NURSING HOME SITE - ADULT RETIREMENT COMMUNITIES SITE

Active Baby Boomers

Five Ways To Boost Your Retirement Income
by the Schwab Center for Investment Research

Bond data in this article was as of Sept. 13, 2004. Please check schwab.com for the latest information.

If you're lucky enough to be retired—or close to retirement generating income is probably one of your biggest concerns. It doesn't help that interest rates remain low by historic standards. Despite Alan Greenspan's two recent 25 basis-point increases in the fed funds rate, long rates actually dropped after a spike earlier this year. It almost makes one wax nostalgic for the bad old days when yields came in double digits.

But not to worry. Inflation is also low, which lifts real (inflation-adjusted) interest rates. What's more, here are five savvy strategies gleaned from Schwab's fixed income and retirement experts to help you boost your retirement income.

 

Hoist a barbell
One strategy is a so-called barbell, which pairs ultra-short bonds with long-term bonds. The long end of the barbell taps into the yields of long-term bonds, currently 3.3 percentage points higher than those of short-term bonds. The barbell's short end gives you flexibility to reinvest into higher-yielding bonds as interest rates rise. Says Hui-Chien Chang, director of fixed income for the Schwab Center for Investment Research (SCIR): "In the current rising-rate environment, we expect a barbell to produce a higher total return than investing in intermediate-term bonds alone."

 

Get short
Looking for an alternative to low-yielding money market funds, without too much volatility? If you can hold on to the investment for at least a year, ultra-short bond funds could be a solution. Says Kim Daifotis, senior vice president and head of fixed income portfolio management for Charles Schwab Investment Management: "While taxable money funds are now yielding about 0.95%, the average ultra-short bond fund has a yield of 2.07%."1

Play the recovery
Corporate and municipal bonds could be another timely income-boosting play. As the economic recovery takes hold, corporate earnings grow. Of the 495 companies in the S&P 500® that have reported second-quarter earnings, 68% beat expectations.2 State and local revenues also expand. And that growth typically translates into improved credit quality for many corporate and muni bonds. (See .)

"Improved credit quality can partially offset the downward pressure on bond prices as rates rise," says Chang. To take advantage of this, consider funds focused on investment-grade corporate or muni bonds. But beware of junk bonds, which tend to slide in value as rates and default risk rise.

Weigh preferreds
Preferred stocks are another high-yielding option. They pay dividends or interest at a fixed rate that's generally higher than bonds. When rates go up, so do yields on new preferreds, and prices fall.

Of course, most preferreds can be called, and they tend to be more volatile than bonds. But if you're less concerned about short-term price moves than maximizing your income, Chang says preferreds can give a core fixed income portfolio a nice boost in yield.

Lock in a fixed annuity
If reliability is your primary concern, an immediate fixed annuity could be the solution. This insurance contract guarantees your principal and earnings, subject to the credit quality of the issuer. Typically, you'd start getting annuity payments immediately, either for a set period or for life.

But the pricing and income stream offered by immediate fixed annuities are very sensitive to interest rates. So when's the best time to buy them? Says Rande Spiegelman, SCIR's vice president of financial planning: "If you expect yields on high-quality, intermediate-term bonds to average around 5% over the long haul, as we do, a generally favorable time to consider an immediate fixed annuity would be when the 10-year Treasury bond (now 4.15%)3 yields between 4% to 6%."

For more information, visit the Schwab Website