6 Steps to Snare Higher Yields in Retirement

Income investing is supposed to be like watching a predictable movie that you've seen a dozen times before. But lately, it has been full of plot twists. Over the past few years, most income investors settled back with their popcorn for a long period of rising interest rates, believing the Federal Reserve would slowly but surely hike rates back to more normal levels. For bond investors, that would mean some temporary pain--when rates rise, bond prices fall--but it would also bring the welcome relief of higher yields.

Then the Fed ripped up the script. After three years of fairly steady rate increases, the Fed left rates unchanged early this year and signaled that it's unlikely to raise rates at all in 2019. Instead of bracing for further rate increases, many bond traders started betting that the Fed would even cut rates this year. (Kiplinger expects the Fed to stand pat.) The shifting expectations drove new money into bonds of all stripes. The Bloomberg Barclays U.S. Aggregate Bond Index gained nearly 3% in the first quarter, while junk bonds rallied more than 7%.

"The theme was, 'Look out, rates are rising. You'll get killed in bond funds,' " says Warren Pierson, senior portfolio manager at Baird Advisors. "That hasn't happened at all."

Retirees who