Corporate and Treasury bonds can help you turn your nest egg into an income stream. In fact, generating a steady income stream to supplement your pension may be one of the hardest parts of retirement.
Bonds have a set interest rate and they usually pay twice a year so you know exactly how much income you should receive and when you can expect to receive it. You can plan your budget around both the timing and the size of the anticipated interest payments.
Choosing which type of bonds to buy
Treasury bonds are issued by the United States government and are backed by the “full faith and credit” of the government and its ability to tax the American people. Treasury bonds are incredibly popular because of their perceived safety. The United States has never defaulted on its bond payments, giving investors confidence in its ability to pay.
Because of the relative safety of Treasury bonds, their interest rates are lower than other bonds. If you want to get the safest income stream that is available from bonds, Treasury bonds may be a good choice. Be aware, though, that all bonds, including Treasury bonds, can fluctuate price while you hold them, so you could lose money if you sell a bond before it matures.
If you’re looking to generate higher income from bonds, consider buying corporate bonds. Corporate bonds are issued by companies from around the world. Just like people, corporations have credit scores that you can use to estimate whether they’ll repay the loan. The lower the credit score of the company, the higher interest you can earn… and, of course, the higher the risk.
Take note: there have been corporate defaults in the past, so you’ll want to diversify your holdings between multiple companies. Diversification within different types of bonds can build a stronger portfolio.
For more information on using corporate or Treasury bonds to create an income stream in retirement, read The Retirement Planning Book, which discusses bond investing at length. For a free download, click here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 23, 2017.