Bond Voyage Sailing Into Retirement Stability

Bonds have long been used to generate income in retirement, but bonds alone may not be enough. And there is a simple strategy that can help make bonds a more effective way to plan for the income you need in retirement. In today’s episode, we will bond voyage and sail into retirement stability.

Just Own Lots of Bonds

Many people believe that you just need to own lots of bonds in retirement, and you’ll have all of the income you’ll need. I disagree. That strategy ignores the value of long-term equity investing which allows us to beat inflation and with the goal that our investments continue to grow and provide income to fund our dreams and goals and whatever healthcare expenses we incur as we live into our 80s and beyond.

Supplemental Income

Owning stock is important during retirement, but what if we need to supplement our income to provide money for our expenses? It’s common for people to turn on income from their portfolios as a way to pay their expenses. We may have income from Social Security, a pension, rental income, or a side hustle, but we may need to add another layer of retirement income.

You don’t work for 40 years in your life to not have the opportunity to turn your income, your savings on to provide you additional income in retirement. This is where bonds come into play. Let’s say your portfolio has a 60/40 stocks-to-bonds split. We can use those bonds to provide four to five years of income.

Lots of advisors recommend bond indexes or bond investments that are perpetual. There isn’t a lot of thought or customization for the client that goes into designing such a portfolio.

A 60/40 split may provide income for four to five years. For those willing to take more risk, maybe they get more in Social Security, have a pension, or rental income, so they don’t need to supplement their income as much. Or perhaps they have a retirement emergency fund to supplement things. A 70/30 split may provide three years of income.

We want to make sure in retirement that we have “buckets” of assets to draw from for a defined period of time. We’re using our bond bucket as income so our stocks can continue to grow and provide for our longer-term needs. Once a bucket of bonds is empty, we may rebalance to refill that bucket, begin taking Social Security, sell a rental property or turn on our portfolio for more income.

Bond Sleeves

There are lots of ways to slice and dice a portfolio to meet retirement income objectives. That’s what is so important about personal finance. It has to be specific to you and your needs. That’s what we do at Paradigm Wealth Partners; we design specific retirement income plans. One way is to bucket bonds for future income.

The way to do this is not by owning perpetual bonds but with bonds that have defined maturity dates. In our scenario of a portfolio with 40% bonds, because we’re close to or in retirement, we would put 10% in bonds that mature in 2023, 2024, 2025, and 2026 for a total of 40% in bonds.

As we need income for 2023, we use income from the bonds that mature in 2023. We don’t touch the others so they can continue to earn interest. Once the 2023 bonds are depleted, we move on to 2024 and so on.

This is a pretty simple strategy, but it’s effective. Often times advisors make retirement planning more complex than necessary. This is back of the napkin stuff, and it works.

If you have questions about bond sleeves or any other aspect of financial planning, reach out to us. And check out my new YouTube channels. The videos are short, walk and talks, where I take a stroll and talk about whatever’s on my mind. I also have a Paradigm Wealth Partners channel.

Listen to the Full Episode:

What You’ll Learn In Today’s Episode:

  • What many advisors do when designing a retirement portfolio.
  • The importance of putting more thought into designing your portfolio.
  • How we create retirement portfolios in a different way.
  • How we use bonds that will help generate retirement income.
  • The best way to simplify retirement income planning.

Ideas Worth Sharing:

  • “You don’t work 40 years in your life to not have the opportunity to turn your income, your savings on to provide you additional income in retirement.” – Jonathan Bednar
  • “One of the ways we design specific retirement income portfolios for our clients is by bucketing out a portion of the bond for your future income.” – Jonathan Bednar
  • “I think far too many certified financial planners and financial advisors make investing and retirement planning way more complicated than it should be.” – Jonathan Bednar

Resources In Today’s Episode:

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