When you're looking for safe, conservative earning opportunities, it's a good idea to educate yourself about different types of investments for fixed income. Learn about the benefits of fixed income investments, such as bonds, and what they can do for your portfolio.
Benefits of Fixed Income Investments
As you get closer to retirement, it's important to reduce the element of risk in your portfolio with fixed income investments. These types of investment options can be excellent tools for diversifying your financial holdings at any stage in life. While diversification is a good idea for most investors, fixed income options become increasingly important as retirement approaches.
Predict Income Over a Set Period
A major benefit of fixed income investing is the opportunity to predict income over a period of time. Even though fixed income investments typically don't result in enormous financial returns, they also do not come with the high degree of risk associated with more aggressive investment strategies.
Limit Risk
That's why included several types of fixed income investments in your financial portfolio can be an excellent way to limit the element of risk associated with your retirement planning strategy.
Know How Much Income You Can Expect
Another benefit associated with fixed income investments is the fact that these types of instruments result in a predictable amount of income over a period of time. When your portfolio includes fixed options, you will be able to know with certainty how much income you can expect to realize from them on a monthly, quarterly, or other specified basis. This is very beneficial for budgeting purposes, especially for those wondering whether or not they have sufficient income to take the step from full-time employment to retirement or semi-retirement.
About Types of Fixed Income Investments
There are several types of fixed income investments.
Bond Funds
Many investors utilize bond funds when seeking fixed income investment opportunities. They generally pay out a dividend to investors on a monthly or twice-yearly basis. Investors can choose to reinvest dividends to purchase additional shares of the bond fund, or may withdraw them for a source of income. Many bond funds are exempt from income tax on interest earned. If you are looking for a way to benefit from tax-free investment income, you may find it beneficial to seek out opportunities to invest in government bonds issued by federal, state, or local municipalities. Interest and capital gains earned on other types of bonds, such as corporate bonds, are subject to the same type of taxation as other investment opportunities.
It's important to note that the bond markets can be quite volatile. Bond fund investments provide fixed income opportunities when kept in one's portfolio until they mature. Investors who divest themselves of bond instruments prior to maturity can gain or lose money.
Certificates of Deposit
Certificates of Deposit provide investors with an opportunity to enjoy an opportunity to earn interest on their money without experiencing any risk of loss. When investors purchase certificates of deposit, they are placing their money in an insured bank investment for a specific period of time.
During the time the money is invested, it will earn a predetermined interest rate for a specified length of time. Once the time period goes by, the certificate will mature. Upon maturity, the investor can cash in the certificate, getting back both the money originally invested and the interest earned during the deposit period. Earnings are subject to taxation. If investors remove their money prior to the maturity date, penalties will apply.
Savings Bonds
Savings bonds are an often overlooked fixed income investment opportunity. However, many people find them to be an excellent way to enjoy a guaranteed return on their investment dollars. Investors may purchase Series EE or Series I savings bonds. Series EE savings bonds pay a fixed interest rate that is deferred until redemption, or for 30 years. The rate is based on the interest rate in effect at the time the instrument is purchased. The interest paid on Series I bonds is adjusted for inflation, based upon Consumer Price Index changes. The interest earned on savings bonds is taxable at the federal level. However, federal taxes are deferred until the time that the bond is actually redeemed, or for 30 years. There is a tax advantage for investors who cash in their savings bonds when paying certain expenses associated with higher education. Additional information about this tax break can be found via IRS form 8815. Earnings on savings bonds are not subject to state or local taxation.
Are Fixed Income Investments Right for You?
There is a place for fixed income investments in most portfolios. If you are interested in exploring whether or not the investment opportunities described here, as well as other types of fixed income investments, are right for you, consult a qualified financial advisor.
If you are approaching retirement and haven't revisited your investment strategy in several years, it's a good idea to reevaluate your approach to find out if you might benefit from incorporating more fixed income opportunities into the retirement planning strategy you are using.
