Welcome to some new Weekend Reading about another important subject: do you need fixed income?
(I want to thank some readers and their email questions related to this subject over the recent months.)
Just before that subject, and our current asset mix, some recent reads on my site…
And…this week I posted this: some back-of-the-napkin examples about retirement numbers and rules to consider. In that post there are some good starting points for your retirement income planning journey but at the end of the day, when you need real math done, please consider a retirement income plan beyond these rules of thumb.
Weekend Reading – Do you need fixed income?
The short answer for me: “I do!”
…and maybe you should consider the same…read on.
What is fixed income?
In short, just as the term sounds: when you own fixed income you get paid.
There are many types of fixed income instruments, though bonds, bond funds, bond ETFs, etc. are probably the best known but not the only ones to consider.
Fixed income products are instruments issued by a government, a corporation or another entity to fund their operations. These products provide a fixed rate of return for a set period of time. That could be via bonds (consider bonds like an IOU from someone) but fixed income products also include GICs or money market funds. The reason why fixed income products can be so appealing in a portfolio is because fixed income securities have less correlation with the stock market – so there is less investment risk. I believe owning fixed income can offer DIY investors like you and I the chance to diversify: yes, you can still own your stocks for income and growth but as the name suggests fixed income can also deliver a stable stream of income too – for less risk.
The return you generate from fixed income is taxed differently from return generated from equity. Capital gains and dividends are taxed favourably, while interest earned on fixed income holdings is taxed as income. Something to be mindful of…
Here is a very valuable post on this subject: Taxation of income.
We often see the terms bonds and fixed income used
I mean, consider this: imagine that inflation rises and the return you’re getting on your bond or bond ETF is now less than the inflation rate (which could be the case today?). Although you may have purchased this bond so your return on your investments would at least match the rate of inflation over time, that strategy is now at risk, at least until inflation declines.
Do you know when recent, higher inflation might subside?
I don’t.
Weekend Reading – Do you need fixed income? Do I need fixed income?
“I do”.
While our retirement income strategy is largely related to living off dividends and distributions in early retirement, I/we do have some fixed income and likely always will.
At the time of this post, our investment portfolio (beyond workplace pensions) is largely 90% stocks and 10% fixed income.
I have my reasons for that.
In How much cash should you keep I wrote:
“I think any money you absolutely need/will absolutely depend on in the next 1-2 years should likely be in cash or some form of fixed income.”
Well, I eat my own cooking!
While I have always believed cashflow is king….some cash is good too. 🙂
This means for us, most of our near-term, future semi-retirement spending (certainly looking ahead into 2026) is now ready to spend in cash/cash equivalents: there is cash savings via higher interest savings accounts, cash-alternative ETFs we hold, and money market funds too. We have done this to sheild ourselves from stock market calamity that may occur between now and the end of 2026 to cover our spending needs.
Beyond that, we’re working on saving up and organizing our portfolio for retirement spending money this year for 2027 – well in advance as continue to work part-time in 2025.
Even further ahead, I’ll come up with a plan for retirement spending for the start of 2028 (!) later this year so stay tuned for that…
The other big reason we keep some cash or cash equivalents on hand is we continue to believe cash should be there when you need it – as an emergency fund. Other than a few occasions since 2016 (yes, nine years ago….) where we’ve dipped into this cash savings, we strive to keep our emergency cash balance at this amount.
I continue to believe the last thing you want in any financial emergency is to go into more debt (and/or the stress of taking on more debt).
Weekend Reading – Do you need fixed income summary
For us, we’ve decided our mix of 90% stocks and 10% fixed income is about right – for right now. I may of course change my mind as our cashflow needs and/or risk tolerance moves into full retirement in the coming year or so.
While I believe in any early retirement base case that living off your dividends that covers your income needs might be ideal, so you can completely ignore share price fluctuations, while cashflow is king keeping some cash and cash equivalents on hand remains very smart for us too.
