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Fixed income alternatives for retirees

If you're going the corporate route, Sheldon suggests a short-term investment-grade fund. Investment-grade bonds are ones credit rating agencies think have little chance of defaulting. "In that kind of fund, you're getting diversification; low interest rate risk, though you'll have some; and low credit risk," he says.

One approach Sheldon recommends is a laddered bond portfolio. You buy bonds or funds with a range of maturities, so that you have the benefit of short maturities -- safety -- and the benefit of long maturities -- yield.

Individual bonds vs. bond funds

If you're buying bonds as opposed to bond funds, you have an advantage in an environment of rising interest rates. That's because when your bonds mature in such an environment, you can reinvest the money into bonds with higher yields.

Most experts recommend that you stick to bond funds unless you have at least $100,000 to invest in individual bonds. That's because individual bonds can be very expensive, their fees are often opaque and many don't have great liquidity, making them difficult to buy and sell.

Bond funds also offer broad diversification and professional management. "When something fails, you want to be in a position to absorb it," says Taylor Gang, vice president at Evensky & Katz Wealth Management. "In a large, diversified portfolio there will be less of an effect."

In any bond strategy you choose, remember that the longer the duration of the bond or the bond fund, the more risk you are taking. Like bond maturity, duration is expressed in years. It's designed to convey a fund's sensitivity to interest rate changes. If a fund's duration is five years, its share price will decline 5 percent if interest rates rise by a full percentage point.

"You have to understand the risk of duration exposure," Gang says. "People probably underestimate the degree of exposure to interest rate risk when they go out on the yield curve."

When the Federal Reserve next raises interest rates, long-term bond prices may fall 20 percent, says Legend Financial's Holtzman.

Stocks

If you can stomach a bit more risk, you might choose stocks or stock funds that focus on stable companies with high dividends.

"Between consumer staples, energy, utility and telecom companies, you can pick up attractive yields with low volatility," Sheldon says. "But keep in mind if you buy stocks that they aren't a perfect substitute for money markets because of the risk."

Risk could quickly derail the best-laid retirement plan, as many retirees learned in the recent stock market rout.

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