Learn about Bonds
Bonds have always been used to anchor retirement income and help protect principal in portfolios.
Unfortunately, safe bond yields (meaning what you get paid for buying bonds) are so low they don’t even keep up with average inflation. Investors that buy US Treasuries today get principal protection at the price of reduced future purchasing power.
Say what? Think of like this. Buy $10,000 of the US 10 Year Bond. In 10 years you are guaranteed to get your $10,000 back. In between now and then, the bond will pay you approximately $185.10** per year for your investment.
Inflation may be lower right now, but historically it averages about 3%. That means the hamburger that cost you $1 today may cost you $1.34 in 10 years, but each dollar you put into the bond for income may only be worth $0.66 cents in 10 years. So, the $0.185 cents in income you collected on that bond purchase over 10 years actually cost you $0.34 cents in purchasing power when your bond matures.
So while numerically you put $10,000 in and you are getting $10,000 out, in terms of what you use those dollars for (buying food, fuel, mortgages) you may only get $6,600 back in 10 years.
If your stockbroker came to you and said “Let’s buy Stock X for $100 that is going to pay you 1.85% for the next 10 years, but it’s probably only going to be worth $66 or so in 10 years,” would you buy it?
Of course not. And yet, people buy US Treasuries every day instead of looking for more reasonable alternatives. Most financial advisors tell them it’s a good idea because they are really salespeople, not planners, and they don’t know any better.
Either way, it’s a losing proposition for retirees. CLICK HERE to see a recent case study on Bonds.
Want to learn more about bonds? Click to learn about TYPES OF BONDS.
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** US 10 Year rate as of June 2016
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