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Buying Bonds for Retirement

Generating Income from Fixed-Income Investments

Jul 26, 2008 Dean Lundell

Baby boomers started turning 60 about two years ago. Boomers and other retirees now hitting retirement age are going to be investing for income to supplement pensions.

How are these “boomers” and other retired people going to supplement a government pension system increasingly at risk from other social programs and under-funded corporate pension plans? The fixed-income market may be retirees' answer to income producing investments they are going to need.

Most people think the world’s stock markets are a big deal and to be fair, they are. It is also a fact the world’s debt markets dwarf the stock markets. The fixed-income markets are where a great deal of serious money is placed. The debt markets do not get nearly the headlines and news coverage that the stock markets do. The debt markets are just not exciting enough – until a credit crunch comes along, such as the most recent mortgage morass.

The Difference between a Broker and a Dealer

Most people use the term “broker” as catch-all term for anyone who works at a brokerage firm. The next time you place a trade, look at the fine print. It will say the firm may have acted as a broker or as a dealer. There is an important difference between a broker and a dealer; 99.9% of all debt is bought and sold on a dealer basis. The odds are very good that your broker’s firm acts as both a broker and a dealer.

What is that difference? Think of it this way; when you buy or sell a house you go to a real estate broker or perhaps agent. When you buy a car you go to an automobile dealer. The difference is in ownership. A dealer owns the product being bought or sold, a broker does not.

While a broker acts as an agent, putting a buyer and seller together for a fee, a dealer buys and sells their product from their own inventory and usually on a “net” basis, which means the firm’s profit is built into the price so the investor never sees it. That is why it is a good idea to shop around. Like anything else, the same debt instrument can and does have different prices at different firms.

Leaning More about Fixed-Income Investments

In this series of articles on the fixed-income markets, you will learn about the different parts of the debt market, how the various types of debt are bought and sold and how to compare apples with apples. It’s not as plain or easy as it may appear at first glance and our next article will focus on how to make comparisons to get the most income you can from the money you have.

Subsequent series of articles will cover equities, options, futures, foreign exchange, over-the-counter derivative markets and how these markets react to and affect the others.

The copyright of the article Buying Bonds for Retirement in Investment is owned by Dean Lundell. Permission to republish Buying Bonds for Retirement in print or online must be granted by the author in writing.

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