With ongoing instability in global economies, many retirees are seeking investment options that will give them some degree of income security.

Bonds are on the front burner as attractive options for retirees, especially at this time when stock markets globally are on a roller-coaster ride.

In recent discussions, retirees who have invested in real estate for retirement income, have now decided to use proceeds from the sale of properties to invest in short-term and long-term bonds as they seek stable and reliable income now and for the future.

How do bonds work?

A bond is a debt instrument issued by the government of a corporate entity (the borrower) to the bond holder or investor. The issuer is obligated to pay interest and principal to the investor over a fixed period. Interest can be paid monthly, quarterly, and semi-annually. All bonds have maturity dates, and are typically low-risk instruments. They are less volatile and not as risky as stocks.

Government bonds are relatively secure and one of the safest bonds on the market. Bondholders commit to repaying the principal, but investing in stocks offers no such guarantee. Bonds offer stable and regular income to investors until maturity. Also, interest rates on bonds tend to be higher than that of money market instruments, certificates of deposit, and savings accounts.

In Jamaica, corporate bonds are in demand. These bonds are issued by high-performing companies and are relatively safe. Investors/retirees should ensure that they invest in bonds issued by companies with a proven track record of performance. Bonds issued by low-ranked companies usually offer very high-interest rates and are of higher risk.

Bond income

Interest earned on bonds provides streams of consistent income for the investors to supplement their salaries or retirement income. Interest payments can also be reinvested to provide future income for investors. Interest payments can be used for mortgage payments and other recurring expenses.

Understanding bond risks

Since most bonds offer a fixed interest rate, bonds become more attractive to investors when interest rates in the market fall. When market rates go up, bondholders will find bonds less attractive. This is referred to as interest rate risk. Other risks are associated with bonds such as liquidity risk, default risk, and inflation risk.

Liquidity risk impacts the investor if the investor decides to sell the bond before the maturity date. How quickly the bond can be sold and converted to cash is referred to as liquidity. Default risk occurs when the issuer is unable to repay the principal and make interest payments as agreed. When the interest rate on bonds doesn’t keep pace with inflation, it is termed inflation risk. An investor or retiree who chooses to invest in bonds therefore should seek the assistance of an experienced and qualified financial advisor to assist in making the best decision that will meet the investment goals of the investor or retiree.

Investment portfolio

Bonds should be included in any investor’s portfolio as they act as shock absorbers in times of stock market volatility and economic instability. It’s advisable for investors and especially retirees who are dependent on a fixed income in retirement, to avoid junk bonds. These are very risky bonds, offer very high returns, and are issued by entities that need capital quickly. Since a retiree may spend over 20 years in retirement, stocks remain the engine of growth for retirees’ funds and offer greater protection against inflation than bonds. However, retirees should never put all their funds in stocks because stocks are risky. Bonds can provide much-needed cash for retirees both in the short term and long term. Retirees should consider bonds as the stabiliser in their investment portfolio.

Grace G McLean is financial advisor at BPM Financial Limited. Contact: gmclean@bpmfinancial and visit the website: www.bpmfinancial.com. Grace is also a podcaster for Living Above Self.