Bonds – Are They Right For My Retirement Income?

 

To know if bonds might be right for your retirement planning, you should first understand a few basic things about them.

The majority of people know very little if anything about bonds. In fact, as Robert Kiyosaki mentions many times in his Rich Dad books, most people don’t know the difference between stocks and bonds. They are very different.

When you buy stock you are technically a part owner of that company – or at least a stock holder. You own equity in the company. That is why stocks are also known as equities.

When you buy a bond you are actually loaning your money out to the company or government who issued the bond. Instead of going to a bank and borrowing money, companies and governments issue bonds. So bonds are debt instruments. They are like IOUs.

When a company is considered a high-risk outfit (many times because of a poor credit rating or they are overextended -with too many loans) their bonds are often called “Junk” bonds.

The federal government of the US has probably issued more bonds and T-bills (which is just another form of bond) than anyone else! That is why you will hear that the US is in debt to China. The US did not actually go over to China and borrow money, but China did invest in US bonds and T-Bills. So in effect, they are loaning money to the US when they buy those bonds (and you are too, any time you buy “Savings” bonds – or any other type of US bond).

Since a bond is a type of loan, there is interest paid on that loan. Its interest payment is known as a “coupon.” You may have heard of “Zero Coupon” bonds? Zero coupons are bonds that don’t pay interest payments as you go, but pay it out at the end of the term of the bond. Investors buy zero coupon bonds at deep discounts from the face value, which is the amount a bond will be worth when it “matures” or comes due.

When a zero coupon bond matures, the investor will receive a lump sum equal to the initial investment plus the interest. In other words, the bond was purchased at a discounted face value (similar to savings bonds).

State and local governments also issue bonds. You may have heard of a bond issue to help build a school or some other government building in your area. Those who buy the bonds are actually lending money for the project.

So, should bonds be in your retirement portfolio? I would answer yes. At least a small portion of your nest egg should be in bonds. The closer you are to retirement age, the less risky type of bond you should want (no junk) in your portfolio. You may also want more bonds the closer you get.

You might also take a look at some bond funds or better yet, some bond ETFs. Let experts handle the actual bond picking for you, while you relax with a well balanced retirement portfolio!

Forget day trading stocks and learn how to trade the mini index!

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