U.S treasury bonds, also known as T-bonds, are generally used as a means of decreasing the risk of a portfolio because they are considered safe and dependable. They pay a steady rate of interest throughout the bond term, and interest payments are exempt from state and federal taxes. However, they do not earn as much as equities and their use has to be balanced with the rest of the portfolio.
Investopedia’s recent article asks “Is a Treasury Bond a Good Investment for Retirement?” The article says that stable value and fixed interest rates may not make these instruments appropriate for all investors and they should not be a significant part of a retirement portfolio. A big factor in determining the appropriateness is the investor's age when buying the bond.
The return on most T-bonds is tied to the five-year U.S. Treasury rate. Many bonds have a lengthy term. Therefore, T-bonds offer a low annual return—about 3% in recent years. As a result, the returns on T-bonds are hardly keeping pace with inflation, which has been in the 2% range. Yet, there is still a space in a retirement account of a young investor for a certain percentage of T-Bonds to be used for the safety and steady interest payments of T-bonds.
The amount of T-bonds one should consider having in a portfolio depends on several factors, such as your level of comfort with risk. However, a rule of thumb is that investors should formulate their allocation among stocks, bonds and cash by subtracting their age from 100. The result shows the percentage of a person’s assets that might be invested in stocks, with the rest spread between bonds and cash. With this formula, a 25-year-old should consider holding 75% of their portfolio in stocks and just 25% in cash and bonds.
As you near or begin retirement, adding bonds and other safer investments as a majority of your retirement portfolio can be wise. With their consistent interest payments and guarantee by the federal government, T-bonds can offer a great income stream after the paychecks end. T-bonds are available in shorter terms than traditional savings bonds, or EE bonds, and can be staggered to create a continuous stream of income for retirement.
There is one type of Treasury bond that even offers a measure of protection against inflation and its effects on the buying power of your portfolio. These inflation-protected T-bonds are called I bonds. They have an interest rate that combines a fixed yield for the life of the bond with a portion of the rate that varies according to inflation.
In summary, your age and tolerance for risk needs to be a factor in any investment decision. A younger person is able to take on more risk, since they have a longer window of time to recover from any downturn. The ratios of stocks to bonds described previously and recommended for retirement in the process of changing, in part due to longer life expectancies and the volatility of the stock market. To find the risk level that works best for you, consult with your financial advisor or an attorney at our firm who can review your life priorities and see if it matches your retirement plan. Call today.
Reference: Investopedia (June 4, 2019) “Is a Treasury Bond a Good Investment for Retirement?”