What place does fixed income have in your retirement?

Sharon L. Thornton, BridgeTower Media Newswires

The day has finally come. You are looking forward to the next stage of life and your new career: retirement. Many people think that when they retire, safety is their primary goal. But you can’t live on certificate of deposit income like your parents did when interest rates were substantially higher — double digit interest rates are about as common as dinosaurs are today.

Retirement may scare you into having all your assets in fixed income. Bonds, money market securities and certificates of deposit seem to be the safest options for protecting you against market declines. Remember, you need your money to last; having too large of an allocation to fixed income may not be the best option to accomplish that goal.

So, first let’s look at what should comprise the fixed income portion of your retirement allocations. The simplest answer is that bonds, money market securities, CDs and savings accounts belong on the fixed income side of your portfolio allocations. But it is not that simple in reality.

Now, what about Social Security? Once again, this is a steady source of income and belongs to the fixed income side of your assets.

Do you have a pension? Strange as it may seem, some people still enjoy the steady stream of income received from their pension. So what side of the equation does pension income belong on? Simple answer: fixed income.

Do you have an annuity? If you have an annuity, then the income derived from it should be reflected on your fixed income side.

Do you own REITSs? The portfolio of professionally managed properties belongs to your fixed income side.

Do you have rental income? If you own apartments or houses and receive rental income from the properties, the monthly funds received are forms of fixed income and should be reflected on the fixed income allocation of your total funds.

The 4% withdrawal rule has been effective for a long time for retirees. However, people are living longer and the income earned on traditional fixed income products may not keep up with inflation in the future. The markets may behave unpredictably and you may not have an indefinite supply of money in retirement.

So, how do we fix this? Make sure that the steady sources of income are reflected in the fixed income allocation of your funds. This may tell that you have too little risk in your investments, or it may be just right.

You need to keep some growth in your funds. By retaining growth investments in your portfolio, you increase the chance of your portfolio growing and improve your chances of having enough money in retirement, giving you the ability to tackle unexpected challenges. Maintaining a portion of growth within your portfolio doesn’t mean that you are taking reckless risks. There could be more risk by not having growth in your retirement years.

By having the sources of income classified properly as fixed income, you can make sure that you are not over allocating to an investment that may or may not keep up with your needs and goals. You may want the safety that supposedly comes with a known source of income, but you also need some growth aspects of your portfolio to make sure that your money is working in the best way for you. Who knows, your retirement could last for many decades.

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Sharon L. Thornton is senior director of investments for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.