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Bankrate's 2008 Retirement Guide
Finding the funds
Sometimes, finding that extra bit of income can turn a retirement nightmare towards a happy ending.
Finding the funds
Investing in your retirement
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Bonds
When you buy a bond, you essentially become a lender, since a bond is really nothing more than an IOU that's been issued by a government or corporation.

In general, bonds are considered safer investments than stocks. But that's not always true. Bonds are rated, and the lower the rating, the better interest they pay and the riskier they are. Firms such as Standard & Poor's and Moody's are among agencies that determine if bonds are "junk" status, meaning they carry high risk, or "investment grade," meaning they carry little to moderate risk.

Uncle Sam guarantees U.S. government bonds, so they're the safest around. They mature -- or come due -- in various time periods. Treasury bills generally mature in three months, while Treasury notes typically mature within a year. Treasury bonds usually mature in five to 30 years. Historically, long-term government bonds have returned an average of 5.4 percent annually, according to Ibbotson Associates.

Local and state governments also issue bonds. Not all are guaranteed, but they're considered relatively safe investments, depending on a government's creditworthiness. Municipal bonds have a distinct advantage: Income is generally exempt from federal taxes and sometimes from state taxes, too.

Mutual funds
Think of these as baskets that may contain bonds, stocks and cash equivalents. With thousands to choose from, mutual funds come in a variety of styles. They may hold a single type of asset, such as only domestic large-cap stocks, or a blend of investments, such as a mix of stocks and bonds in a balanced fund.

Mutual funds also come in a variety of styles. Some are riskier than others. Index funds are geared to mimic certain indices (such as the Standard & Poor's 500) and they tend to be more tax-efficient and less costly than, say, managed funds, which may also have sales charges and other expenses.

Mutual funds enable investors to buy a multitude of assets relatively cheaply. Instead of spending $1,000 for shares of a single company, you could spend the same amount on a fund that holds the same company plus many others. It's a cheap way to diversify your assets and hedge against risk.

Mutual fund companies generally are run by managers who pay close attention to how assets are performing. If you don't have the time or expertise to monitor various investments, then putting money into a mutual fund can be a safer, more practical way to invest.

-- Posted: Nov. 10, 2008
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