- Low Risk: Many fixed-income funds, such as CDs or government bonds, are extremely low risk.
- Protection from Market Instability: Diversifying a portfolio with fixed-income investments gives a certain degree of protection from market crashes
How to Discover the Top Fixed Income Funds
Expanding a portfolio with fixed-income investments can have incredible benefits for everyone, but especially those who are retired or nearing retirement. However, be aware that those who dive in to investments without adequate consideration can lose a lot of money, while those who make informed decisions are likely to enjoy lower risks with higher rewards.
With that said, it is of utmost importance to find a trustworthy financial advisor to get started and help plan out potential investments. Before making any decisions, be absolutely sure sure that all options have been compared and consulted with a financial advisor.
References
[1]https://www.thebalance.com/municipal-bonds-what-are-they-and-how-do-they-work-3305607
[2]https://www.investopedia.com/terms/a/agencybonds.asp
[3]https://www.investopedia.com/terms/t/treasurybond.asp
[4]https://www.investopedia.com/terms/c/corporatebond.asp
[5]https://www.thebalance.com/mortgage-backed-securities-types-how-they-work-3305947
[6]https://www.investopedia.com/terms/c/certificateofdeposit.asp
[7]https://www.investopedia.com/terms/p/preferredstock.asp