When you’re looking to find the highest rate of return to build your retirement fund for the future, it’s sometimes a losing battle when interest rates stay miserably low. But one enticing investment is the step-up bond that can potentially grow your retirement fund through a gradual build of the yield over a long period of time. These bonds are usually available from companies sponsored by the government or through individual corporations.
While you might consider step-ups to be a safe and potentially rewarding option for a long-term investment, consider some of the pros and cons. From personal perspective, I planned to invest in a step-up bond, but changed to a mutual fund based on one reason you’ll find below.
Pro: A High Yield When You’re Close to Retirement
The single most attractive option for a step-up bond is in how the yield is designed to grow in four or five steps over a set time frame. Longer step-ups (around 30 years) can go up to as high as 8% before they mature. The step-up bond I considered through Barclays Bank started at 3.5% for the first seven years.
Con: The Problem of Being Callable
Almost all step-up bonds are callable, meaning that if interest rates are below what the expectations are by a given date, the bond will be called and you’re forced to reinvest at a lower yield. This helps the corporations providing the bond to keep up with interest rates rather than helping you. But if you’re in to investing with these bonds for the short term, it can potentially be a moderately good gamble.
Pro: Payouts of Interest
Many step-up bonds have an option of having your interest dividends sent to you as a check or placed directly into your checking account. This is only an option if you plan to use that to help supplement your income. Although if you want to think longer term as an investment, it’s best to leave the bond alone until it matures or you want to redeem the bond during a far-off call date.
Con: Interest Payments Are Not Monthly
If you expect to get a monthly payout of interest from your step-up bond, you won’t. Most of these bonds pay only every six months. It’s one reason why I changed my mind on a step-up and switched to a mutual fund that pays a monthly interest.
Pro: The Gamble of Interest Rates Rising
It’s sometimes worth the risk to think that interest rates will rise over time. As long as they rise during the time of the step-up bond’s maturity (a perfect scenario), you could gain a win in the step-up game.
Con: Interest Rates May Rise Too Quickly
Forbes.com recently reminded that when the Federal Reserve takes measures to ramp interest rates too quickly, all bond investors get hurt. A fast jump in interest rates creates inflation and can ultimately degrade the principal of the bond. That can hurt if you decide to sell the bond when you need your principal right away for a financial emergency.
Talk with your investment counselor about these aspects, and time these bonds out in the best way for your benefit. Time may not always be on your side, though getting a gist of the future can help benefit you in a step-up bond profit.