What is Income Risk?

Income risk is the chance that an investment which is used for income will fluctuate in an unfavorable way if the interest rate environment or market conditions change.

Some mutual funds and ETFs are branded as income funds when they use lots of corporate bonds that generate regular income payments, but they are often sensitive to interest rate changes. The Federal Reserve Board and the market can affect changes in the interest rate environment as times goes on.

For those retirees who are relying on bonds and bond funds for income, this creates a fair amount of income risk. When one of their bonds matures, or when many bonds within a fund mature, more bonds will be purchased at the current interest rates at that time. When interest rates are not set in stone, the individual cannot depend on their income staying the same.

One alternative to this is income annuities, which offer fixed payments for life. Others who use stock dividends for income may be subject to a similar income risk, but one that is more determined by the performance of the company paying the dividends and their ability to weather difficult times.

Still others define income risk as the chance that a retiree will deplete their assets in retirement, which may be the result of equities losing value or just having insufficient funds to provide an income for as long as is needed.

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