Looking for a safe and regular income in retirement?

As we enter retirement, two big fears will loom for many of us:
Will I have enough money to live the life I want?
How can I protect my nest egg from market fluctuations?

Bonds can offer enormous peace of mind against both these fears. If invested wisely, they can deliver (1) a strong passive income, (2) considerable protection against a volatile market, and (3) the means to truly enjoy your retirement.

To learn more, we spoke to Philip Brown, Head of Research at FIIG Securities, on what makes bonds a particularly safe and reliable investment option for retirees.

The basics:
What are bonds?

Simply put, says Philip, “a corporate bond is a loan you make to a company”.

These loans are made to well-established “investment grade” companies, such as Woolworths, Commonwealth Bank or Sydney Airport, that carry relatively little risk.

The company will give you regular interest payments, then return your original investment at the end of the loan period.

“The best thing bonds provide is protection of your capital,” says Philip. “You know you’re going to get your money back at the end, and over the course of the investment, they’re paying a predictable income – every month, every quarter, every year.”

“You can plan to live off that interest whilst knowing that the capital at the end is also safe.”

“And for people trying to design their retirement, knowing what you’re going to get in advance is obviously quite useful.”

In short, it’s a predictable and dependable income stream to enjoy your retirement — without needing to draw on savings or incur debt. For some helpful practical examples of how to achieve this, download the free eGuide below.

How can bonds protect against market fluctuations?

While shares are highly susceptible to geopolitical changes and rising interest rates, bonds are widely considered a far lower risk, as they fluctuate less dramatically.

Philip advises that it’s best not to see bonds as an alternative to shares, but an ideal way to diversify. In fact, bonds and shares can work best together.

This is largely due to the trend of “negative correlation”, where the value of bonds and shares generally move in opposite directions.

“When investors are confident, shares rise in price and bonds tend to fall,” says Philip.

“When people are scared, when they’re selling their shares because they’re not sure what’s going to happen, they’ll want to buy bonds, so bonds rise in price.”

This means that if you have a portfolio divided between shares and bonds, “half that portfolio is always doing well.”

Philip cites the recent stock market disturbance, in which the ASX dropped 5% in just a few days, as a strong example. “Bonds rose 3% during the same time.”

“If you had a mixed portfolio across that period, you rode through that volatility quite nicely.”

Learn more:
Get your FREE eGuide, ‘How to Retire with Passive Income’, below

How should I balance bonds against shares in retirement?

“We recommend that clients have a mixed portfolio,” advises Philip. “Some shares, some bonds, some property… you’ll always have a part of your portfolio that is doing well.”

Broadly, however, bonds tend to become more important as you approach retirement age.

“The general rule of thumb is that over a long period, bonds will give you slightly less return than equities, and much more stability.”

“So if you already have a large sum of money that is sufficient for you, and you want to protect it, that’s when you need bonds.”

“If you buy a bond, it will never double overnight. But also it’s very rare for bonds to drop by 30 or 40% overnight, and a well-designed bond portfolio will not do that.”

That said, the economic landscape shifted considerably in bonds’ favour in October 2023: for the first time in more than a decade, the yield on bonds began exceeding that of equities. This means bond investors have been enjoying the best of both worlds: lower risk and stronger returns.

To learn more about these exciting changes, download your free eGuide here.

What does a reliable bond portfolio look like?

When designing a portfolio, there are three different types of bonds to consider.

• Fixed-Rate Bonds have a predetermined interest rate consistent through the bond’s life, creating a reliable income stream.
• Floating-Rate Bonds offer changing interest payments that will move up and down in a way closely aligned with the cash rate.
• Inflation-Linked Bonds are designed to protect you against the risk of inflation; your interest payments and principal amount will grow and maintain their real value.

Each has unique advantages and risks, so a careful balance of these three will offer the most stability.

“That portfolio does need to be designed,” advises Philip. “The Relationship Managers at FIIG will help you do that.”

Getting started: it’s easier than you might think

FIIG, a leading independent expert in fixed income, has over 25 years of experience helping Australians achieve a financially secure retirement.

Their free eguide is a wonderful starting point, offering a thorough, newcomer-friendly introduction to the world of bonds.

For a more personal chat about your specific hopes for a retirement income, you can also arrange a friendly, no-obligation call with a fixed income expert.

Along with bespoke portfolios (which a FIIG Relationship Manager can help you design around your specific needs), FIIG also offers a range of ready-made bond portfolios designed with retirees in mind.

This includes the FIIG Australian Bond Fund and the FIIG Monthly Income Fund, a new offering Philip recommends if you’re specifically looking for a strong, predictable monthly cash flow.

“You buy it once at the beginning, we take care of choosing the bonds, and you get to sit back and enjoy your monthly income.”

For more information, visit fiig.com.au

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.