2. The income planner
You need to take withdrawals from your portfolio to meet required minimum distributions (RMDs), discretionary expenses in retirement, or something else, and you’d prefer only to spend your portfolio’s income.
The idea: Individual investment-grade bonds issued by corporations and federal, state, and local governments may offer attractive and predictable yields, plus low risk of default.
Rationale: Interest rates are still relatively high on individual high-quality bonds, potentially enabling those who want to metaphorically “clip coupons” to earn reliable income, plan the timing of their bonds’ maturities to preserve the value of their portfolios, and enjoy peace of mind when stocks turn volatile.
If you have several hundred thousand dollars to invest, you may be able to construct a portfolio of high-quality, low-risk bonds with reliable yields that are higher than many other fixed income or short-term cash investments. And if you are able to hold these bonds until maturity you may be relatively unbothered by price swings in the broader bond market as interest rates continue to move around, because your bonds will mature at their full face values.
Ideas to consider: Unlike investing in a fund, you can choose specific bonds and hold them until they mature. One benefit of this strategy is “precision,” according to Richard Carter, vice president of fixed income strategy at Fidelity.
“You can select the specific bonds and calculate their specific coupons and maturities in order to meet your expected cash flow needs,” he says. If you are buying individual bonds, Fidelity suggests you consider spreading investment dollars across multiple bond issuers.
A popular way to hold individual bonds is by building a portfolio of bonds with various maturities. This is called a bond ladder. Ladders can help create predictable streams of income, reduce exposure to volatile stocks, and manage some potential risks from changing interest rates.
Fidelity offers more than 250,000 bonds, including US Treasury, corporate, and municipal bonds. Most have mid- to high-quality credit ratings that could be appropriate for a bond ladder.
Tools and resources for investors looking for individual bonds include screeners to help you find available bonds, tools to build a bond ladder , alerts to let you know when your bonds are maturing, and Fidelity’s Fixed Income Dashboard to help you understand your bond portfolio.
