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Calculate Retirement Income with High-Yield Bonds

Posted on August 25, 2010 by bobrichards

Most economic specialists will tell you to invest your pension funds in a varied portfolio of stocks, simply because over a long period of time, this kind of  stock portfolio might potentially outperform a diversified collection of bonds. That may be great guidance, when you have enough time to ride out stock market volatility. But what if you do not have forty, twenty, or perhaps ten years until retiring?

If you're in your fifties, sixties or perhaps seventies, and you are concerned about a retirement shortfall, the conventional wisdom may not apply and you may be able to calculate retirement income that's sufficient from high-yield bonds.

Before you need the income, it is wise to keep any bonds you own in a tax-deferred retirement account, including an individual Retirement Account (IRA) or 401(k) plan. It's always best to have bonds, instead of shares, in a retirement account as doing this will help you calculate retirement earnings that are higher. Here's why.

Stocks, by their nature, have built-in tax deferral. You only pay tax on profits when you sell. Moreover, even if the stock will pay dividends, it's most likely those dividends are subject to taxes at the reduced capital gains rate. Therefore when you have stocks and bonds as part of your retirement nest-egg, bonds ought to remain tax-sheltered inside a retirement plan. By profiting from that tax arbitrage, you can calculate retirement earnings that after tax, are  more for you.

But why high-yield bonds rather than other kind of bonds? High yield bonds offer potentially greater returns and might not be as unstable as shares or perhaps other bonds. Sure, there was an unparalleled wave of liquidations and defaults after the 2001 depression. And indeed, high-yield bonds usually have lesser credit-ratings from agencies like Standard & Poor's and Moody's. But that shouldn't automatically scare you away as you calculate retirement alternatives for income. Along with accepting the credit risk comes higher returns.

Most 401k plans do not offer a high-yield bond investment option however, you are able to own them in your self-directed IRA. The important thing isn't to own individual high yield bonds but instead, own shares in a high yield bond fund. Whenever you calculate retirement risk, the fact that a fund will diversify among hundreds of bonds minimizes risk to reasonable levels.

Always remember that some precautions apply to owning any sort of bond fund. When interest rates go up, the net-asset-value of the bond fund shares will drop. Do not freak out or make immediate changes. Interest rates rise and fall constantly so just go with the tide. When you calculate retirement earnings alternatives, there are few options that can provide a better monthly revenue than high yield bond funds.

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    About bobrichards

    Bob Richards
    Editor | Involved in Various Marketing Positions within the Financial Services Industry

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