Retirement Happiness – At My Age Money Is … by Bill Storie

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At my age, money is ….

In this Retirement Happiness Series we discuss the issues and concerns about money, and how its various components are so inter-twined that sometimes we cannot see a solution to our constant fear of running out of money as we get older.

Part 4  –           Investment Income (Fixed Income)

Generally speaking there are three types of standard investment for your pension fund :-

  1. Stocks and shares
  2. Fixed income securities
  3. Mutual Funds

Last week we discussed Part 1 – Stocks and Shares. This week Part will discuss the second, #2 – Fixed Income securities such as Bonds, Treasuries and other Government or Corporate debt securities. In simple terms, these are investments offered by institutions which provide a fixed rate of return, or interest, for a fixed period of time (the “term”).

They are generally speaking “safe” investments in that they rarely default – yes, some have defaulted, but by and large they started off as low-grade (or “junk” bonds, if you prefer). So, if you buy a bond for example, then you will receive the fixed rate of return (interest) every year without fail – usually paid quarterly or semi-annually.

This fixed aspect makes it more attractive to investors seeking a known amount of income year over year. They don’t have to be concerned about whether the company (the Borrower) has had a good, or a bad, year, which might affect their ability to pay the ordinary share dividend. On the other hand of course, the fixed security generally doesn’t increase or decrease in value. In other words there is minimal opportunity for capital gain (or loss).

Example : Borrowing company issues a Bond for $1,000 (usually they can be bought in $25 units) at a fixed interest rate of 5.5% for a fixed term of 20 years. So, you the investor, will receive $55 every year for 20 years if she holds for full term. This doesn’t account for inflation of course, so the investor needs to determine if the fixed income for a long period is in her best interests, especially if this investment income is a major part of her total annual income in retirement, where there are few opportunities to augment the existing annual income.

There is one feature typically on a fixed income security, which does require observation. The borrowing company may have inserted a “call date” in its terms and conditions when it issued the bond. These are pre-determined dates during the life of the bond at which the borrowing company reserves the right to call in the bond i.e. to redeem those bonds in issue. It will be done at the face value (“Par”) of the bond and depending what price you paid for the bond, assuming a date other than issue date, then you may see a profit or loss at redemption. It is therefore important to be aware of the call dates and how far out they are from your date of purchase.

Fixed income securities are very popular in the retirement community, simply because you know what your income will be and that the security is reasonably safe. Many experts suggest that you should have between 60-80% of your portfolio in fixed income securities. Fair enough, however, if your life expectancy is 20 years and more then there is ample time for you to be more aggressive in your investment strategy. So, think carefully whether the “fixed” nature of this type of investment is the best fit in YOUR circumstances.

And finally, the usual caveat …….. You should be able to instruct your pension provider, and in turn, the investment manager of your pension fund, what tolerance level you have for your investment decisions, ranging from “conservative” to “aggressive”. It is not an easy decision to make, especially to get it consistently right, so every appropriate financial advice must be taken. This is a broad overview and by no means can be classified as solid advice in your case. Be careful.

You should be able to instruct your pension provider, and in turn, the investment manager of your pension fund, what tolerance level you have for your investment decisions, ranging from “conservative” to “aggressive”. It is not an easy decision to make, especially to get it consistently right, so every appropriate financial advice must be taken. This is a broad overview and by no means can be classified as solid advice in your case. Be careful.

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