If you’re preparing to retire, you may be spooked by today’s investing environment. That’s pretty understandable when you think about what’s happened in the stock and bond markets over the past 20 years: the 9/11 attacks, the financial crisis of 2007 to 2009 and the COVID-19 panic of March and April 2020. Despite the ups and downs, for example, the S&P 500, an index of the largest and most successful companies in America, has returned 7.51% on an annualized basis between Jan. 1, 2000, and Dec. 31, 2021. (1)
These returns put many who have saved consistently while working in a good position for retirement. However, saving for retirement and spending during retirement are two very different endeavors. That’s because when you save for retirement over many years, you have the time to outlast market volatility and bear markets. You don’t have the same ability during retirement, as you depend on your savings to generate income to pay your bills.
In other words, your retirement savings needs to replace your paycheck by providing a stream of income that can pay your bills. Options for such a substitute paycheck are numerous.
That being said, retirement doesn’t come with a “do over” button. That’s why it’s so important to avoid three major retirement income mistakes.
Mistake #1: Investing in bonds or bond funds in a rising rate environment
While U.S. Treasury bonds, bills and notes and highly rated corporate bonds were reliable sources of income in the past, that isn’t the case today. In fact, it hasn’t been the case for many years. Table 1 shows how much interest rates – and the income that these bonds generate – have fallen during the past few decades.
Table 1
| 10 Year US Treasury Bond Yield | Yearly Interest on $100,000 Investment | |
|---|---|---|
| January 1990 | 7.94% | $7,940 |
| January 2000 | 6.58% | $6,580 |
| January 2010 | 3.85% | $3,850 |
| January 2015 | 2.12% | $2,120 |
| January 2021 | 1.88% | $1,880 |
| September 2021 | 1.31% | $1,310 |
Source: U.S. Treasury Department (2)
Table 1 reveals how low the income that you could gain from investing in a 10-Year U.S. Treasury Bond has fallen. If you invested $100,000 in the 10-year U.S. Treasury bond in 1990, you would receive $7,940 in income per year. However, that same investment of $100,000 today would yield $1,310 in income, more than six times less.
Much lower interest rates translate into much less income from bond investing. Not only that, but if …….