Retirees Be Warned: Holding This Type Of Bond In Retirement Could Cost You

Bonds with yields comparable to stocks can seem like the ideal investment for retirees, but in the finance world these are known as junk, or high-yield, bonds and investing them can be a bad idea for retirees. Junk bonds are debt securities issued by corporations rather than governments. While corporate bonds are a common investment vehicle (and are generally exposed to less risk than stocks), junk bonds specifically refer to securities from companies with lower credit ratings and weak financials. Investing in these types of bonds actually defeats the purpose of investing in bonds, which can be used to provide stable income during retirement.

Companies will issue these bonds despite their bad ratings as a way to raise capital during periods of economic growth. To offset the riskier nature of these bonds, they typically offer higher interest rates (and returns) than municipal bonds. But during market downturns, junk bonds are more likely to miss interest payments or default entirely, putting retirees' income at risk. 

For the average retirement investor, stable income and high return rates may look appealing, but holding them long term can cost you greatly. Because these securities are issued by companies with shaky finances they carry a higher risk of missing interest payments or defaulting entirely. Even one missed interest payment could disrupt a retiree's income, while a default would stop future payments altogether. For retirees, junk bonds can derail a planned budget by being less predictable than municipal bonds, which are safe to redeem after five years.

Junk bonds can also cost retirees by not acting as a safeguard in a troubled economy. Municipal and Treasury bonds are specially touted as a good investment for retirees because they aren't tied to the stock market and can still provide stable income during periods of volatility. Junk bonds on the other hand are issued by public companies and go up and down in value based on performance. This could result in delayed payments if it reaches maturity during a downturn or a drop in value if you try to sell out of the position. Despite the initial appeal junk bonds offer, these bonds carry high risk at a time when individuals need financial stability.