Unlocking bond yields for retirement

ONE of the best ways for retirees to secure a good income replacement rate is by generating decent yields from their investments.

The replacement rate refers to the percentage of a person’s pre-retirement income that is replaced by retirement income.

A reliable source of this yield can come from corporate bonds.

However, for those looking to tap into such investment products, getting your hands on decent-yielding corporate bonds is not easy.

The reason for this is simple: access to these bonds often seems to be reserved only for the banks’ rich clientele through their private wealth management services.

For instance, bonds issued by local banks or blue-chip corporations that yield around 6% to 7% annually typically require a minimum investment of about RM250,000.

But why are these bonds not sliced and diced for the man on the street?

Some argue that banks, which manage the issuance and sale of these bonds (just like they handle initial public offerings), take all for themselves and their wealthy clients.

Banks, in turn, claim that there just isn’t enough corporate bonds coming into the market.

Incidentally, government debt papers, which are highly secure, typically do not provide sufficiently high yields to make a meaningful difference for retirees.

A solution must be found to help retirees get hold of smaller portions of decent-yielding corporate bonds.

Additionally, another way to boost yields for retirees and close the gap on their replacement rate is through investment funds that pay out dividends monthly.

This is a healthy, growing trend among issuers, and more unit trust and asset management companies should follow suit.

Finally, while the unit trust market has made strides in lowering fees – a thorny, ongoing issue – some players still charge too much.

Regulation should be introduced to ensure that the man on the street does not get unfairly charged for products that he or she relies on to provide income during retirement.