SENIORS CONSIDER INVESTING IN BONDSMay 22nd, 2012 | By Sharon Shaw Elrod MSW EdD | Category: Senior Finances
Investment Issues for Senior Citizens
Seniors who are fortunate enough to have money to invest must look at options for investments, and review those options with scheduled regularity. And financial advisers are a critical part of this process. Most of us senior citizens need help deciding how to diversify our investments, just what bonds or securities to purchase and what scenario is best for our particular financial future.
This article takes a look at bonds and provides information to readers about the pros and cons, and what you might want to talk with your financial adviser about.
A bond is kind of like a loan to the company that issues it. You loan money to the company and they make interest payments to you on a pre-determined basis. They also return the money you loaned at the end of a fixed term, i.e., when it ‘matures’. And therein lies a benefit for many senior citizens. A lot of us like the idea of the promise of getting all our money back at the end of the term of the bond; we don’t like the possibility of losing our money when the stock market takes a dip. We also like the idea of getting specific interest payments that we can count on at specified times. If it’s part of the income we have to live on, we like knowing how much it is and when it’s coming.
A lot of bonds are issued by governmental agencies and corporations. One of the benefits of some bonds is that they are tax-free; that means you don’t have to pay federal or state income tax on interest you receive from a tax-free bond. Such an investment is a consideration for those senior citizens who try to keep their income tax liability as low as possible.
So what is the downside of bonds? Your investment adviser will tell you there is no investment that is risk-free. The market value of bonds fluctuates. What usually happens is that when interest rates go up, bond prices go down. The company or governmental agency that issues the bond has to be stable enough to be able to pay interest and return the principal to you at the end of the term. And you might need to sell your bond before it matures; if you need to sell it at a time when the price of the bond had dipped, you will lose some of the principal you invested. No investments are free of risk.
One of the most important considerations in purchasing a bond is its rating. Ratings range from AAA, which is the best, to D, which is a company in default. The stronger the rating, the better the investment. Consult your financial adviser about ratings when you are considering purchasing bonds.
A good article to review online was written by William J. Lynott for AARP. In it he quotes Michael Sullivan of the Estate Planners Group in Washington Crossing, Pa. “Investing in bonds may not be as exciting as madly fluctuating stocks and funds,” says Sullivan. But bonds can “limit risk, offer stability and are an essential part of a balanced portfolio.”