July 17, 2025 • 7 mins
"Hey Mike, I plan on living off of income from my bond portfolio. What's the risk with this income strategy and how do you plan around it?” Discover when it makes sense to use bonds as an income source, and why you may want to blend this income strategy with another growth-focused strategy.
Text your questions to 913-363-1234.
Request Your Wealth Analysis by going to www.retireontime.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mike (00:05):
Welcome to How to Retire On Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial advisor andfiduciary. And with me in the
studio today is my colleague,David Franson, who will be
reading your retirementquestions. As always, you can
submit those questions to (913)363-1234.
Again, that's (913) 363-1234.David, what do we have for
(00:26):
today?
David (00:28):
Hey, Mike. I plan on living off of income from my
bond portfolio. What's the riskwith this income strategy,
Mike (00:35):
and how do you plan around it? A bond portfolio is a very
tried and tested strategy. It'sboring, and boring is often very
good.
David (00:45):
K? What kind of bonds are these? Are these just a variety?
That's a
Mike (00:48):
good question. It's probably usually, when people
say they got a bunch of bonds,they've got a bunch of bond
funds.
David (00:53):
Okay.
Mike (00:54):
So we should probably differentiate the two.
David (00:55):
So the fund has a lot of different bonds in it?
Mike (00:57):
They're actively trading bonds. Oh. So, basically, bond
funds can lose money. So ifinterest rates go up or down,
the treasury, the ten yeartreasury, you'll like the market
will affect bond funds. So bondfunds aren't necessarily
protected.
They're less volatile or lessrisky, but they have less growth
potential. You equally have toappreciate the growth potential
(01:20):
with the risk that you'retaking. Bonds themselves are
technically, quote, unquote,called fixed income, if you
wanna be fancy. Okay. That's thefixed indexed part of the
financial services space.
And, originally, the idea wasyou buy some bonds from some
municipalities, some localgovernments, or treasuries from
(01:40):
the federal government. Right?
David (01:42):
K.
Mike (01:42):
And you get your coupon rate that pays you your income,
and all is well. And you mightsay, well, I've got a bunch of
municipal bonds, so I'm gettingtax free income. Life is good.
There's a couple of risksassociated with it. I'm not
saying it's a bad strategy.
I'm saying, let's highlight therisks associated with it. And if
you're okay with these risks,then great. If you're not okay
(02:03):
with these risks, then maybe youmaintain the strategy, but just
blend in another or a secondarystrategy to complement it.
David (02:10):
Okay.
Mike (02:11):
Now the two risks that I see are very high are, first
off, inflation risk. So I knowthere are inflationary bonds out
there. I'm not dumb. But thebonds that I see people buying
aren't necessarily tied toinflation. They're tied to a
fixed coupon rate.
David (02:28):
So you're saying that there's a bond that would change
its rates based on inflation?
Mike (02:32):
Yeah. For example, like a zero coupon bond that's tied to
inflation.
David (02:35):
Oh, okay. So if inflation goes up, then the bond would pay
more, is that what that means?
Mike (02:38):
It matures at a better rate.
David (02:40):
Oh, I see. Okay.
Mike (02:41):
K. But most of bonds I'm seeing in portfolios, they
aren't built around inflation.Uh-huh. They're built around,
okay. Here's the debt that wewant, and in exchange for you
lending your money to us,because bonds are debt
instruments, we're going to payyou a coupon rate, and then when
it matures, you get your moneyback.
That's the idea.
David (02:57):
So there could be like I don't know. The city of Prairie
Village wants to expand theirpolice department, whatever.
They would get a bond for that?
Mike (03:03):
Yeah. That'd be like a municipal bond. Okay. And those
could be tax free. Now allmarkets are equally weighted
based on the risk reward andbenefits.
So a municipal bond will bepriced in even though it may be
tax free, but you're probablygonna get a lower rate than if
you bought a bond that wouldcreate a taxable situation. So
(03:24):
don't think that you're gonnahave an apples to apples
comparison of tax free municipalbonds than not.
David (03:30):
Okay.
Mike (03:31):
Also, it's important to note that according to the
provisional income, which is howyou calculate Social Security,
municipal bonds and their,quote, unquote, tax free income
actually count against you whenit comes to your Social Security
calculation. You can't getaround that. It might be okay.
It might not be okay. The reasonwhy I say it might be okay, it
might not be okay, is you mightthink, well, it's the
government.
(03:51):
If something goes wrong, they'lljust increase taxes, and the
government's not gonna collapse.That's not always the case. Some
municipal bonds can go belly up.Like, look at Puerto Rican
bonds.
David (04:02):
Okay.
Mike (04:02):
So Puerto Rican bonds were going insolvent or at risk of
insolvency, and so that kind ofwent sideways. So not all bonds
are perfectly safe. They'rebacked as good as the
municipality or so on. But letme go back real quick. Inflation
risk.
If inflation gets out of hand,your bond doesn't necessarily
keep up with inflation. So youmight actually go backwards. K?
