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Should You Choose A Fixed Income Strategy For Retirement?

Should You Choose A Fixed Income Strategy For Retirement?

Fixed-income strategies are becoming more popular, particularly in retirement. People want certainty that they’re going to have enough money to finance their lifestyles once they give up work. 

But are fixed-income strategies, like pensions and annuities, the best options? Or would you be better served by a different approach? 

The purpose of this article is to answer that question. As you might expect, the answer is very much “it depends.”

The Benefits Of Fixed Income For Retirement

The benefits of a fixed income for retirees are substantial. Fixing income guarantees a specific income stream from underlying assets that make regular payments, making it easy to finance your housing, car, medical care, and anything else you might need.

People who’ve earned a salary all their lives find fixed-income opportunities more psychologically acceptable. These products are like a replacement for a regular wage, providing a stream of payments every month you can then allocate to the things you need. If that’s how you’ve always approached your finances, it can help you manage them better going forward. 

Fixed-income strategies also help you preserve your capital. The money you receive in the form of income relates to the interest payments made on the underlying stocks, bonds, and real estate yields. As such, the amount of money you have behind your income never changes, meaning you never waste your capital. 

Fixed income is usually quite stable even if the rest of the market is volatile. If you put your savings into an annuity, you will eventually get that money back when the contract term comes to an end. Furthermore, there’s less volatility overall, which is good news for anyone retiring. It means that the money you have in your portfolio now is likely to stay there for some time in the future. Buying bonds and annuities lets you preserve your capital for decades. 

Risk mitigation is another reason why retirees choose fixed income. Even if the stock market goes down, these products guarantee a return, supplementing any federal payments. 

Finally, fixed-income portfolios can contain a diverse selection of asset classes with low correlations with each other. This means that if one asset starts to go down dramatically, it is unlikely the rest will follow. Most fixed-income product managers choose a mix of asset classes, including stocks, bonds, cryptocurrency, and property to supply the fund. Together, these smooth long-term returns and help fund managers meet their clients’ risk tolerance preferences. 

The Downsides Of Fixed Income Strategies

Of course, the downsides of fixed-income strategies can be significant. For example, inflation is a risk. Even if prices go up, the nominal amount of money you’ll receive under these schemes remains the same. This dynamic means that the purchasing power of the dollars in your wallet will decline over time, forcing you to accept a lower standard of living. After twenty years, the value of your fixed monthly income might only be 50% of what it was originally. 

Duration risk is another challenge that people who invest in fixed-income assets face. Long-term bonds and securities can be sensitive to small changes in the interest rate. 

Of course, this risk goes up significantly if interest rates rise, as they are doing now. As such, the value of things like bonds could fall, undermining a fixed-income account, and leading to financial pain. Ideally, you want to start a fixed-income approach at the start of the new bond cycle, not during turbulent, inflationary periods. 

Low-interest rates can be a problem, too. If the coupon rate on bonds is low, then your fund may fail to generate the returns required to meet your income requirements. You could ultimately wind up living in poverty or having to downsize significantly. 

Finally, fixed-income investments can receive different tax treatments that make them less competitive. You may have to pay a higher rate of capital gains along with income taxes at the state and local levels. As such, you’ll want to consider the tax implications of fixed-income holdings. Find out how much they will cost you and decide whether other approaches might be better. 


Fixed-Income Versus Mutual Funds

Of course, the biggest alternative to the fixed-income approach is to put your assets into a mutual fund. These charge you a percentage fee every year but enable you to invest in assets that promise a higher return. 

The people who invest in mutual funds are often those who have many years left until retirement and a high-risk tolerance. These individuals are looking for the best possible returns over the long term. 

The cost, of course, is the additional risk involved. Asset prices may crash 80 percent before markets rebound, making your money less stable. Over many years, you will have considerably more cash available if you use a mutual fund, but you can also go decades without any significant returns, as happened historically during the Great Depression. 

Mutual funds also have the advantage of being more flexible than fixed-income assets. Annuities, for example, often come with penalties if you try to get out of the contract or withdraw your money early. By contrast, you can take your money out of a mutual fund immediately by simply selling any assets you own. 


Putting it all together, many retirees find using fixed income is an excellent strategy to help them feel financially safe and secure. Unlike conventional investment options, they provide the stability they need to continue with life as normal. 

Ultimately, whether you choose to use fixed income depends on your financial preferences. Fixed-income investments can be a valuable option for some people who want stability, income, and low risk. However, it isn’t for everyone, especially if you are looking for more money in the future. Investments don’t grow at all under fixed income, and the value of your capital can still vary if bond prices go up and down. 

You’ll want to think about the long-term growth potential of your portfolio and how long you expect to live. As such, the proportion of your portfolio you allocated to fixed income may vary considerably. 

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