When you reach retirement age, it’s important to ensure financial stability. Bonds may be a suitable investment for retirement planning. With corporate bonds, you can generate passive, predictable income to fund your golden years.
Bonds can provide regular income via regular coupon payments throughout retirement. This makes bonds a better choice than other investments with less predicable returns, like stocks. However, generally, bonds will provide investors with a slightly lower return than shares issued by ‘blue chip’ companies. Despite this, bonds should still be considered if you are looking for a stable return on your investments to fund your retirement years.
Planning retirement
Having a retirement plan is crucial because it ensures financial security and stability during the post-work phase. It helps individuals save and invest wisely, hopefully providing a safety net to enable the individual to enjoy a comfortable retirement without relying solely on limited pensions or government support.
Many people don’t even think of retirement until they reach the age of 50 or 60. This may be too late to see the benefits of savings, investment growth and compounding returns. Therefore, it is important that you consider seeking advice from a financial adviser as early as possible in order to plan your financial affairs during your retirement.
Having said that, generally, here are four points that most successful investors take into account when designing their retirement plan:
- Don’t delay – don’t wait until you’re in your 50s before putting a plan in place. Go to a financial planner while you are still in your 30s or 40s.
- Calculate how much you will need – a financial advisor can help you calculate how much you will need to save to offset costs later.
- Note that super isn’t enough – for most people, the 11% that goes into their super fund each week won’t be enough to last through retirement, especially with longer life expectancy.
- Consider Investing – Investments can serve as an alternative source of income. Our guide will teach you how to fund your retirement with a fixed income from bonds.
What factors affect the cost of retirement?
Longer life expectancies and inflation have skyrocketed the cost of retirement in Australia. This means that where $1 million may have been enough in the past, you may now need $2 million.
According to research conducted by the Australian Financial Security Authority (AFSA), couples need an estimated $70,482 to live comfortably each year post retirement. Singles require a minimum of $50,004
The rising cost of living
However, Finder’s Consumer Sentiment Survey 2022 saw household expenses as $185 per week. If you take the 7% inflation up till March 2023 into consideration, this figure would now be $197.95 per week. This is a significant increase from $137.87.
The AFSA Retirement Costs Report also estimates that $35.91 per week is sufficient to cover building and contents insurance. However, the Climate Council: Uninsurable INation: Australia’s Most Climate-vulnerable Places report suggests that premiums for every one out of 25 homes and commercial buildings in Australia will be unaffordable by 2030.
These are reasons why $1 trillion is expected to flow back into fixed-income investments over the next few years. Lower-risk fixed-income assets allow investors to better predict their cash flow. This, in turn, enables them to create a proper budget plan.
Longer life expectancy
ABS data shows an increased lifespan for Australians. In 1991 life expectancy was 74.4 years for males and 80.3 years for females. In 2019 – 21 life expectancy rose to 81.3 for males and 85.4 for females. Having to cover expenses for additional years pushes retirement costs into the millions.
Singles who retire at 60 and live to 85 can expect retirement to cost in the region of $1,250,100. Couples can expect costs of almost $2 million. Remember that the AFSA report doesn’t account for rent or mortgage payments. These can be an added burden for retirees, especially as interest rates increase in a bid to fight inflation.
For example, a weekly rent or mortgage payment of only $300 adds up to $390,000 over 25 years.
How fixed income helps fund retirement
Bonds are “defensive assets.” This means they provide lower returns, for lower risk. This low return, however, can generate a predictable flow of income to fund your retirement years.
Fixed-income investments with set maturity dates have a specific face value or par value. They provide regular coupon payments. They also return the face value on the maturity date if the investor holds the bond to maturity.
Investors seeking to capitalise on lower-risk, lower-return financial investments should consider switching from risker investments equities to bonds. This will allow them greater confidence in the return on their investments.
There are three main types of corporate bonds in Australia: fixed-rate, floating-rate, and inflation-linked. Here we look at the three different types of bond incomes.
These bonds provide certainty in declining interest rate environments. If you invest in a fixed-rate bond, you’ll know what your periodic payment will be (via each coupon payment) and when. This information is based on the payment terms and coupon rate set at the time the bond is issued.
These bonds pay a fluctuating rate of return and are sought after when interest rates are rising. The coupon rate is calculated by adding a certain margin or percentage to an underlying interest rate (e.g., cash rate + 2%).
These bonds are often used to provide a hedge against rising prices. The coupon on these bonds are linked to the CPI (Consumer Price Index), which is designed to protect against inflation.
Unlike investing in shares , or property, bond returns are not linked to a company’s share price or property value. This means you don’t have to check market prices constantly.
The benefit of owning a fixed-rate bond is knowing exactly how much revenue it will bring in and for how long. As long as the bond issuer doesn’t default or call in the bonds, you, as the investor, can calculate your periodic coupon payment and return on maturity with certainty and confidence.
Making smart investment decisions that optimise your portfolio can help deliver regular, predictable income in your retirement years.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.