(04:22):
Yeah. In addition to theinflationary risk, you've got
reinvestment risk.
I don't see a lot of peoplebuying a bond letter that goes
out for thirty years. Usually,it's like five to seven years.
So what happens once the bondmatures? What is the coupon
rate, or what are you gonna getat that point? No one knows.
What if bonds are gonna be, Idon't know, 2%? Could you live
(04:46):
off of that? If you'vemaintained your principal and
you're living off whatever thecoupon rate is or the income,
quote unquote, rate is, couldyou live off that? And are you
okay with the income riskbecause the coupon rate is or
the reinvestment risk is kind oflike your income risk in that
situation? And you might say,well, you know, if that happens,
I'll just sell part of theprincipal.
Well, if you sell part of theprincipal, then you're also
(05:07):
cutting your legs out fromunderneath you. It's like the
snake eating its tail. That'sthe right expression. Right? It
can be an issue.
Then you've got another layer ofissues, and that's the creditor.
So how good is the creditor thatbacks it? So I'd say overall,
government based bonds areprobably safer than other bonds.
That's a generalization. That'snot always true.
(05:29):
But then you've got corporatebonds, and there's high quality
corporate bonds, and there arelow quality corporate bonds. And
marketing is a very interestingthing, and that you've got high
yield bonds, which are junkbonds. You're being compensated
at a higher coupon rate fortaking on more risk.
David (05:45):
Sure. Okay.
Mike (05:46):
So you're not gonna have a safe retirement based on fixed
income when you're getting 9%,if that's even possible from
these bond funds or not bondfunds, but bonds themselves. So
proceed with caution. It is aviable strategy when implemented
correctly, but just understandthat you may be taking on
(06:07):
additional inflation risk,reinvestment risk, and credit
risk in that strategy. There'sno such thing as a riskless
retirement, and there's no suchthing as a perfect investment
product or strategy, which meansit is very, very important, in
my opinion, to blend strategiesand be prepared for whenever
your strategy doesn't work,what's your backup plan. That's
(06:30):
all the time we've got for theshow today.
If you enjoyed the show,consider subscribing to it
wherever you get your podcast.Just search for how to retire on
time. Discover if your portfoliois built to weather flat market
cycles or if you're missing taxminimization opportunities that
you may not even know exist.Explore strategies that may be
able to help you lower youroverall risk while potentially
(06:50):
increasing your overall growthand lifestyle flexibility. This
is not your ordinary financialanalysis.
Learn more about Your WealthAnalysis and what it could do
for you regardless of your age,asset, or target retirement
date. Go towww.yourwealthanalysis.com today
to learn more and get started.
Welcome to How to Retire On Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial advisor andfiduciary. And with me in the
studio today is my colleague,David Franson, who will be
reading your retirementquestions. As always, you can
submit those questions to (913)363-1234.
Again, that's (913) 363-1234.David, what do we have for
(00:26):
today?
David (00:28):
Hey, Mike. I plan on living off of income from my
bond portfolio. What's the riskwith this income strategy,
Mike (00:35):
and how do you plan around it? A bond portfolio is a very
tried and tested strategy. It'sboring, and boring is often very
good.
David (00:45):
K? What kind of bonds are these? Are these just a variety?
That's a
Mike (00:48):
good question. It's probably usually, when people
say they got a bunch of bonds,they've got a bunch of bond
funds.
David (00:53):
Okay.
Mike (00:54):
So we should probably differentiate the two.
David (00:55):
So the fund has a lot of different bonds in it?
Mike (00:57):
They're actively trading bonds. Oh. So, basically, bond
funds can lose money. So ifinterest rates go up or down,
the treasury, the ten yeartreasury, you'll like the market
will affect bond funds. So bondfunds aren't necessarily
protected.
They're less volatile or lessrisky, but they have less growth
potential. You equally have toappreciate the growth potential
(01:20):
with the risk that you'retaking. Bonds themselves are
technically, quote, unquote,called fixed income, if you
wanna be fancy. Okay. That's thefixed indexed part of the
financial services space.
And, originally, the idea wasyou buy some bonds from some
municipalities, some localgovernments, or treasuries from
(01:40):
the federal government. Right?
David (01:42):
K.
Mike (01:42):
And you get your coupon rate that pays you your income,
and all is well. And you mightsay, well, I've got a bunch of
municipal bonds, so I'm gettingtax free income. Life is good.
There's a couple of risksassociated with it. I'm not
saying it's a bad strategy.
I'm saying, let's highlight therisks associated with it. And if
you're okay with these risks,then great. If you're not okay
(02:03):
with these risks, then maybe youmaintain the strategy, but just
blend in another or a secondarystrategy to complement it.
David (02:10):
Okay.
Mike (02:11):
Now the two risks that I see are very high are, first
off, inflation risk. So I knowthere are inflationary bonds out
there. I'm not dumb. But thebonds that I see people buying
aren't necessarily tied toinflation. They're tied to a
fixed coupon rate.
