What is the job of a bond in your portfolio? When you think about it, bonds have two primary roles in a well-balanced portfolio.
Role #1 is to provide steady income. Role #2 is to provide stability for a portion of your principal to offset some of the volatility of market positions. How are bonds doing in fulfilling those roles in today's environment?
When it comes to steady income, bonds are currently grading out at a D. Due to low interest rates, you are receiving almost no income from your bond positions, unless you venture into high-yield bonds, which are a euphemism for junk. Investment-grade bonds are paying very little.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In regards to providing stability to your portfolio, bond prices are at all-time highs. Bond prices move inversely with interest rates. What will happen to the value of your bonds when interest rates rise in the future? They will decline. Buying bonds today is the equivalent of buying high so you can later sell low. Not a great idea.
What else can you do?
Imagine for a moment that you could go out on the market today and buy a 10-year investment-grade bond with the principal insured paying a coupon rate of 4%. Would you buy that bond? If you are like most people, you would jump all over it and hold it for the next 10 years happily.
That hypothetical bond would fulfill both roles of a bond admirably. Unfortunately, no such bond exists. However, something very similar does exist if you broaden your horizons.
If you are willing to expand your thinking just a bit, you will find that insurance companies have a few fixed indexed annuities that actually work similarly to our hypothetical 10-year 4% bond.
For many of you, you simply need to get over the word "annuity."
Warning: Very Few Qualify
Please be aware that out of the thousands of fixed indexed annuities very few will actually produce a 4% return over the next 10 years.
One fixed indexed annuity approach that we are currently using as a bond alternative: As of this writing, two highly rated companies have a 10-year fixed indexed annuity that pays interest equal to 35% of Standard & Poor's 500-stock index when it is up for the year, and pays 0% when that index is down for the year.
In other words, if the market is up, you get 35% of the upside. If it is down, you get 0% for that year. Each year during the 10 years is evaluated separately when calculating interest.
If you do any kind of research, you will find that this approach will very likely net you between 3% to 6% annual returns in almost any 10-year period. Your principal is insured, and you receive returns closer to what you want your bonds to pay.
Of course, fixed indexed annuities come with disadvantages. The two biggest are that you will pay surrender charges if you exit out of the annuity completely during the contract period, and the earnings are not guaranteed.
If you cannot stomach an annuity, you can also look into the world of limited partnerships, as there are options for alternative income. But buyer beware: These can look very good on the surface, but the liquidity is often very limited.
Don't be afraid to think outside the box in today's low interest rate environment. You need to evaluate new solutions to today's new problems.
Michael Reese, CFP®, CLU, ChFC, CTS is the founder and principal of Centennial Wealth Advisory, LLC with offices in Austin, Texas and Traverse City, Michigan. His focus is to help retirees enjoy financial security in any economy.
-
Aging: The Overlooked Risk FactorSponsored Elder care is a personal and financial vulnerability many people fail to plan for.
-
AI vs the Stock Market: How Did Alphabet, Nike and Industrial Stocks Perform in June?AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in June.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the FairwayThink of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty MovesIf you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
