The Hidden Risk Behind 10% Yield Investments Most Retirees Miss
High-yield investments look especially attractive when uncertainty rises. A 9% or 10% yield feels comforting when markets are volatile and interest rates are unpredictable. But yield alone doesn’t tell the full story and in some cases, it hides the real risk.
One of the most common examples is Business Development Company (BDC) funds. These investments often advertise generous dividends, sometimes close to double digits. The reason they can do that is simple: they lend money to companies that can’t easily borrow from traditional banks.
That’s where the risk begins.
Why high yield exists in the first place
BDC funds don’t generate high income by accident. They lend to smaller, leveraged, or financially fragile businesses companies that fall outside conventional lending standards. In good economic environments, many of these loans perform just fine. Cash flows are stable, defaults are low, and dividends keep flowing.
When the economy slows, the equation changes.
As revenue declines and borrowing costs rise, the weakest borrowers feel pressure first. Defaults increase, loan values fall, and suddenly that high yield doesn’t look so generous anymore. In extreme cases, investors don’t just lose income they lose principal.
Yield doesn’t equal safety
A common mistake is assuming that a steady dividend means stability. In reality, yield is compensation for risk. The higher the yield, the more uncertainty is embedded in the investment.
This doesn’t mean BDC funds or other high-yield investments are inherently bad. It means they require context. They behave very differently in strong economies than they do during recessions or credit tightening cycles.
History offers plenty of reminders. During past downturns, many high-yield vehicles cut distributions sharply or collapsed entirely. Recoveries can take years, and for retirees relying on income, time matters.
What this means for retirement planning
For retirees and near-retirees, sequence of returns risk is real. Losses early in retirement are harder to recover from, especially when withdrawals are ongoing. High-yield investments amplify that risk.
This is why many retirement strategies prioritize reliable income first Social Security, pensions, and conservative cash reserves before reaching for yield in the market. Once core income needs are covered, additional investments can focus on growth or opportunistic income with clearer risk boundaries.
Younger investors face a different calculation. With longer time horizons and steady savings, volatility is easier to absorb. Even then, understanding where yield comes from matters more than the headline number.
Fees, complexity, and false certainty
Another layer often overlooked is cost. High-yield funds can include management fees, leverage costs, and embedded expenses that quietly reduce returns. Even investors who believe they are “fee-free” are often paying indirectly through lower net performance.
Complexity itself becomes a risk. When markets turn quickly, complicated structures are harder to unwind, understand, or explain especially during stressful periods.
The real takeaway
High yield is not a shortcut to safety. It’s a tradeoff.
In strong markets, yield feels rewarding. In weak markets, it reveals its cost. The smartest approach isn’t chasing the highest payout, but aligning investments with time horizon, income needs, and risk tolerance.
Income investing works best when it’s boring, durable, and resilient not when it depends on everything going right.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