David (02:28):
So you're saying that there's a bond that would change
its rates based on inflation?
Mike (02:32):
Yeah. For example, like a zero coupon bond that's tied to
inflation.
David (02:35):
Oh, okay. So if inflation goes up, then the bond would pay
more, is that what that means?
Mike (02:38):
It matures at a better rate.
David (02:40):
Oh, I see. Okay.
Mike (02:41):
K. But most of bonds I'm seeing in portfolios, they
aren't built around inflation.Uh-huh. They're built around,
okay. Here's the debt that wewant, and in exchange for you
lending your money to us,because bonds are debt
instruments, we're going to payyou a coupon rate, and then when
it matures, you get your moneyback.
That's the idea.
David (02:57):
So there could be like I don't know. The city of Prairie
Village wants to expand theirpolice department, whatever.
They would get a bond for that?
Mike (03:03):
Yeah. That'd be like a municipal bond. Okay. And those
could be tax free. Now allmarkets are equally weighted
based on the risk reward andbenefits.
So a municipal bond will bepriced in even though it may be
tax free, but you're probablygonna get a lower rate than if
you bought a bond that wouldcreate a taxable situation. So
(03:24):
don't think that you're gonnahave an apples to apples
comparison of tax free municipalbonds than not.
David (03:30):
Okay.
Mike (03:31):
Also, it's important to note that according to the
provisional income, which is howyou calculate Social Security,
municipal bonds and their,quote, unquote, tax free income
actually count against you whenit comes to your Social Security
calculation. You can't getaround that. It might be okay.
It might not be okay. The reasonwhy I say it might be okay, it
might not be okay, is you mightthink, well, it's the
government.
(03:51):
If something goes wrong, they'lljust increase taxes, and the
government's not gonna collapse.That's not always the case. Some
municipal bonds can go belly up.Like, look at Puerto Rican
bonds.
David (04:02):
Okay.
Mike (04:02):
So Puerto Rican bonds were going insolvent or at risk of
insolvency, and so that kind ofwent sideways. So not all bonds
are perfectly safe. They'rebacked as good as the
municipality or so on. But letme go back real quick. Inflation
risk.
If inflation gets out of hand,your bond doesn't necessarily
keep up with inflation. So youmight actually go backwards. K?
(04:22):
Yeah. In addition to theinflationary risk, you've got
reinvestment risk.
I don't see a lot of peoplebuying a bond letter that goes
out for thirty years. Usually,it's like five to seven years.
So what happens once the bondmatures? What is the coupon
rate, or what are you gonna getat that point? No one knows.
What if bonds are gonna be, Idon't know, 2%? Could you live
(04:46):
off of that? If you'vemaintained your principal and
you're living off whatever thecoupon rate is or the income,
quote unquote, rate is, couldyou live off that? And are you
okay with the income riskbecause the coupon rate is or
the reinvestment risk is kind oflike your income risk in that
situation? And you might say,well, you know, if that happens,
I'll just sell part of theprincipal.
Well, if you sell part of theprincipal, then you're also
(05:07):
cutting your legs out fromunderneath you. It's like the
snake eating its tail. That'sthe right expression. Right? It
can be an issue.
Then you've got another layer ofissues, and that's the creditor.
So how good is the creditor thatbacks it? So I'd say overall,
government based bonds areprobably safer than other bonds.
That's a generalization. That'snot always true.
(05:29):
But then you've got corporatebonds, and there's high quality
corporate bonds, and there arelow quality corporate bonds. And
marketing is a very interestingthing, and that you've got high
yield bonds, which are junkbonds. You're being compensated
at a higher coupon rate fortaking on more risk.
David (05:45):
Sure. Okay.
Mike (05:46):
So you're not gonna have a safe retirement based on fixed
income when you're getting 9%,if that's even possible from
these bond funds or not bondfunds, but bonds themselves. So
proceed with caution. It is aviable strategy when implemented
correctly, but just understandthat you may be taking on
(06:07):
additional inflation risk,reinvestment risk, and credit
risk in that strategy. There'sno such thing as a riskless
retirement, and there's no suchthing as a perfect investment
product or strategy, which meansit is very, very important, in
my opinion, to blend strategiesand be prepared for whenever
your strategy doesn't work,what's your backup plan. That's
(06:30):
all the time we've got for theshow today.
If you enjoyed the show,consider subscribing to it
wherever you get your podcast.Just search for how to retire on
time. Discover if your portfoliois built to weather flat market
cycles or if you're missing taxminimization opportunities that
you may not even know exist.Explore strategies that may be
able to help you lower youroverall risk while potentially
(06:50):
increasing your overall growthand lifestyle flexibility. This
is not your ordinary financialanalysis.
Learn more about Your WealthAnalysis and what it could do
for you regardless of your age,asset, or target retirement
date. Go towww.yourwealthanalysis.com today
to learn more and get started.
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