Using Bonds in Your Retirement Plan
Bonds have historically been used in investment planning to generate income and bring a level of safety to your retirement plan. But what percentage of your investments should be in bonds?
The old rule of thumb says to subtract your age from 100, and the result tells you what percentage of your money should be in the stock market. For example, if you’re 60 years of age, 100 – 60 = 40. The rule of thumb says you should have 40% of your money in the stock market and 60% in bonds.
This rule of thumb exists because it’s widely believed that bonds are a “safe” investment. But bonds aren’t always safe – and when they’re not, this rule of thumb doesn’t really apply. In the situation above, perhaps 40% in stocks makes sense, but 60% in bonds may not.
Bonds are directly linked to interest rates. When rates rise, bond values go down and vice versa. And when interest rates are near historic lows – as they have been over the past few years – they have little room to go lower but lots of room to go higher. Since they’re inversely related, as rates go higher bonds value decline, making them less attractive for investors looking to generate income in retirement. When that happens, it’s a good idea to search out better options for guaranteed retirement income. Your financial advisor can help you determine if bonds are a good fit for your portfolio and what percentage you should own as part of your investment strategy.
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