What are fixed-income investments and why are they useful in retirement?

Fixed-income investments, also known as fixed-income securities or bonds, are financial instruments that pay a predictable stream of income over a period of time.

These investments are essentially loans made by investors to issuers, which can be governments, corporations, or other entities. In return for the loan, the issuer agrees to pay periodic interest payments and return the initial amount at the maturity date.

They are lower risk compared to other investments like stocks due to what you are investing in. Government bonds, particularly those issued by stable governments like the US, are considered very safe investments. Corporate bonds are rated also rated by credit rating agencies, allowing investors to gauge the creditworthiness of the issuer.

While fixed-income investments can be vulnerable to inflation risk, some bonds, like Treasury Inflation-Protected Securities (TIPS), are specifically designed to provide protection against inflation

Why are they useful investments in retirement?

Fixed-income investments are commonly used in retirement planning because they offer a stable income source during retirement years. Annuities, for example, are a type of fixed-income investment that provides regular payments for life.

They are not supposed to be risky, otherwise you may as well invest in stocks. This risk is heightened as retirees will be working much less than their younger peers, if at all.

“Bonds are the single biggest mistake I see over and over and over again,” says Allan Roth, a certified financial planner and accountant at Wealth Logic, based in Colorado Springs, Colo.

“Bonds should be boring ... and allow you to sleep at night,” he said.

Many retirees use this method of investment as a cornerstone of their retirement income planning. By creating a diversified portfolio of bonds, annuities, and other fixed-income assets, retirees can create a reliable income stream that complements Social Security and pension income.