Are Bonds (Still) a Good Investment for Retirement?
- Andrew Casteel CFP®
- 19 hours ago
- 12 min read
Are bonds a good investment for retirement, or did the last few years prove they’re too volatile to trust?
If you’re wondering whether bonds still deserve a seat in your portfolio, you’re not alone, especially now that yields look very different from the near‑zero era we just lived through.
The reality is more nuanced: bonds aren’t “safe” or “broken,” they’re tools. Used well, they can still play a critical role for affluent investors age 55+ with seven‑figure portfolios.
Key Takeaways
Bonds remain a powerful way to reduce volatility, fund near‑term spending, and temper sequence of returns risk—but only if maturity, credit quality, and account location are aligned with your plan.
The jump in 10‑year Treasury yields from 0.89% (2020) to 4.21% (2024) significantly improves long‑run expected returns for high‑quality bonds versus the prior decade.
Affluent retirees should pay close attention to taxes: bond interest is generally ordinary income under IRS Publication 550 (Investment Income and Expenses) and can push you into higher brackets or Medicare IRMAA surcharges.
Not all bonds are equal. Duration risk, credit risk, and structure (individual bonds vs funds vs ladders) can dramatically change how “conservative” a position really is.
A thoughtful fixed‑income design should integrate RMD age 73 rules, future RMD changes, and your broader estate and tax plan.
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Are Bonds Still a Good Investment for Retirement?
Yes—bonds can still be a valuable investment for retirement, but we believe they are no longer a simple, set‑and‑forget “safe” bucket.
Their real value today comes from shaping your cash‑flow strategy, managing volatility, and coordinating with taxes, not from blindly following a fixed stock‑bond ratio.
After 2022’s painful bond losses, many retirees understandably asked, “What’s the point?” When both stocks and bonds fall together, it’s easy to question whether bonds still do their job. Yet the key is how you own bonds, not whether you own them.
Historically, high‑quality fixed income has:
Reduced portfolio drawdowns when equity markets sell off.
Provided more stable income than dividends alone.
Created psychological comfort that helps investors stay invested.
Those roles haven’t disappeared. What changed is the starting yield and the interest‑rate environment. According to Federal Reserve data, the average 10‑year Treasury yield was just 0.89% in 2020 but climbed to 4.21% by 2024.
Higher yields mean:
More income for each dollar allocated to high‑quality bonds.
A better starting point for long‑term total returns.
Greater cushion against price declines than when yields were near zero.
Vanguard’s research echoes this: despite recent volatility, bonds remain “an important staple in retirement portfolios” and higher yields “may be good for many retirement investors” over time.
So the question for affluent retirees isn’t whether bonds are “good” or “bad.” It’s:
Do you have the right mix of bond types, maturities, and account locations for your spending, taxes, and risk tolerance?
How Have Bond Yields Changed in Recent Years?
Bond yields have risen dramatically since 2020, resetting expectations for future returns. The 10‑year Treasury’s annual average yield climbed from 0.89% in 2020 to 4.21% in 2024, making today’s high‑quality bonds far more compelling as income and diversification tools than they were in the previous decade.
One of the most important shifts for retirees is invisible day‑to‑day, but obvious in the data:
Year | 10‑Year Treasury Yield (Annual Avg, %) |
2020 | 0.89 |
2021 | 1.08 |
2022 | 2.95 |
2023 | 3.96 |
2024 | 4.21 |
Source: Board of Governors of the Federal Reserve System, via FRED series RIFLGFCY10NA (annual averages, updated January 2, 2025).
What this means in plain language:
In 2020–2021, many retirees held bonds paying less than inflation. Their main job was volatility reduction, not income.
By 2024, yields around 4–5% on high‑quality bonds provided a more reasonable starting point for both income and long‑term returns.
Meanwhile, Series I savings bonds, which combine a fixed rate and an inflation component, offered a 4.03% composite rate with a 0.90% fixed rate for bonds issued November 2025–April 2026, a huge improvement over the 0% fixed rates that dominated the 2010s.
