Retirees often include bonds in their retirement portfolio because of their perceived safety and the consistent income they provide. However, while bonds play a valuable role in a retiree’s portfolio, it is important to fully understand how they work before buying them.
Holding bonds may reduce potential growth
If your goal is to leave an inheritance to your children when you pass away, bonds could significantly reduce the amount you will be able to leave. Since 1926, bonds have averaged around half of the return of stocks. Naturally, past performance is no guarantee of future returns.
Bonds do play a valuable role in retirement portfolios, but overloading on bonds can lessen your portfolio’s overall performance. Keeping some of your money in stocks may increase your returns, and allow for greater overall growth (and risk).
What role can bonds play in a retirement portfolio?
One of the biggest risks that retirees face is sequence of returns risk, which means that if they suffer a few bad losses in the beginning of their retirement, they might not have enough time to be able to make up the losses. A significant drop in the value of your investments in the few years post-retirement can irreparably harm your plans as you draw down your portfolio while the value of your investments bottoms out. In the worst scenarios, you may have to lower your lifestyle, return to work, or run out of money.
Increasing your bond holdings as you approach retirement and in the few years after you retire can reduce the sequence of returns risk that you face, since bonds tend to be less volatile than stocks.
Bonds can also provide a steady income in retirement. You can generally rely on their regular and predictable payments to pay your expenses while hoping the stock portion of your portfolio will produce growth. How you allocate your funds will depend on your income needs and goals.
To help decide if bonds are right for your retirement portfolio, read my piece here Profile-financial.com/bonds-portfolio
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 9, 2017. Updated October 2020