When you invest in bonds, you’re essentially lending money to a government (state, federal, city or county) or corporation, then the borrower agrees to pay you (and all its other bondholders) back over time. As a bondholder, you can receive regular income from the bond in the form of principal and interest payments, unless the bond issuer defaults (such as if a company goes bankrupt).
In general, the higher the interest rate on a bond, the riskier the investment. If your bonds are highly rated — i.e., ratings companies believe the bond issuer is financially strong enough to repay its debts — they're generally considered lower risk. U.S. Treasury bonds are generally considered to be the safest type of bond investment because they are backed by the full faith and credit of the U.S. government.
Many people invest in bonds (along with stocks) as part of their overall retirement savings portfolio. But remember: Bonds are not guaranteed investments.
If you already have an emergency savings fund (usually three to six months of expenses), then you might want to start investing in stocks. Stocks are one of the most common forms of investments for people who are saving for retirement.
With stocks, you own a share of a corporation, which entitles you to a share of the company's profits. When the company pays a dividend to shareholders, you get more money in your account. When the company's stock price goes up, so does the value of your investment.
Stocks can be risky and are not guaranteed to go up in value. The price of stocks can go up or down, and sometimes the stock market fluctuates rapidly — known as market volatility.
It can be risky to have too much money invested in too few companies — any individual company's stock can go down. You may want an investing strategy that includes more diversity to help with the risks of an undiversified portfolio. So, it could be time to consider mutual funds.
Mutual funds are professionally managed portfolios of stocks, bonds and other investment assets (such as money markets, real estate or precious metals). When you invest in a stock mutual fund, you buy shares in a fund that owns shares of different companies, so you end up owning little pieces of a multitude of companies. This gives you broad diversification in your portfolio and lets you benefit from the profits of the corporate world, while (hopefully) managing and reducing your risks.
However, mutual funds can be risky. There are no guaranteed returns on your investment in mutual funds. Mutual funds can also be complicated; it's important to do your research and understand the fees and risks of each fund, as well as to build a portfolio of investments that suits your overall financial goals. For example, if you have 30 years left until retirement, you may want to aim for a portfolio with a larger percentage of stocks and a lower percentage of bonds. Stocks often have a higher rate of return than bonds over the long term but also have greater risk, so as you move closer to retirement, your “safer" bond and cash investments should increase while you dial down the number of stocks in your portfolio. You should review your portfolio periodically to ensure it is meeting your objectives.
A good financial planner or brokerage can help you evaluate your options for mutual funds, depending on your age, income, investing goals and risk tolerance. Also, try Prudential’s retirement investment persona tool to evaluate your preferred investment style, find out how much risk you're comfortable with, and figure out which types of investments are right for you.