SMSF advisers should consider bonds and fixed income investments for clients transitioning from the accumulation into the retirement phase, one industry expert has recommended.
“As you transition to retirement and the focus becomes more about generating an income, bonds can work really well to achieve those outcomes,” FIIG Securities fixed income sales director Simon Michell said.
“The best thing a bond does is that it has a future point in time in which you know what its value is, called the maturity date.
“The price of the bond will move up and down with interest rates, but on the maturity date it will pay you back your investment in cash.”
Aside from the fixed point of return, bonds also pay interest to investors in the form of quarterly coupons, providing a stable income supplement and cash flow to retirees.
However, those quarterly coupons, which were interest rate dependent, should not be the main attraction to clients who were looking to invest in bonds, Michell said.
“The purpose of your fixed income or bond allocation is not about speculating about what you think interest rates are going to do,” he said.
“You’ve got other asset allocations to try and grow your portfolio, [and bonds are] more about capital preservation and income generation.
“So it’s really about having all the protections in your fixed income portfolio to buffer against whatever interest rate view emerges.”
The growing interest in bonds and fixed income for retirement planning had spurred on growth in Australia’s bond market, with investors looking to seek the protections bonds offered, he said.