Higher yields don’t eliminate risk. They change the trade‑offs:
Price sensitivity (especially for long‑maturity bonds) is still meaningful.
But the income component is now large enough that, over time, it may dominate price swings—particularly in diversified benchmarks like the Bloomberg U.S. Aggregate Bond Index.
For affluent investors, this yield reset is the central reason to revisit your bond strategy now.
Which Types of Bonds Make the Most Sense for Affluent Retirees?
Affluent retirees often focus on high‑quality, short‑to‑intermediate‑term bonds. Treasuries, TIPS, investment‑grade corporates, and municipal bonds using riskier credit (like high yield or private credit) only as modest “satellite” exposure. The right mix depends on your tax bracket, income needs, and tolerance for volatility.
Let’s break down the main categories.
1. U.S. Treasuries and TIPS
Treasury bills, notes, and bonds are backed by the U.S. government for timely payment of principal and interest, and their interest is taxable federally but exempt from state and local income tax.
Treasury Inflation‑Protected Securities (TIPS) add explicit inflation adjustment to principal and interest, making them a powerful tool for long‑term spending needs when real yields are positive.
When real yields (yields above inflation) on TIPS are positive—as they have been recently—retirees can lock in a level of inflation‑adjusted income potential that simply wasn’t available during the ultra‑low‑rate years.
2. Municipal Bonds
For many high‑net‑worth retirees, municipal bonds can play a significant role in taxable accounts:
Interest is generally exempt from federal income tax, and may be exempt from state tax if you live in the issuing state.
This can be especially attractive if you’re in a high marginal bracket and have already filled tax‑advantaged accounts.
The trade‑offs: credit risk (municipal finances vary widely), call features, and often lower nominal yields versus taxable bonds. In some cases, the after‑tax yield on high‑quality corporates or Treasuries may still compare favorably, particularly for investors in lower tax brackets.
3. Investment‑Grade Corporate Bonds
Investment‑grade corporates may offer higher yields than Treasuries, but introduce credit risk—the risk that a company defaults or its perceived creditworthiness declines.
For many retirees, corporates can:
Provide incremental yield in bond funds or ladders.
Fit best as a portion of the fixed‑income allocation, not the entire core.
4. High‑Yield Bonds and Private Credit (Use with Care)
The SEC’s Investor Bulletin on high‑yield corporate bonds highlights that their higher coupons come with meaningfully higher default and credit risk, making them more volatile and equity‑like.
That doesn’t make them “bad,” but for affluent retirees they usually belong in the “satellite risk bucket”, not as the main engine of income.
5. Savings Bonds (I‑Bonds and EE Bonds)
I‑Bonds offer a composite rate based on a fixed rate plus an inflation rate, with tax deferral and exemption from state and local tax. Current composites of 4.03% with a 0.90% fixed rate make them more compelling than in past years.
EE Bonds have their own guarantees (like doubling in value in 20 years for certain issues), but also come with holding‑period requirements.
Interest on both is generally taxable at the federal level but can be deferred until redemption; rules are detailed in IRS Publication 550 (Investment Income and Expenses).
As our own Megan Waters, CFP® explains to clients: “For high‑net‑worth retirees, bonds aren’t just about yield, they’re about matching specific tools to specific jobs: Treasuries and TIPS to protect purchasing power, municipals for tax‑sensitive dollars, and just enough credit risk to make the overall plan work.”
How Should Bonds Fit Into Your Overall Retirement Income Strategy?
Bonds generally work best as part of a broader retirement income framework: aligning maturities with your spending timeline, using them to buffer stock volatility, and integrating them with RMDs, Roth strategy, and Social Security. The right allocation is personal, but most affluent retirees benefit from a structured, time‑segmented approach.
1. Bucketing by Time Horizon
A common, planning‑friendly framework is to align your fixed‑income structure with time horizons:
Years 0–3:
Cash, Treasury bills, and ultra‑short bond funds for near‑term spending and emergency reserves.
