Even though many consumers are putting off retirement further and further these days, the fact is that you should still be planning for the inevitable day that you can’t work any longer, whether by choice or not.

One thing to keep in mind, as retirement gets closer, is that the “investment horizon” you have gets smaller, meaning that you want to invest in things that are less risky. For this reason many financial advisors suggest that consumers in their 50s and even in the early 60s dedicate at least 50% of their portfolio to Bonds.

One of the best reasons to invest in bonds is that they offer many different choices and sectors, giving you the ability to diversify your portfolio quite nicely. Many bonds can only be purchased for a $5000 minimum investment however, meaning that you need to have significant assets in order to put together a portfolio that includes different issuers, different market sectors and different maturities of bonds.

For that reason, you might wish to consider bond funds, unit trusts or exchange traded funds. That will make it a bit more convenient to diversify your portfolio, and more affordable as well. One caveat however is that they don’t offer the same promise of a specific maturity date that a single bond will give you.

Depending on the tax bracket that you happen to be in, it might be more advantageous to purchase tax advantaged bonds that are issued by either federal, state and/or city governments. The reason is simple; any interest that is paid to you on US government securities will, in most cases, be exempt from both state and local income tax. If you live in a state where taxes are high, this can be crucial. Interest that you get on municipal bonds is exempt from federal income tax and, in many cases, exempt from state and city income tax also.

One excellent way to invest in bonds is called “laddering”, which along with diversification lowers your risk. An example is to purchase bonds with different maturities that are staggered over 1, 3, 5 and 10 years, reaching maturity at those times and making sure that, no matter what interest rates are in effect at the time, your bonds still deliver a good return. The reason is that, if interest rates are rising, your short-term bonds that are maturing will let you reinvest at a higher rate and, when rates are dropping, your longer-term bonds will still be paying you with their higher coupons.

If you have any questions about investing in bonds, or about personal finance in general, please let us know by commenting or dropping us an email, and we’ll get back to you with advice and answers ASAP.