Retirement Income Ideas for Your Financial and Lifestyle Choices

Investing in Bonds and Fixed Income

Most bonds offer fixed coupon rates (i.e., a steady, repeatable income stream), which can give the impression that bonds are among the safest investments available. However, bonds still carry several types of risk:

• Interest rate risk. Interest rates and bond prices move inversely. That means rising interest rates may cause your fixed income holdings to lose value. If you sell before they mature, you may end up realizing significant losses.
• Liquidity risk. Some bonds may be difficult to buy or sell, meaning they lack liquidity. You could purchase a thinly traded bond at a premium, or sell a thinly traded bond at a discount—both potentially unfavorable scenarios. In the worst-case scenario, you may not be able to find a buyer for your bonds when you need to sell for emergency cash.
• Reinvestment risk. When a bond matures or is “called” by the issuer, the investor is repaid the principal and then must reinvest that money into new bonds. If interest rates have dropped, investors may have to settle for a lower coupon payment—potentially affecting your income needs—or purchase a more expensive bond to keep that income stream intact.
• Credit/Default risk. Because a bond is essentially a loan you make to the bond’s issuer, when you purchase a bond, you’re taking on the risk that the issuer is unable to continue coupon payments or repay your principal amount. Therefore, default risk is one determinant of a bond’s yield and a measure of the issuer’s creditworthiness. Just as banks charge higher loan rates to riskier borrowers, higher bond yields can also reflect a higher credit risk from a bond issuer.

In addition to these risks, bonds generally underperform stocks over the long term, which could hinder reaching your retirement goals. However, bonds can still play a role in your retirement income plan, but we generally recommend using them as a buffer against the stock market’s volatility instead of as your primary income source.

Incorporating Annuities

Investors who prefer less risky investments may seek out annuities for their promises of guaranteed lifetime income—especially after retirement when investors’ income streams generally shrink. But, annuities come with their share of tradeoffs:

• Surrender charges. If you have a significant unexpected expense in retirement and need to pull money out of an annuity earlier than specified in your annuity contract, you may be subject to incredibly high surrender charges depending on the contract.
• Unconsidered inflation. Many annuities lack the ability to combat inflation and may leave your purchasing power impaired. Some annuities do offer inflation-protection features, but for an additional fee.

Using Certificates of Deposit (CD)

A CD is a promissory note issued by a bank. It entitles the CD owner to predictable interest for a pre-determined time period—anywhere from one month to five years. The downside to a CD’s predictable returns is the loss of liquidity.

While CDs may give you slightly better returns than the average savings account, they may not be a reliable longer-term growth strategy. Inflation could significantly impact the investment’s purchasing power. For example, a $100,000 CD paying 3% interest annually will generate $3,000 in income. However, the long-term annual average of inflation is near 3%¹. So while the CD paid $3,000, the purchasing power of the $100,000 invested in the CD decreased by $3,000, thereby generating no net real return. Inflation may degrade returns over the CD’s investment time horizon.

Generally, the higher the interest rate on a CD, the longer you’ll be required to lock up your money and the higher your penalty if you make withdrawals before the CD matures. If you need money for any unforeseen circumstances, you may have to pay a significant penalty.

Incorporating Social Security Benefits

Most retirees should consider Social Security to be a supplement to other retirement income. For many, Social Security won’t cover all expenses in retirement. If you plan to rely on Social Security benefits to meet your expenses, you may want to continue working until maximum benefits are available, which is generally at age 70.

Careful Planning and Healthy Diversification

Many of the investments mentioned in this article can be good choices if they are part of a well-diversified portfolio. Selecting the right investments to generate income in retirement takes skill. To find out more about Fisher Investments’ unique portfolio-construction strategy, familiarize yourself with our top-down investing approach.

¹Source: Global Financial Data as of 3/21/2023. United States Consumer Price Index from 12/31/1925 – 12/31/2022, average annualized inflation was 2.94%.