Where to start your investigation on investment bonds for retirement planning.
The reason many people don't invest in bonds is that they think the return is too small compared to that of other investments, especially stocks. Historically, this is true. But remember, you don't live historically. You have to consider your goals and the potential risk for any investment. In this context bonds don't look so bad.
If you were to retire today, you might need to support yourself financially for twenty-five or thirty years - or more. Because of their relative security and regular income, bonds will be a part of your portfolio and you will need to consider how they will fit into your retirement planning.
How you save and how much you save obviously depends on your specific situation. But save you can - and must. For as little as $25 you can buy U.S. EE savings bonds that are backed by the U.S. government and can be bought at banks or even where you work, often with savings plans that will allow almost everyone to participate. They are bought at half face value so your $25 will get you $50 at maturation. Interest on these bonds changes monthly and the government guarantees they will reach their face value within 20 years or less.
If you have a bit more to invest, the bond market offers many varied bond investments for you to consider. A couple of general points need to be kept in mind, however, as you consider these investments. The most important point to remember is that interest rates and bond values go in opposite directions. As interest rates go up, the value of bonds you already hold goes down since they will pay the same premium as before while new bonds will pay the higher rate. If you are holding a bond for income and will hold it until maturity, this might not make too much of a difference. But it is a consideration.
Another general point to remember is that bond mutual funds do not have a maturity date. Unlike the bonds within them, they go on and on. If you hold a bond, you will collect its face value at maturity; if you hold a bond fond and bond prices fall, you could face a loss similar to stock funds. Your investment is in the fund, not in the bonds themselves.
Worried about inflation? I-bonds were made just for you. They are U.S. government bonds that adjust the interest rate they pay twice a year depending on the rate of inflation. Inflation goes up, the interest rate they pay goes up as well. Similar to EE bonds, the I-bonds can be bought at a low price to allow investors of any economic level to participate.
Additional inflation protection can be found with TIPS, Treasury Inflation-Protection Securities. They can be purchased with five to thirty year maturity and they pay semi-annually like any other Treasury, but there is an "extra" return portion that is based on the rate of inflation and paid out at the maturity of the security. This gives you money along the way and a nice addition at the end for inflation - something that can be quite useful at retirement. Remember, however, you will be taxed along the way for the premium paid as well as the "extra" building in your portfolio. This is a consideration if your TIPS security is not in a tax-deferred account like an IRA.
A similar consideration exists for another popular retirement investment vehicle, the zero-coupon bond. These bonds pay nothing until maturity when you get the principal and total interest together. This is a good investment for retirement when interest rates are going down and when the security is held in a tax-deferred account. With rising interest rates, however, other bonds are more attractive.
When you invest in bonds as part of your retirement planning, you have to consider your financial situation, when you are going to retire, and what you will need at that point. Do you have toleration for risk and can you recover if you make a mistake? Are Treasuries the way to go, or are you willing to get a better return from less secure corporate bonds? Will the dollar depreciate making foreign bonds a worthy risk?
Unless you're really good at roulette, bonds should be a part of your general planning for retirement. As with any investment, it takes thought, some study and, if you have a good broker or teacher, some discussion as well. Bonds aren't as simple as they used to be for the average investor but all you can do is to study, analyze and decide. These have been some suggestions on how to begin.
