Multi-Asset

An Income Stream Can Flow to Your Retirement Destinations

An Income Stream Can Flow to Your Retirement Destinations

 

Income-generating investments are an important component in pursuing your retirement dreams. If you're approaching retirement, or already there, it's wise to understand how income investments can:

  • Provide a portion of the money you need for living expenses.
  • Potentially safeguard the overall value of your portfolio as they may react differently to various financial events.

There are some key points to keep in mind. Bond prices are closely linked to changes in interest rates so when rates rise, bond prices fall and vice versa. However, not all bonds and bond funds are created equal, as this chart demonstrates.

chart1

Charts are provided for illustrative purposes only and are not indicative of the past or future performance of any Dreyfus product.

Bond funds offer different maturities and duration. The key is determining the right mix of bonds, and income-generating stocks, in your asset allocation strategy.

A Brief Recap on Fixed Income Diversification and Asset Allocation in Retirement
To create an income stream designed to flow in all financial climates, it makes sense to consider different types of income opportunities.

  • Here’s why. When you divide your money among a variety of bond funds using the strategy of asset allocation, you can potentially better manage the risk in your overall portfolio.
  • Volatility of various bond indices and stocks over the long term.

chart1

Though asset allocation and diversification cannot ensure a profit or protect against a loss, by employing these concepts you may benefit when one type of fund does well and limit the downside when another does not.

Understanding the Universe of Income-Generating Investments
To diversify your income stream in retirement, here are some well-known income options to learn more about.  

Short-Term Bond Funds    
What are they?  
They are debt securities and seek current income by primarily investing in high-quality U.S. Treasury bonds, government agency obligations and mortgage-backed debt of Ginnie Mae, Fannie Mae and Freddie Mac and corporate bonds.

Short-term bond funds typically generate lower rates of interest than high-quality intermediate-term bond funds or dividend-paying stocks. However, short-term bond funds carry the lowest potential risk among these investments. Please remember that all bonds are subject to interest rate fluctuations.

Municipal Bond Funds
What are they?
They are debt securities issued by government entities such as counties, cities and states. Often referred to as munis, the bonds are used to fund municipal operations and infrastructure projects.

Munis seek current income that’s free from national, and sometimes state and local, income taxes. This tax efficiency can become more attractive to investors as interest rates increase. With muni bond funds, investors can pursue potentially higher current income on an after-tax basis without being exposed to risks of higher-yielding, non-investment-grade bonds and without the market exposure of dividend-paying stocks.

Equity Income Funds
What are they?
They invest in dividend-paying stocks of companies and seek capital appreciation and income. By pursuing attractively valued companies with solid fundamentals, equity income funds seek higher income than short term or muni bond funds.

Additionally, equity income funds typically carry more risks than more traditional bond funds, but less risk than more aggressive stock funds.

What is their role in a diversified income portfolio?
Often, high-quality, financially strong, dividend-paying companies may provide investors with an alternative to traditional bond funds as well as be part of a wealth building strategy.

Equity income funds, offer investors a way to broaden their search for high-quality income streams. It's helpful to view an equity income fund as primarily an equity strategy and subject to market and investment style risks to varying degrees.

Harnessing the Breadth and Depth of Income-Generating Opportunities
It's important to consider allocating your portfolio among bond and income-generating stock funds because often these investments are not correlated with one another, as this chart shows. By diversifying your income streams, you can seek to smooth out the ups and downs of financial markets.

There are many options, but which one is right for you?  Please contact me directly to discuss these options and how they may benefit your investment plan. 

Risks:

All investments involve risk, including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks, to varying degrees. Equity Dividends: There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Bonds are subject to interest-rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Municipal Income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

DEFINITIONS

Correlation measures the relationship between the changes of two or more financial variables over time.

Duration is a measure of the sensitivity of the price — the value of principal — of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years.

Standard deviation is a measure of the dispersion of a set of data from its mean. It is calculated as the square root of variance by determining the variation between each data point relative to the mean.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury. Government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. The Bloomberg Barclays U.S. Municipal Bond Index is a widely accepted, unmanaged total return performance benchmark for the long-term, investment-grade tax-exempt bond market. The Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody's, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. The Bloomberg Barclays 10-Year US Treasury Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed income securities. The index assumes reinvestment of all distributions and interest payments. The S&P 500 Composite Index is a widely accepted, unmanaged index of U.S. stock market performance.

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This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of a particular investment strategy, investment manager or account arrangement.  Information contained herein has been obtained from other sources believed to be reliable, but not guaranteed.  Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation.  No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.  The Dreyfus Corporation and MBSC Securities Corporation are companies of BNY Mellon. © 2018 MBSC Securities Corporation, Distributor, 225 Liberty Street, 19th Floor, New York, NY 10281.

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