6 Steady Fixed-Income Plays… Even If You Retire Early!

Daniel Penzing
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Fixed-Income Earner #1: Bonds

Everyone loves the thought of earning interest without investing your principal. Even retired investors can benefit from the many advantages of a fixed-income instrument, provided you have sufficient time before you really begin to spend the proceeds. If you are approaching retirement, get ready to get your hands dirty. There are risks associated with fixed-income investing. However, because there are also inflation risks, owning bonds, as opposed to growth investments, probably makes more sense for retirees than investors approaching that stage of life.

If you are in the 25 – 35 age bracket, you have enough time to think about the risk/reward and to learn about investing in bonds. The previous fixed-income investor has a variety of choices. He or she might choose high-yield bonds (which are riskier), conventional or government bonds (which pay premium rates of interest), or intermediate-term bonds.

Just to make it a little more complicated, another investor could substitute interest-bearing instruments with investment in a money market fund. In either case, the instrument must be cash-equivalent and have a low to moderate credit risk.

Municipal vs. Corporate Bonds

First, you have to decide if you want to invest in corporate bonds or municipal bonds.

Municipal Bonds

Now, let’s talk about what municipal bonds are. Municipal bonds, which are often referred to as munis, are used by the government to raise money and finance projects.

These are typically backed by the full faith and credit of the U.S. government. As a result, the credit risk is very low and are considered a safe investment. However, they generally don’t offer the same kind of returns as corporate bonds.

Corporate Bonds

Corporate bonds are instead issued to fund projects by a corporation. The credit rating is based on the company itself, not the full faith and credit of the U.S. government. As a result, corporate bond prices fluctuate with the perceived possibility of default. This is why they generally offer higher yields than municipal bonds.

So, What Are The Benefits of Buying Corporate Bonds?

When you buy corporate bonds, you are buying into an ownership piece of a company. Meaning; if the company generates a profit, you get a portion of that profit. This is because the outlook for corporate bonds is good compared to municipal bonds. Sure, there is the possibility of default if the company runs into trouble, but a higher rate of return is typically associated with the higher investment risk.

Tax-Exempt Funds

Tax-exempt funds, or munis, are just like their name implies. They are funds that may be exempt from state and local taxes. If you decide to purchase a tax-exempt fund, research to find out if you live in a state that will tax the fund. Tax-exempt funds aren’t exempt from federal taxes, so you must pay capital gains taxes on the assets in the fund.

Since munis are usually issued by the government, there are different tax advantages with some kinds of munis than with others. For example, a bond that is issued by a state or local government will be exempt from federal taxes and may be exempt from state taxes as well. A muni bond that is issued by the federal government may be exempt from state and local taxes, but doesn’t qualify for a federal tax exclusion.

Mortgage-backed and asset-backed bonds are structured to reduce the amount of state income tax. You can find municipal bonds that are issued by banks, companies, and governments. You can also find bonds that cover certain professional areas, such as medical and educational.

When buying bonds, make sure that you seek out qualified professional assistance because you could end up with a bad investment, which could cost you more in the long run. The bond market is huge and there are lots of different types of bonds. You could lose money while attempting to research and evaluate it yourself.

Bond Funds vs. Individual Bonds

Way back in 2012, we detailed the difference between precious metals and junk bonds. (They are 2 very different investments; each has its place in a diversified portfolio).

But today, we are going to focus on another bond category: Treasury bonds. Treasury bonds are issued by the federal government, part of the national debt. They are considered as safe as anything can be. They are backed by the full faith and credit of the US government.

But they are not just for investors. You can buy Treasury bonds in a number of ways, including directly from the federal government, or through a high-yield online savings account.

Treasury Bond Yield

Of course, just like any other type of bond, the yield — or interest you earn — is tied to the prevailing interest rates. So as interest rates are rising, the coupon (yield) on a bond investment is rising. And as interest rates are falling, the yield drops.

For example, let’s look at the previous 2-years on the benchmark 10-year Treasury bond (as of December 8, 2016). As the chart below may show you, the yield is anything but static and has not only gone up and down, but has gone up and down dramatically.

Fixed-Income Earner #2: Dividend-Producing Stocks

You might be surprised by this, but dividend-producing stocks are another great way to build steady income in your retirement account. Dividend-payers usually pay quarterly, but not always, which means that some of your dividends will be received in December instead of March, and vice-versa. Dividends also fluctuate like the stock price, so some years you will get a higher total dividend amount than others.

Dividend stocks are also much more volatile than income-producing bonds – especially the higher up the dividend chain you climb. However, if you stick to solid, dividend-paying companies, you can generally count on a steady annual income stream. So while my first income earner was paid monthly, my second is paid quarterly.

