November 03, 2022

Evidence that Bonds Aren't Always a Safe Investment, Ep #122

21 minutes

In episode #106 of the Retirement Made Easy podcast, I talked about the risks associated with investing in bonds. I also mentioned a Fidelity® U.S. Bond Index Fund, right? In this episode, I'm going to share an update about this index fund to help you understand how bonds can be risky. I'll also talk about the #1 contributing factor that can help you retire wealthy. Don't miss it!

You will want to hear this episode if you are interested in...

[1:45] An unexpected retirement coaching call
[5:38] An update on the Fidelity US Bond Index Fund (FXNAX)
[12:32] The #1 indicator of people who retire wealthy
[16:59] Why you should always contribute a percentage

An update on the Fidelity US Bond Index Fund (FXNAX)

As I'm recording this podcast, the index is down 16.13% year-to-date. Bonds are supposed to be a safe and conservative investment, right? So how can this happen? It's because interest rates have risen so dramatically. As interest rates go up, bond prices go down.

Let's say you buy a McDonald's bond for $10,000, it pays 2% interest, and it matures in 10 years. It's like you're lending money to McDonald's. In return for your loan, you're paid interest twice a year. You'll get paid $200 of interest per year. The price you can sell the bond for—after 10 years—will fluctuate daily.

When interest rates double, let's say McDonald's starts to offer bonds that pay 4%. But when you try to sell your bond, it's not worth $10,000. Maybe it's only worth $8,000. Why? Because if someone can buy a brand new bond paying 4% and yours is only paying 2%, they aren't going to overpay for yours.

If you hold the bond for 10 years, you'll get your money back (as long as the company doesn't default).

Why bonds aren't always safe investments

The longer it takes for your bond to mature, the more it will be impacted by interest rates. Long-term bonds have been dropping dramatically in price due to rising interest rates in 2022. The S&P 500 is down 21% as of recording. Bonds are down 16%—almost as much as the stock market. Even worse, the Federal Reserve plans to raise interest rates two more times in 2022. Because of this, the price of bonds will continue to drop.

The #1 indicator of people who retire wealthy

The #1 indicator of people who retire wealthy is their savings rate. Dave Ramsey recommends that people save 15% of their household income for retirement (after paying off debt and having an emergency fund). If you're saving 15% for retirement, you'll be in fantastic shape for a well-funded retirement plan.

How much are you saving for retirement? One gentleman I recently spoke with was contributing 3% to his 401, not a penny more. Why? Because his company only matched 3%. He was shocked when I told him he couldn't afford to retire because he hadn't saved enough. Many people only contribute up to the match in their 401k. That's a huge mistake.

Listen to the whole episode to learn more about what you should be doing to retire wealthy.

Resources & People Mentioned