Striking the Right Chord: Navigating Bonds and Dividend Stocks in Retirement Investments

Terri Spath |

Retirees and those approaching retirement often seek to generate retirement income through dividends and interest payments while preserving their principal for heirs or unexpected expenses. In recent times, low bond yields led some to favor dividend-paying stocks. However, the investment landscape is evolving, and bonds are emerging as a potentially better option.

Shift from Dividend Stocks to Bonds:

  • Given recent low bond yields, many turned to dividend-paying stocks for income. Bonds now appear more attractive, with the S&P 500 index yielding 1.6% compared to nearly 5% from secure Treasury notes.
  • Cash as an Alternative: Historically, we advised retirees to set aside 1-3 years of living expenses in cash to avoid selling stocks at depressed prices. With three-month Treasury bills yielding over 5%, holding cash has become a productive option.
  • Diversification with Municipal Bonds: Considering potential interest rate adjustments, a diversified portfolio should include longer-term products. High earners in high state-income-tax areas can explore municipal bonds, offering federal and often state and local tax exemptions.

Investment Strategies for Different Life Stages:

  • Steady Income with Less Risk for Retirees: Younger adults benefit from stock-heavy portfolios due to higher returns, averaging 7.1% since 1926. As individuals enter their 50s and 60s, reducing stock exposure mitigates risks associated with market downturns.
  • Balancing Act for Portfolio Allocation: In times of lower bond yields, maintaining a high stock percentage was necessary for a satisfactory overall return. With current bond yields above 4%, a more balanced approach is feasible for achieving desired returns.

The Right Portfolio Mix For You:

  • Customized Solutions: A 60% stock and 40% bond split is the industry standard one-size-fits-all solution. A tailored portfolio that aligns with your individual goals can grow wealth while managing risk effectively.
  • Financial Impact Considerations: Illustration: Investing $1 million in 10-year Treasury notes yielding 4.23% generates $42,300 annually. After federal taxes (22% tax bracket), the investor retains $32,994.

As financial landscapes evolve, staying informed and adapting strategies is crucial. If you have questions, we can help.