Traditionally, bond coupon payments arrived in the mailbox, and the investor never had to sell anything. For some, there is a mental hurdle or fear associated with selling portions, however small, of one’s portfolio in order to generate necessary cash flow. Retirees often feel that they will run out of finite capital too soon, so they rely on what they perceive to be “safer” payout methods.
Systematic withdrawals can also seem risky and unsustainable for investors worried about a bear market swiping away a large chunk of their portfolio. Taking out money during a downturn can be anxiety inducing.
Other risks investors should consider that can directly impact the sustainability of income in retirement: a significant rise in living costs, a surprise large expenditure or health cost, and a longer-than-expected lifespan, all of which potentially result in an individual using up their own funds too soon.
Given the low current yields, the safest categories of bonds provide little income and are forcing many retirees to increase allocations to riskier asset classes, like higher yielding bonds or equities. While investors may have limited control over the rise in their living costs, they can at least try to address the risk to their portfolio.