By Dan Weil • Bankrate.com

With paltry interest rates on money market accounts and funds — and yields on certificates of deposit not much better — retirees are looking for safe alternatives.

Ch. 3: Retirement decisions

We’re getting a lot of questions about that, says James Holtzman, a shareholder at Legend Financial Advisors in Pittsburgh.

He and others recommend an array of alternatives that improve yield, ranging from short-term government bond funds to utility stocks. But keep in mind that while many investments offer a higher return than money market funds and short-term CDs, virtually none of them offers as much safety.

When you move from money markets, risk increases. That’s the first thing you have to keep in mind, says Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, N.Y.

Bonds

Bonds are probably the first place you’ll want to look, as their returns beat money market accounts and funds with more safety than you get in stocks.

The risk with bonds — also known as fixed-income investments — is that when interest rates rise from their historic lows, bond prices can fall. Remember that bond prices move in the opposite direction of interest rates.

The environment for the fixed-income market over the next several years is likely to be very different than the past 10 to 20 years, says Michael Sheldon, chief market strategist for RDM Financial Group in Westport, Conn.

These are the lowest interest rates we’ve seen in a generation. So it’s logical that rates can only go in one direction from here, namely higher.

Legend Financial recommends a short-term adjustable-rate government bond fund for some of its clients. Short-term bond prices decline less than long-term bonds when interest rates rise. Adjustable-rate bond funds can offer more stability in dividends and share price than fixed-rate bond funds. And government bonds are safer than corporate bonds.

Given the risk of higher rates, Holtzman says retirees should consider putting just a portion of their cash reserves into this type of fund. You hear about keeping six months of your spending needs in cash reserves, he says. Maybe put one to three months of it in a fund like that.

Treasuries, munis and corporates

A Treasury bond or Treasury bond fund will offer you the most safety in the fixed income market. Unless the federal government goes bankrupt, you can rest assured that the bond’s principal and interest will be paid in full.

The second safest class of bonds and bond funds is the municipal market. These bonds come in two forms. First, there are general obligation bonds, which are repaid with general tax revenue received by the municipality.

And then there are revenue bonds, which are paid back with revenue from a specific project — a hospital or a convention center for example. Obviously general obligation bonds are safer than revenue bonds. To compensate for the risk, revenue bonds have higher yields.

Corporate bonds and bond funds offer higher yields than Treasuries and munis, but they also present greater risk. That’s because corporations can go bankrupt more easily than the government.