Fixed Income Still A Solid Retirement Investment


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Five years after the Great Recession, investors approaching retirement face decisions that have never seemed tougher on how to allocate their portfolios. With interest rates hovering near zero for years, one thing is certain: The days when seniors on a fixed income could rely only on fixed income investments are long gone.

"What's worked in the past is not going to work in the future," said Scott Eldridge, director of portfolio management at Richmond, Va.-based Caprin Asset Management, which has approximately $1.1 billion under management.

Still, experts believe fixed income is a critical component of any portfolio, whether for retirees or those getting set to retire soon, though they differ on the appropriate proportions.

A rough 50/50 split between equities and fixed income has been proven over time to offer the most stable and productive returns, says Chris Mier, managing director with Chicago-based Loop Capital Markets.

But Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management, thinks the allocation to fixed income should be higher. Investors should allocate their ages, plus 5 percentage points, she said. A 67-year-old would allocate 72% to fixed income.

Vail believes it's never been more critical for investors to work with professionals who can help run scenarios to take some of those "unknowables" out of retirement planning.

"Given that we're unwinding the most unconventional monetary policy the universe has ever seen, it's not the best time to be trying to do this on your own," she said. Professionals can also help investors determine how close they are to being fully funded, and whether they can invest more conservatively or need to take on more risk.

Whether investors choose to work with a professional or go it alone, most experts advocate a diverse mix of types of fixed-income products. Caprin advises clients to own a mixture of individual bonds and bond ETFs, Eldridge said.

ETF Advantage

Owning bonds allows investors to reap some income while the bond is outstanding and then recoup the entire amount when the debt matures. ETFs offer the advantages of having a professional manager evaluating the individual bonds and rolling them over when they mature, but with more liquidity than traditional bond funds.

Mier also suggests holding individual bonds, but doesn't think most individual investors need ETFs. Low-cost bond mutual funds are the best way to go, he said.

There's broad agreement among experts when it comes to the types of debt to invest in. Municipal debt, despite some recent shaky headlines, remains both safe and very attractive for many reasons, especially its tax benefits.

Eldridge advocates municipals backed by a specific revenue source, like hospitals. Mier says the winning combination is a mixture of municipals and corporate debt.

Best Value

U.S. Bank thinks the best value is in high-yield debt, like corporate bonds, and some exposure to emerging markets. For more risk-averse investors, mortgage-backed securities may be a good play, Vail said. Treasuries have become so rich in recent years that most experts advise against them, even for the most conservative ones.

Experts also suggest stretching for yield through duration, rather than less desirable credit qualities.

"The desire for income is so strong and rates are so low that we've seen investors substituting credit risk for rate risk," Eldridge said. "That's not always the most prudent decision. These are the kinds of markets where mistakes could be made and not show up for a while."

That's another reason to hold municipals, Mier said. The muni yield curve is much steeper than that of other types of debt, meaning longer maturities offer much better returns.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds

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