The Role Of Corporate Bonds In Retirement Planning

Did you know recently, a report by NITI Aayog highlighted that around 70% of senior citizens in India are dependent on their families for maintenance. What's even more concerning is that around 78% of them do not have pension coverage¹!

Earning and providing for your loved ones for a major part of your life and, towards the end, being dependent on them can feel unsettling. So, why not take these numbers as a wake-up call and start saving for your retirement today? The 30X retirement rule would help you set an adequate goal. The idea here is to save up around 30 times your annual expenses, ensuring you have enough for your golden years. However, this number will vary from person to person, depending on the rise in inflation, cost of living, financial needs and goals. 

Considering the volatile nature of Indian and global markets, one must keep a healthy ratio of debt and equity in one’s portfolio. In this article, we discuss how corporate bonds can prove to be a lucrative asset in your retirement portfolio.  

Why Should Bonds Be A Key Component Of Your Retirement Portfolio?

Building a stable and reliable financial retirement plan becomes critical as you move towards your golden years. Bonds can help you with just that, ensuring a steady income while safeguarding your investments against market volatility. Some other reasons why you must consider having bonds in your retirement portfolio are:

Liquidity

As a retiree, you may often face the need for unexpected emergency fund withdrawals to clear medical bills, deal with problems with the house's infrastructure, etc. Thus, investing your funds in an avenue that allows quick access to funds for unplanned expenses or planned withdrawals would be more sensible.

Bonds check all these requirements, especially the short-term ones. Unlike some investments that may require selling at a loss or waiting for a market rebound, bonds can be sold relatively easily, ensuring you have ready cash when you need it. However, keep in mind that liquidity for govt bonds and A-rated corporate bonds tends to be higher than other categories of bonds.

Steady Income

Retirement tends to be a phase of life with few to zero active sources of income. However, this is not the case with your expenses.

Thus, including investments in corporate bonds in your retirement planning can help. This lucrative avenue has the potential to resolve all your money-related problems, ensuring you have a constant and predictable cash flow without taking too much risk like in the case of equities.

Diversification

Every investment comes with a certain level of risk of losing your funds or not realising as much as you expected. Thus, it is advised that you must not invest everything you have in a single asset but rather diversify. Diversification of your investment portfolio will minimise the risk as the losses from one can be set off with the gains of others.

This is precisely what corporate bonds in retirement planning can help you with. They act as a stabiliser, offsetting potential losses in the stock market. For retirees, this balance is crucial for preserving capital and ensuring steady portfolio growth without excessive risk.

Tax Advantages

No one would want a considerable portion of their hard-earned and smartly invested funds to be taken by the government as tax. Thus, it is essential that you invest in investment options that are tax-free. There are ‘tax free bonds’ and ‘tax saving bonds’ that can help you with their respective tax advantages.

Potential Risks You Must Look Out For?

Every investment option comes with a certain level of risk, even bonds. Some of the risks related to corporate bonds in retirement planning that you must keep an eye out for are:

Interest Rate Risk

When interest rates rise, bond prices tend to fall. This can lead to losses if you need to sell your bonds before maturity. Thus, as a retiree relying on bonds for steady income, you may face reduced returns in a rising-rate environment.

Inflation Risk

Inflation majorly affects the purchasing power of fixed-income payments. If the inflation rate outpaces your bonds' yield, your real returns will decline. This can impact your ability to cover living expenses during retirement.

Default Risk

Corporate bonds, especially the ones with lower credit ratings, carry the risk that the issuer may fail to repay the principal or make interest payments. Retirees cannot afford significant losses from defaulted investments.

Reinvestment Risk

When interest rates are low, reinvesting the principal from a matured bond might result in lower yields. This could impact your investment gains and result in a lower income than what your portfolio could have generated over time.

Liquidity Risk

Although bonds are typically liquid, high-yield corporate bonds or bonds in niche markets can be harder to sell quickly without incurring a loss. Thus, you must carefully select a bond, keeping your retirement needs in mind before investing your funds.

How to Mitigate the Risks

Now that you are aware of the potential risks of including corporate bonds in retirement planning, you must also know there are ways to minimise these risks. Some of these ways are as follows:

Diversify Across Bond Types and Issuers

Don’t rely solely on one type of bond or a single issuer. You must consider a mix of government, corporate, and municipal bonds. Moreover, diversify your funds across credit ratings and industries. This will lower the risk of significant losses.

Ladder Your Bond Portfolio

Bond laddering involves purchasing bonds with staggered maturities. This strategy spreads out the reinvestment timeline, reducing reinvestment risk. Moreover, it would give you consistent access to capital as bonds mature at regular intervals.

Consider Inflation-Protected Bonds

To deal with the risks related to an inflating economy, you must invest in Treasury Inflation-Protected Securities or similar products. These bonds adjust their principal value with inflation, ensuring your purchasing power remains intact.

Focus on High-Quality Bonds

You must always choose bonds with high credit ratings, also known as investment-grade bonds. Such bonds are less likely to default, offering greater security to your retirement savings.

Use Bond Funds For Liquidity and Diversification

Bond funds allow you to invest in a diversified pool of bonds. This presents an opportunity for you to minimise the risks associated with its liquidity and diversification. However, be mindful of fees and how they may impact your returns. You can also invest in basket - a theme-based investment option that will let you invest in a pool of Bonds and/or SDIs with one click.

Conclusion

In conclusion, bonds offer the financial stability and predictable income necessary for a worry-free retirement. However, it is important to keep in mind that even bonds are not risk-free, but a well-planned strategy and continuously monitoring your investments can help you make profitable decisions.

So, what are you waiting for? It is never too early to start the financial preparation for your golden years. Grip is an investment platform that can help you with it. It facilitates you with a wide range of alternative investment options, including corporate bonds. So, sign up with Grip today and take the first step towards a financially sound retirement.

Frequently Asked Questions On Role Of Corporate Bonds In Retirement Planning

Q1. What is the best stock-bond ratio for retirement?

There is no specific ideal stock-to-bond ratio. It varies depending on various factors, like your age, risk tolerance, financial goals, and income needs. Young retirees are often found more inclined towards stocks, while the older ones prefer the stability that comes along with bonds.

Q2. Where can I invest my retirement money for monthly income?

If you wish to establish a monthly income source with your retirement money, bonds and fixed deposits are just the avenues you are looking for. However, you must know that bonds offer better gains as compared to fixed deposits.

Q3. How do I buy bonds for retirement?

There are various ways to buy bonds for retirement, including brokerage accounts, government platforms like RBI Retail Direct, or mutual and exchange-traded funds. You can also invest in secured, rated and regulated opportunities on Grip. Sign up today. However, before buying, ensure that you choose bonds based on your goals, risk tolerance, and income needs.

Reference

1. NITI Aayog, Accessed from https://www.niti.gov.in/sites/default/files/2024-02/Senior%20Care%20Reforms%20in%20India%20FINAL%20FOR%20WEBSITE_compressed.pdf. 

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Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip") is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer related documents carefully.