Why Bonds are Best Investments for Baby Boomers
With several hundred baby boomers nearing retirement in the coming years, there is much fear about how much strain the social security system can bear. Many analysts predict that when all of these retirees come to depend on social security to meet their post retirement living expenses, the entire system may collapse.
It cannot be said with certainty that social security is doomed but it is clear that in near future, Americans may get a much smaller percentage as social security than at present. What is certain is that retirees can no longer depend entirely on Uncle Sam for their post retirement living expenses.
While it is critical for every citizen to start saving for retirement it is now more important than ever for near retirees to ensure that they invest in safe avenues. In this way they can be assured of having a financially secure post retirement life.
Bonds as investment option
Bonds are the best investment options for people on the verge of retirement. These instruments are safe because they offer assured returns at the end of a fixed period. A bond, as opposed to equity, is a loan that you make to the issuer.
As your debtor, the issuer/ company is bound to pay you when your bond matures. With a corporate bond, you get priority over shareholders of the business when it comes to repayment, even if no dividends are being offered to them in the year of your repayment.
As bonds are safe investments, they perform better when the economy is declining. All other investments such as equities, bullion etc may yield poor returns because of dropping interest rates or failing confidence in the economy. But in such a scenario when interest rates are falling, a bond’s value in terms of resale value is higher. This is because the interest rate or coupon of the bond is fixed and insulated against the economic decline. When the market is in turmoil more people prefer to move their money into safer channels such as bonds, which increases demand for this instrument. This increased demand in turn boosts prices.
Because a near retiree has very little earning period left, it is impossible for him to recoup losses through his earnings if his investment is wiped out. This is why baby boomers should give more weightage to the safety of their investments than their yield. Government backed bonds, municipal bonds and bonds from well established blue chips companies satisfy this condition perfectly making these ‘zero risk’ instruments the safest investments for senior citizens.