As retirement gets closer, many investors focus more on protecting their money than growing it. Fixed-income investments can help by providing steady interest payments and reducing stock market risk. With the right strategy, these investments can help cover living costs, lower risk and add to Social Security or pension income.
A financial advisor can help you determine which fixed-income investments fit into your broader portfolio strategy.
What Are Fixed-Income Investments?
Fixed-income investments are financial instruments that pay a set amount of income on a regular schedule, typically through interest or dividends. While fixed-income investments tend to offer lower returns than stocks, they come with less volatility and risk.
Diversity is key. Traditionally, advisors recommended subtracting your age from 100 to determine your stock allocation, with the remainder in bonds or fixed-income assets. Today, that rule of thumb has evolved, but the underlying principle remains: as you age, your portfolio should generally become more conservative.
For retirees, fixed-income investments can help create a steady stream of income to pay for everyday expenses like housing, healthcare and food. By adding bonds, CDs, or other fixed-income options to their portfolios, retirees can also reduce the need to sell stocks during market downturns. Additionally, these investments could be timed to mature when cash is needed, giving retirees more control over their income and helping them avoid tapping into savings too early.
Examples of Fixed-Income Investments for Retirees
If you’re looking for steady income and capital preservation, here are seven options that retirees commonly add to their portfolios.
1. Fixed Annuities
Fixed annuities are insurance products that provide guaranteed income for a set period, or for life, in exchange for a lump-sum payment. They offer tax-deferred growth and consistent payments, which can be especially helpful for retirees seeking a “paycheck” in retirement.
While annuities can come with fees and surrender charges, they eliminate market risk and offer peace of mind. A single premium immediate annuity (SPIA) is a common choice for retirees wanting to convert savings into predictable income.
2. Municipal Bonds
State and local government issue municipal bonds to fund public projects like schools, highways and utilities. The interest from most municipal bonds is exempt from federal income taxes, and sometimes state and local taxes as well. This makes them especially attractive to retirees in higher tax brackets.
While generally safe, municipal bonds do carry some credit and interest rate risk. Choosing bonds with strong credit ratings or investing through diversified municipal bond funds can help manage this risk while providing tax-advantaged income.
3. Corporate Bonds
Companies issue corporate bonds to raise capital and typically offer higher yields than government securities. They are categorized by credit quality, with investment-grade bonds being less risky than high-yield or “junk” bonds.
For retirees comfortable with moderate risk, investment-grade corporate bonds can enhance income potential. Diversification is key here, however. Holding bonds from a variety of sectors and issuers, often through mutual funds or exchange-traded funds (ETFs), helps reduce exposure to any single company’s financial health.
4. Treasury Inflation-Protected Securities (TIPS)
TIPS are government bonds indexed to inflation. As the Consumer Price Index (CPI) rises, the principal value of TIPS increases, and interest payments adjust accordingly. This makes TIPS an effective hedge against rising prices, a critical concern for retirees on fixed incomes.
Although TIPS generally yield less than traditional Treasuries, their inflation adjustment feature can protect purchasing power over time. Investors can buy TIPS individually or through TIPS-focused mutual funds and ETFs.
5. Treasury Securities
Investors and analysts consider U.S. Treasury securities, including Treasury bills (T-bills), notes and bonds, among the safest fixed-income investments. Backed by the full faith and credit of the U.S. government, these instruments provide steady interest payments and return your principal at maturity.
T-bills mature in one year or less, while notes and bonds range from two to 30 years in duration. Retirees focused on principal preservation should include T-bills in their investment portfolio. They’re also exempt from state and local income taxes, which can enhance their after-tax returns.
6. Certificates of Deposit (CDs)
Banks and credit unions issue CDs that pay a fixed interest rate over a set term in exchange for a timebound deposit that ranges from a few months to a few years. The FDIC insures CDs (up to $250,000 per depositor, per institution), making them one of the safest ways to earn interest on idle cash.
Retirees can use a CD ladder, a strategy involving multiple CDs with staggered maturities, to create regular income while maintaining access to their money. While returns are modest, the predictability and safety of CDs make them a reliable component of many retirement portfolios.
7. Dividend-Paying Stocks and Preferred Shares
Fixed-income strategies often include dividend-paying stocks and preferred shares because of their consistent income. Companies with strong balance sheets and long histories of dividend payments can offer reliable cash flow and some potential for capital appreciation.
Preferred stocks, in particular, function similarly to bonds. They pay fixed dividends and take priority over common stocks for payouts, though they carry more risk than traditional bonds.
Working with a financial advisor can help you build a fixed-income strategy that complements your broader portfolio and supports a secure, comfortable retirement.
Potential Benefits of Fixed-Income Investments
Fixed-income investments offer several key advantages, especially for retirees looking to maintain financial security without taking on excessive risk.
- Predictable income: Regular interest or dividend payments help cover living expenses.
- Reduced volatility: Fixed-income securities tend to fluctuate less than stocks.
- Capital preservation: Many fixed-income options prioritize protecting your principal.
- Inflation protection: Investments like TIPS adjust for rising prices.
- Tax efficiency: Municipal bonds and certain retirement accounts can reduce tax liability.
Bottom Line
The best fixed income investments for retirees of course depends on you and your financial goals. But in general, you’ll likely want to consider those that offer stability, consistent income and protection against market swings — all essential features for a sound retirement plan. From government-backed securities to tax-advantaged municipal bonds and income-generating annuities, retirees have access to a wide range of options to meet their needs.
Retirement Plan Investments
- A financial advisor can help you analyze investments for your retirement portfolio and manage risk. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your nest egg could grow over time, SmartAsset’s retirement calculator can help you get an estimate.
Photo credit: ©iStock.com/Eva-Katalin, ©iStock.com/pcess609, ©iStock.com/PeopleImages
Read the full article here