The above-mentioned companies all offer dividend payments, which means you could end up with the same sort of reliable income stream that my 2nd income earner is providing. Moreover, you'd be receiving it for free, since these companies would be compensating you for your investment in them. Plus, if your dividend payments are reinvested, you could find that you generate even more income for yourself.

Fixed-Income Earner #3: Annuities

When you purchase an annuity,1 you give your money to an insurance company. They in turn agree to pay you a certain amount of income for the rest of your life. For some people, annuities provide steady, guaranteed income later in life.

Annuity buyers agree to give money to the insurance company in exchange for those payments. They can be single premium annuity or joint-premium annuities. You can also choose from immediate annuities (often called straight annuities) or deferred annuities, which can be purchased as an IRA or a traditional or Roth 401(k).

For a single life annuity, the money you buy the contract with is guaranteed to be returned to your estate or beneficiaries after your death. If you buy a joint-life annuity, you are guaranteed to receive those payments until the second you die.

Annuities offer many different income streams and options. You can also elect to take payment of income only to certain family members and leave the rest to your estate. The earlier in life you take annuity payments, the greater the penalty.

If you choose to take early payments, you may lose as much as 25% of your income. However, you can choose your annuity payment structure if you’re purchasing a deferred annuity.

Fixed-Income Earner #4: Certificates of Deposit

(CDs)

Certificates of Deposit are considered by many to be the dullest, dreariest investment product out there. True, CDs have been around for so long and have been so available that many investors think of them as boring old fashioned “grandma” investments.

But in recent years, CDs have gotten a hipster makeover. The explosion of online savings accounts and CDs are making CDs sexy once again.

For example, today you can actually make guaranteed interest and COLA increases on CDs. This is pretty much unheard of in Certificate of Deposit history!

CDs also have no early withdrawal penalties. This means that if you’re a retiree who wants to take a break from working, you can sell your CD after one or two years and get a full, penalty-free return of your principal.

Finally, CDs are a great way to buy fixed income whenever you don’t have a lot of money to invest. Many Investors purchase CDs in their retirement accounts. This is especially common among retirees who are close to retirement age and can¿t afford to lose their principal.

Fixed-Income Earner #5: TIPS

(Treasury Inflation-Protected Securities)

TIPS are one of my favorite fixed-income investments, and I’m a proud owner of both inflation-indexed bonds and Treasury Inflation-Protected Securities. Let’s start with TIPS.

TIPS have a fixed interest rate and a variable rate tied to the Consumer Price Index (CPI). Every six months, the total interest rate of the bond adjusts itself based on the current CPI. In other words, if the CPI increases by 4%, then the interest rate paid on your TIPS investment will increase by 4%.

The major advantage of this is that during economic downturns, your investment will decrease in value at a slower rate than adjusters bonds. For example, the CPI increased by 1.7% during 1998 — a year in which the stock market crashed. A study by Merrill Lynch shows that when adjusted for inflation, the stock market decreased by 53% that year!

Fixed-Income Earner #6: Rental Property

Ownership of an investment property is always a nice option to have – especially if you can live in it for free or at a discount and get your monthly income through rent (rather than getting a standard mortgage payment on it).

A good friend of mine is a perfect example of why this is so wonderful … Here’s the deal: He and his wife retired fairly early (in their early 50’s) and had a lot of cash from the sale of their business. They had a great income and no kids, and they wanted to use their money to buy wealth rather than chase it. They bought a home in a VERY good area of town and rented it out for even more. While there was some cosmetic work they needed to do to get it ready to rent, they enjoyed the fact that they didn’t have to do it themselves (and all the upkeep/repairs it involves) because they could afford excellent help.

In Conclusion

The idea of retiring makes a lot of people happy because they can finally take it easy if they want to. However, unfortunately, it’s not easy at all to retire. For one thing, you have to find a way to make your investments work so you can survive.

Investing is not an easy thing to do well at all. It’s easy to lose money in investments because there are so many variables involved. The only way to make sure you do well in your investments is to practice. The more you do it, the more you get used to how things work.

One investment that’s always been good for people is buying properties and then selling them for a profit. Moreover, this is an investment that works even for people who retire early. It’s an especially good investment because it’s something that can produce income.

There are a lot of properties you can invest in. Basically, you have two options for investment properties: commercial buildings and houses. In general, commercial buildings have needed a lot of work to put them in good shape.

Houses are great… except you might have to fix them up yourself. This can be a lot of work, depending on the house, but if you have the time, it’s well worth it.