Years 4–10:
Short‑ to intermediate‑term high‑quality bonds or a ladder of individual Treasuries and CDs, designed to cover planned withdrawals.
Years 10+:
Intermediate‑term core bond funds (often tracking or resembling the Bloomberg U.S. Aggregate Bond Index) and TIPS for long‑term, inflation‑aware income potential.
This structure helps manage sequence of returns risk by reducing how much of your early‑retirement spending depends on selling stocks when markets are down.
2. Integrating Bonds with RMDs and Roth Strategy
Because RMDs now generally begin at age 73 (and later at 75 for younger cohorts under SECURE 2.0), many affluent retirees have a window in their 60s and early 70s to proactively manage taxes.
Bonds influence this in several ways:
Placing taxable bond funds in IRAs and Roth accounts, while using municipals or taxable‑efficient equity ETFs in brokerage accounts, can help control current taxable income.
Thoughtful use of bonds in traditional IRAs can support Roth IRA conversions before RMD age, potentially smoothing lifetime tax brackets and mitigating future RMD spikes.
3. Watching Medicare IRMAA and Other Thresholds
Interest income from bond funds and ladders can increase your Modified Adjusted Gross Income, potentially triggering Medicare IRMAA (Income‑Related Monthly Adjustment Amount) surcharges on Parts B and D.
That doesn’t mean avoiding bonds—it means:
Thinking carefully about how much fixed income sits in taxable accounts.
Timing large realized gains, Roth conversions, or bond sales so they don’t all land in the same high‑income year.
As Scott Hurt, CFP®, CPA, puts it: “For many of our retired clients, the real battle isn’t just market risk—it’s tax and healthcare creep. A well‑designed bond strategy can help manage volatility and keep you below key tax and IRMAA thresholds, instead of accidentally tripping them.”
4. Role of a Fiduciary Planner
At Covenant Wealth Advisors, we help clients analyze their balance sheet, projected spending, tax picture, and risk capacity before we ever decide “how much in bonds.” The question isn’t “60/40 vs 70/30”—it’s how the fixed‑income portion can best support your specific goals over the next 30+ years.
What Risks Should You Understand Before Relying on Bonds?
Bonds carry several key risks—interest‑rate (price), duration, credit, inflation, and liquidity risk. Even U.S. Treasuries can lose value if sold before maturity. Understanding these trade‑offs is crucial so you don’t mistake “lower volatility” for “no risk,” especially when structuring bond funds versus individual bonds.
1. Interest‑Rate and Duration Risk
The SEC is explicit: when interest rates rise, prices of fixed‑rate bonds generally fall, and vice versa.
Interest‑rate risk is this inverse relationship.
Duration risk measures how sensitive a bond or fund is to rate changes; the higher the duration, the larger the price move for a given rate shift.
This is why long‑duration bond funds fell sharply when rates rose from their 2020 lows. If your “conservative” bucket is dominated by long‑duration exposure, you may be taking more risk than you realize.
2. Credit and Default Risk
Corporate and high‑yield bonds introduce the risk that issuers:
Miss interest payments.
Default entirely.
Become less creditworthy, causing prices to drop before maturity.
The SEC’s guidance on high‑yield bonds emphasizes that higher yields come with higher default and credit risk; for most retirees, that level of risk generally means high‑yield bonds are better viewed as a supplemental, higher‑risk holding rather than the core stability anchor of a portfolio.
3. Inflation Risk
If your bond income doesn’t keep up with inflation, your real spending power erodes. This is particularly important for long retirements that can easily span 25–35 years.
Tools to address this include:
TIPS (inflation‑linked principal and coupons).
A mix of stocks and real assets alongside bonds.
Avoiding over‑reliance on long‑term nominal bonds at low yields.
4. Liquidity and Call Risk
Some bonds and bond‑like instruments:
Can be called (redeemed early) if rates fall, leaving you to reinvest at lower yields.
