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.
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.
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.