Many investment advisors give their clients the default advice that bonds are good for retirement. This begs the question of whether that default advice is the optimum recommendation for every client in every situation.
The investment management professionals on the 6th Avenue Team believe that the answer to that question is “No”. Based on our years of experience in providing wealth management services, we hold the strong conviction that no single investment vehicle is the right product for every investor. Rather than delivering default advice, we meet with each of our clients and perform an in-depth analysis of both their current financial situation and their prospective wealth management goals and needs. After we are confident that we have formed a thorough picture of those goals and needs, we provide investment advice that is uniquely tailored to each client. That advice will include recommendations for bonds as a retirement asset only if bonds are the optimum product for the investor’s specific situation.
What Are the Advantages of Bonds?
For a few common reasons, bonds are often touted as a good investment asset for investors who are either retired or who are approaching retirement. Advantages of bonds include:
· Bonds are generally more stable than stocks. Highly rated corporate bonds and government debt instruments are subject to fewer price fluctuations than stocks. Retired investors that want to preserve the core value of their investment accounts will benefit from this price stability.
· Bonds generate regular income. Regular interest payment from bonds can provide periodic income for retired investors to pay their normal and customary living expenses.
· Bonds are generally safer and more secure. Investors that need an investment vehicle, for example, to holds funds over a short time period will do well to place those funds in bonds. The principle amount of those funds will be less likely to erode when it is held in bonds or a bond fund, and the investor will have access to those funds in an active and liquid bond-trading environment.
· Certain bonds are tax–efficient. Certain types of bonds will generate income that is exempt from taxation. That income might be less than the income generated by higher yield corporate bonds, but that lower yield may be entirely tax-free, which is a significant benefit for investors who are in higher tax brackets.
What Does it Mean to Retire Bonds?
“Bond retirement” occurs when the issuer of a bond pays back the money that was initially borrowed when the bond was issued. Bond investors lend money to a bond issuer, such as a government or corporation, and receive bonds as well as regular interest payments. When the initial investment is paid back, the bond is considered “retired”.
Like all investments, bonds are not entirely risk-free. If an investor’s wealth management plan suggests bonds for retirement income, that plan will need to reflect a few common bond risks.
· Rising rates mean lower bond prices. Interest rates and bond prices have an inverse relationship. When rates increase, bond prices will go down to adjust bond yield to the higher interest rate environment. The investment advisor representatives on the 6th Avenue Team routinely adjust their recommendations to reflect the evolving goals of their clients and the shifts in market conditions, including rising interest rates, that can affect those goals.
· Bad economic conditions can increase credit default risks. Cash flow problems and downturns in the general economy can create conditions under which bond issuers are unable to meet their interest or redemption obligations. Some bond issuers also retain a right to redeem bond debt before a bond’s maturity date. The 6th Avenue Team’s investment managers analyze prevailing economic conditions to alleviate the effect that these risks might have on a client’s portfolio. These and other risks, however, are always inherent in bonds and all other investment assets.
· Periods of high inflation will erode the value of bond returns. The purchasing power of fixed bond income will decline when inflation rates begin to climb. This has not been a significant issue for many years, but investors cannot assume that long periods of low inflation will continue.
Bonds may be a good option when an investor’s wealth management plan calls for assets that generate regular income and that provide greater assurances of price stability. An investor who needs a higher return on his or her investment assets might be tempted to move into higher-interest bonds. Those bonds, however, will expose an investor to higher risks. Thus, an investor’s tolerance for risk is a critical component in a wealth management plan.
Investors that need a short-term vehicle to hold funds will typically be well-served by bonds, as long as they regularly monitor bond performance and market conditions to verify that they are not experiencing sudden short-term losses.
A blend of different bonds can offer an investor a range of risks and returns. A good solution might be for an investor to include both short- and long-term bonds in a portfolio to account for those risks and to generate an overall return that serves the investor’s needs. Again, those needs will drive the decision to invest in bonds, including the type and character of bonds that are the right match.
The 6th Avenue Team’s investment advisors provide wealth management advice for high net worth individuals, institutions, and not-for-profit organizations. Our intake and financial advisory process is designed to define each of our client’s individual financial goals and implement an investment plan , from the initial meeting through the generational growth of their assets as we help them to evolve that plan in response to changing individual and market circumstances.
Please see our website for more information about using bonds in retirement planning, or call our midtown Manhattan offices to schedule an in-person appointment with one of our investment advisor representatives.
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