May trade in thin markets, causing spreads to widen during stress.
Bond funds mitigate some of this by diversifying across many issues and providing daily liquidity—but that also means their prices fluctuate daily, and there is no maturity date at which you “get back to par.”
5. Behavioral Risk
Finally, there’s behavioral risk: selling at the wrong time. Selling bond funds at the bottom of a rate spike can lock in losses just before higher yields start to work in your favor.
Vanguard’s research underscores that, over longer periods, bond investors often benefit from reinvesting coupons at higher yields after rate increases, particularly in diversified indexes like the Bloomberg U.S. Aggregate Bond Index.
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Frequently Asked Questions
Many sophisticated investors still have basic questions about how bonds fit into retirement. The FAQs below address whether bonds remain useful, how simple rules of thumb like “$1,000 a month” actually work, how prominent investors like Warren Buffett view bonds, and what long‑term saving math looks like.
Are bonds still a good retirement investment?
Yes—used thoughtfully, bonds can still be a powerful retirement tool. They may:
Reduce volatility versus an all‑stock portfolio.
Provide more stable income for near‑term withdrawals.
Help manage sequence of returns risk in the first decade of retirement.
But the specific mix of bond types, maturities, and account locations should be tailored to your spending, tax situation, and risk capacity.
What is the $1,000 a month rule for retirement?
You’ll hear different versions, but a common shorthand is: how to lower your taxable income once you start taking required minimum distributions.
For every $300,000 in diversified retirement assets, a 4% initial withdrawal rate may support roughly $1,000 per month in today’s dollars, adjusted annually for inflation—if markets cooperate.
This is a rough rule of thumb, not a guarantee:
It doesn’t reflect your personal longevity, tax rate, or asset allocation.
It may be too aggressive or too conservative depending on when you retire and how flexible your spending is.
What does Warren Buffett say about bonds?
Warren Buffett has long argued that long‑term bonds at very low yields can be poor investments, calling them “terrible investments” when yields are low relative to inflation.
In his widely discussed 90/10 strategy, he suggested that most of his own family’s long‑term money be invested 90% in a low‑cost S&P 500 index fund and 10% in short‑term U.S. Treasuries—a very equity‑heavy mix that may be too aggressive for many retirees.
For affluent retirees, the takeaway isn’t “avoid bonds,” but:
Be cautious about long‑duration bonds at low yields.
Recognize that even Buffett keeps some portion in short‑term government bonds as a stabilizer.
How much is $1,000 a month invested for 30 years?
This depends entirely on your assumed rate of return. As a purely hypothetical illustration:
At 4% annual return, $1,000 per month for 30 years grows to roughly $694,000.
At 5%, about $830,000+.
At 7%, around $1.2 million.
These figures assume consistent contributions, no taxes or fees, and a smooth compound annual rate—none of which reflect real‑world volatility. They are not a promise of what your portfolio will earn, but they illustrate how time and compounding can work in your favor.
Conclusion
Bonds have not been “canceled” as a retirement investment. If anything, the sharp rise in yields has restored their ability to contribute meaningful income and diversification—provided you respect duration risk, credit quality, taxes, and your personal spending plan.
For affluent retirees, the real work is less about picking the “best bond fund” and more about designing:
A time‑segmented income plan.
A tax‑aware bond and cash structure that respects RMD age 73, future rule changes, and Medicare IRMAA thresholds.
A portfolio you can live with through both stock and bond market cycles.
If this feels like a lot to coordinate on your own, that’s normal.
Would you like our team to just do your retirement income and tax planning for you? Contact us today for a complimentary retirement roadmap experience.
About the author:
Chief Investment Officer
Andrew is the Chief Investment Officer for Covenant Wealth Advisors and a CERTIFIED FINANCIAL PLANNER™ practitioner. He has over 11 years of experience in the financial services industry in the areas of wealth management and financial planning for retirement.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible, no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.