Retirement Investment in Bonds

Get To Know The Ways To Allocate Based On Your Needs For Retirement In Bonds
Written by PaayiAdmin |01-Aug-2020 | 0 Comments | 366 Views

When you are planning about your retirement account, one major thing you need to think about is that how much portion of your investment you need to put in stocks and how much you need to but in bonds. Let's see to make retirement investment in bonds.

We have seen many times in the past so many years if you put your money for a long time you will get good returns in stocks as compared with bonds. Bonds can be more predictable but usually deliver lower returns.

In case you also have the pension then already you are guaranteed with a stable and steady source of income in post-retirement. Many financial advisors, in that case, will suggest you that your pension is doing the role of bonds and if you have a more substantial pension, you can be more energetic and put more amount in your stocks.

But in fact, it is dependent on many factors than that, if you want to invest in bonds then at all depends upon how much additional income you need and not on your are having the pension or not.


Ways To Allocate based on Your Needs

Below you will find the example of two retirement types, and in each case, they suppose they need $70,000 for a comfortable retirement life.


Retirement Type#1 - Higher Pension

In this retirement type the person has saved about $3,00,000 in their 401(k) plan and have the following financial sources after retirement:

  • $50,000 per year from a pension.
  • $25,000 per year from other sources like social security.

As it is seen in this case that the person I was already fulfilling his need for retirement income and his all the expenses can be covered. And in this case, he doesn't need to cover his financial expenses from $3,00,000 for his financial expenses.

So, in this case, this amount of $3,00,000 can be used in any way they want, like how much it should be allocated in bonds and what will be the rate of returns and the risks involved. In this case, extra amount can be invested safely and on their terms as nothing is needed immediately to fulfill daily expenses.

You should understand that simply because in this case pension is higher that does not mean less amount should be invested in bonds, it all depends on the personal situation, circumstances and comfort level.


Retirement Type#2 -Lower Pension

In this retirement type the person has saved about $3,00,000 in his/her 401(k) plan and have the following financial sources after retirement:

  • $30,000 per year from a pension.
  • $25,000 per year from other sources like social security.

In this case, the needed income is about $7,00,000 per year to fulfill all the financial needs, but the yearly income after the retirement will be $45,000 which low than needed, so the person need to withdraw $15,000 per year from 401(k) account. And if we divide $15,000 by account size $3,00,000, it will be about 4%, and if the investment is structured properly withdrawing 4% is properly per year.

As in the second case, the retiree needs to rely on his 401(k) account, so he needs to have a well-structured portfolio to achieve the financial needs yearly. In both the cases, the person had the plans most retirees should decide how to allocate their investments by first making a good plan and then as per the individual situation and circumstances they adjust it to fit their yearly financial expenses.   


How Allocating To The Bonds Work

In the second scenario above you have seen that retirement fund can be used to buy the bonds which get matured every year to meet the particular yearly expenses and this is called a bond ladder.

And the process of matching investments to the point of time in future where they are needed the most is called time segmentation and implementing proper time segmentation will always be helpful in your post-retirement life.

In both the scenarios above the additional amount of can be invested in buying bonds but have different financial plans and time segmentation. Short-term volatility will not matter as the bonds will be there to cover the present withdrawal needs which again cover the present financial needs and expenses.

So, the main point to understand is that there is plenty of time to wait for the long period in the stock market as per particular need and requirement.  

If we assume stock market growth of above 5% for next ten years will grow as much as enough for retirement stage and in the second scenario the retiree two would be able to sell the stocks and can buy bonds to cover the bonds which are matured and was being spent.

Let us assume that in the second scenario after one year the $1,50,000 of the amount allotted to stocks gone up by about 7% and it is then worth about $1,60,500 and in the first case the person would sell $10,000 and use it to buy the bonds which are going to mature in ten years.

Let's assume the first retiree is retired and he would be spending about $10,000 from the bond that matured in the present year or the same year of his being getting retired. And using this the first retiree will create a pseudo pension for next ten years, where he can easily cover the withdrawals need for the coming years and can easily meet his financial goal.

So, it is understood that when you are having a pension, it will surely going to help you in your retirement, but that really means that you need to change your other accounts and portfolios of investments as per your situations and circumstances at the time of your retirement as it will surely help you.

All the investment plans which you have made should be according to yearly expenses or say the desired yearly expenses which you want to have after your retirement and generally, it is same before retirement and after retirement and have a proper plan for your projected use of funds.

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