When you retire, your cash flow changes. Since most pensions won’t replace 100% of your pre-retirement income, you need other ways to increase your monthly cash flow.
A bank may not meet your needs
If you put your money in a regular savings account in the bank, you have little risk of losing your principal. But, you also will receive relatively low interest, as banks normally pay the lowest yields in the world of fixed income. This prevents you from “growing” your money. Whatever money you have may lose value due to inflation. If you have the tolerance to take on some level of risk, consider adding bonds to your portfolio. (Watch a 12-minute video on bonds.)
Bond coupons are usually higher than bank rates
A bond is a loan that you make to a country or company. You lend them money, they pay you interest on a set schedule, and at some point in the future, on the “maturity date,” they return your principal. The main risk of bonds is that the issuer of the bond will default. However, default in the quality bond market is not common. Bonds are rated according to their risk level, and more conservative investors choose high-rated quality bonds to generate income from their portfolio.
An easy tool to buy bonds
Depending on the amount of money you want to invest, you may buy a portfolio of individual bonds yourself, or you might find a bond mutual fund (or exchange traded fund – “ETF”). These investment vehicles own lots of different bonds and you own a piece of the whole pie, which gives you instant diversification. Make sure to check with an investment advisor and read the prospectus before investing, though, since there are real risks.
If you are worried about cash flow during retirement, email me (doug@profile-financial.com) to start a conversation about whether bonds make sense for you.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published November 8, 2016.