There’s a reason workers are often advised to load up on stocks in the course of saving for retirement. If you want to grow your IRA or 401(k) through the years, stocks are a good bet because they’ve historically delivered notably higher returns than bonds.
But stocks are also a lot more volatile than bonds. As such, they’re a riskier prospect for retirees. And if that milestone is approaching, you may want to start shifting your assets over to bonds. That way, you’re less likely to take losses in your portfolio when the time comes to actually tap your IRA or 401(k) plan.
While bonds may be an appropriate retirement investment, you’ll want to avoid these mistakes during the transition.
1. Dumping all your stocks
By the time you retire, it’s a good idea to move some of your assets out of stocks — but that’s some, not all. You’ll still need your retirement account to generate decent growth during your seniors years, so getting rid of your stocks completely could put you in a position where that growth stagnates.
A better bet? Consider starting off retirement with a roughly equal mix of stocks and bonds. If you’re more risk-averse, you could opt for 40% stocks and 60% bonds. But unloading your stocks completely could mean having to stick to a lower savings-withdrawal rate during retirement. The result? Less annual income for you.
2. Not laddering your investments
While bonds are a reasonable investment for retirees, one risk you face when buying them is interest-rate risk — getting locked into a term where the interest your bonds are paying is lower than the going rate. If you’re going to buy bonds, aim to stagger them so they mature at different intervals rather than, say, buying a bunch of 10-year bonds that all mature at the same time.
3. Forgetting about municipal bonds
The great thing about bonds is that they typically pay interest on a preset schedule that can serve as a supplemental income source for you. But those interest payments won’t be yours to keep completely if you load up on corporate bonds because corporate-bond interest is taxable.
Municipal bonds, however, work differently. Municipal-bond interest is always tax-exempt at the federal level. And if you buy municipal bonds issued by your state of residence, you can avoid state and local taxes, too.
Be careful with bonds
Bonds are no doubt a suitable investment for retirees, and also for workers within a couple of years of wrapping up their careers. But if you’re going to buy them, steer clear of the above blunders so you don’t limit your nest-egg’s growth in retirement, get stuck earning less interest on your investments, or subject yourself to needless taxes.
Finally, if you’re not sure which bonds to choose for your retirement portfolio, you might consider investing in a bond exchange-traded fund (ETF). That way, you can own a lot of bonds with a single investment, which gives you more diversity — and also, more protection.
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