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Active Retirees : Active Retirees June-July 2012
44 | www.probussouthpacific.org Twelve months ago term deposit rates were up to 7% As of March the highest 12-month term deposit rate available is 5.85% The average yield of a 10- year Commonwealth bond in 2010/2011 was 5.33% One released in February of this year yielded a modest 3.81% The portfolio of an investor who wants an $80,000 pension income in 2013 might include a $50,000 bond parcel that matures during that year. Assuming corporate bonds are held to maturity, a total return around 7% can be achieved, compared to 6% at best for term deposits finance $50,000 parcels, small enough to allow ‘direct’ ownership, rather than ownership through a managed fund. Why would a retiree own a corporate bond directly? There are two major benefits: firstly, they’re more transparent. It is easy for an investor to analyse and monitor one company, rather than the dozens typically held in a managed fund. The other benefit is managing cash flow, which is particularly important for retirees. Distributions from managed funds are not as predictable as direct bond holdings. But retirees can use direct bonds with staggered maturity dates (maturity is when the bond investment is paid back), to match cash flow needs. For example, if an investor wants an $80,000 pension income in 2013, his or her portfolio might include a $50,000 bond parcel that matures during 2013. The cash flow can be augmented with share dividends and other income sources. One strategy some retirees are using is to put their next six to 12 months of cash flow needs in term deposits, then invest their cash flow needs for the next two to five years in corporate bonds. FIIG’s Gordon said a fixed income portfolio might include leading corporate names such as Telstra, Wesfarmers, Sydney Airport, Leighton, Envestra and Downer. Those bonds are available in investment lots of between $50,000 and $100,000, and yields range from approximately 6 per cent to 8.5 per cent per annum. “On top of that, there are a number of banks that can be added to the portfolio as well for additional diversification,” Gordon said. Corporate bonds, however, are not an entirely free lunch. “There is the opportunity for greater returns in corporate bonds but there is also more volatility and more risk,” Gordon said. There are also some benefits of holding bonds in managed funds. “In volatile times fund managers earn their money through managing the risk of your portfolio in order to achieve capital growth and not just yield,” said Andrew Heaven, a financial planner at WealthPartners Financial Solutions. But he adds that you pay for that expertise through fees, which are not charged on direct bond holdings. One area many advisers advocate investing in via managed funds are international bonds, due to their greater complexity and risk, including exchange rate risk. •• what is fixed incoMe? The fixed income asset class includes relatively safe term deposits, government bonds and semi-government bonds, and riskier corporate bonds, hybrid securities and international bonds. Roll AnotheR numbeR $ Smaller parcels allow direct ownership of corporate bonds, meaning that the investment is easier to monitor. Thinkstock
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