Is it Worth a Risk to Get More Income From Retirement Savings?

Here are some bonds to consider if you're searching for more yield:

Consider ‘higher-quality’ junk

This strategy might sound like an oxymoron, but seeking higher yields in companies whose bonds are rated “junk” — ones that rating agencies Standard & Poor's and Fitch Ratings put at BB+ or lower — may be worth the higher risk, King says.

"There is definitely potential to buy ‘higher-quality’ junk bonds,” he says.

Some of his fund's current holdings, which King considers good examples, include rental car company Hertz, frozen french fry maker Lamb Weston, and managed health care operator Centene.

"These are all BB-rated bonds yielding [between] 4 percent and 5 percent,” more than twice the yield on 10-year Treasuries, King says. “Does anyone think Hertz is going out of business?"

"It is not very probable” that these companies will default before the bonds his fund owns mature between 2024 and 2027, according to holdings cited on the CFIAX website.

Diversify with municipal bonds

For retirees in higher tax brackets, owning a broad mix of tax-free municipal (muni) bonds is a way to earn a bigger after-tax return than they would get owning a 10-year Treasury, says Alex Vicencio, a chartered financial analyst and private wealth adviser for Wells Fargo Advisors in Miami.

Municipalities issue these types of bonds to pay for projects such as repairing roads and remodeling schools. Retirees in the 35 percent tax bracket who are earning 2.5 percent tax-free income on their muni bond investments would need to receive 3.85 percent in taxable returns to earn a comparable amount after taxes, Vicencio estimates.

But putting all your money into your hometown's muni bond is probably not wise. You won't get the protection that investing in a large number of muni bonds issued in different states and from multiple municipalities gives, he says.

Vicencio also recommends creating a “ladder” of maturities. That means having muni bonds coming due every year for the next 15 to 20 years.

That way, if the economy enters a higher-yield environment, you'll have the “opportunity to reinvest the cash at higher yields,” he says. And if rates fall, your overall return is likely to remain fairly stable because you'll likely have money invested in other muni bonds at higher interest rates, which will offset the income loss from reinvesting fresh dollars in bonds with lower yields.

Do it yourself with total bond funds

If you're a do-it-yourself investor, you can boost your income by choosing a total bond fund that invests in virtually every type of bond imaginable, ranging from Treasuries to high-rated corporate bonds to junk. These funds own a broad mix of bonds with different maturities, risk profiles and yields.

While the price of the individual bonds can go up or down, sending yields in the opposite direction, owning so many different types of bonds will smooth out the volatility. You can select from actively managed funds that portfolio managers run, or you can opt for a lower-cost total bond index fund or total bond exchange-traded fund, better known as an ETF, which will give you broad bond market exposure.

"The argument for having a mutual fund that is well-diversified is you have between 100 and 200” different bonds, says Chris Pariseault, head of fixed income and global asset allocation institutional portfolio managers at Fidelity Investments. “You have Treasury securities. You have mortgage-backed, high-yield, leveraged loans and emerging market debt.

"They all have [different] yields and profiles. All of these things, if you believe modern portfolio theory, are supposed to diversify and lower your risk,” he says.

Fees are always a consideration, Pariseault says. The lower the fees you pay, the less drag on your returns.

Add stocks with dividends to balance

Sure, stocks are more volatile than bonds, but equities increasingly are being viewed as a way to generate income. The dividend yield on the Standard & Poor's 500 stock index was 1.8 percent through Dec. 24, putting it on par with the interest on a 10-year Treasury.

And many individual stocks pay much richer dividends. Well-known companies now paying dividends in excess of 5 percent include department store retailer Macy's, automaker Ford and telecom company AT&T, according to S&P Global.

The case for generating income via stocks that pay dividends is that you earn income but also have the potential to profit from capital appreciation.

But don't get fooled into buying only high dividend payers. Those big payouts may come with a greater risk of default.

Buy stocks with a history of boosting their dividends every year, because dividend growth is a signal of financial strength.

"If you get a high, safe dividend yield, you should be willing to take on some risk,” says King, adding that his fund had more than 40 percent of its assets invested in stocks at the end of November. Dividend-paying stocks the fund owned include packaged foods company Conagra Brands, global package deliverer UPS and banking giant Wells Fargo.

For people who need an income stream, equities are an essential component of generating enough income to live on in a low-yield world, says Freeman of Socorro Asset Management.

"Using fixed income alone, you can't get there,” he says.

Freelance writer Adam Shell was a markets and Wall Street reporter for USA Today.