After a few years of rising interest rates and bond fund losses, the question I hear most often from people approaching retirement is some version of: do bonds even make sense anymore?
It is a fair question. For a long time, bonds were treated as the reliable, boring half of a portfolio. They provided income, they cushioned the blow when stocks fell, and they generally did what they were supposed to do. Then 2022 happened, and a lot of people watched their bond funds lose value at the same time their stock funds were falling. That experience understandably shook some confidence in the asset class.
But dismissing bonds entirely based on that experience would be a mistake. What happened in 2022 was the result of a specific and unusually rapid shift in monetary policy, not a permanent change in how bonds work. And the silver lining of that rate environment is that bonds now offer meaningfully better yields than they did a few years ago. If you are approaching retirement and looking for reliable income, that actually matters.
Here is how I think about bonds in the context of a retirement plan today.
Why Bonds Felt Different in 2022
The core mechanic of bonds is straightforward: when interest rates rise, existing bond prices fall, and when rates fall, prices rise. This is known as interest rate risk, and it is one of the most important things to understand about the asset class.
For most of the 21st century, interest rates were in a long-term decline. That created a tailwind for bond investors: not only were they receiving interest payments, but the value of their existing bonds was rising as rates fell. The 2022 rate environment reversed that dynamic sharply. The Federal Reserve raised rates faster than at almost any point in modern history, and bond prices dropped accordingly.[^1]
The experience was jarring, particularly for retirees and pre-retirees who had come to think of bonds as simply safe. But it is worth separating the performance of bonds during that specific period from the role bonds play in a retirement plan over the long term. Those are two different questions, and conflating them leads to poor decisions.
Higher rates are actually good news for anyone buying bonds today. You are locking in better yields than were available a few years ago, which is a meaningful advantage if you are building an income strategy for retirement.
The Role Bonds Play in a Retirement Plan
When I work through asset organization with clients, I think about bonds primarily in terms of what job they are doing in the portfolio. That framing matters because it changes how you evaluate them.
Bonds serve three main purposes in a retirement context.
Stability. Bonds, particularly high-quality government and investment-grade corporate bonds, tend to hold their value better than stocks during market downturns. That stability is not about earning the highest return. It is about having assets you can draw from without selling equities at a loss.
Income. Interest payments from bonds provide predictable cash flow. In a retirement plan built around an income floor, bonds can help close the gap between what guaranteed sources like Social Security cover and what your actual expenses require.
Sequence-of-returns protection. This is the one most people overlook. The biggest financial risk in early retirement is not a bad market in isolation. It is a bad market at the wrong time, specifically when you are actively withdrawing money. Bonds provide a buffer: when stocks are down, you draw from the stable portion of your portfolio and let equities recover. Without that buffer, you are forced to sell depreciated assets to fund living expenses, which permanently impairs the portfolio.[^2]
How to Use Bonds More Strategically
Given where rates are today and what retirement income planning actually requires, here is how I approach bonds with clients.
Focus on Quality and Duration
Not all bonds carry the same risk profile. High-yield or junk bonds behave more like equities than traditional fixed income, and they should not be treated as the stable portion of a retirement portfolio. For the stability role, I generally favor U.S. Treasuries and investment-grade corporate bonds.
Duration, which measures how sensitive a bond is to interest rate changes, is also important. Longer-duration bonds will swing more in price as rates move. For clients in or near retirement, shorter to intermediate duration bonds tend to be more appropriate. They offer reasonable yields without the price volatility that comes with longer maturities.[^3]
A bond ladder, where you hold bonds maturing at staggered intervals, is one of the most practical approaches for retirees. As each bond matures, you reinvest the principal at current rates. This reduces the impact of any single rate environment and provides predictable cash flow at regular intervals.[^4]
Build an Income Floor
One of the most effective uses of bonds in retirement is to help establish a predictable income floor. Social Security and any pension income form the foundation. Bonds can supplement that floor by generating the additional income needed to cover essential expenses reliably.
For example, if your essential expenses are $72,000 per year and Social Security covers $52,000, you need to generate another $20,000 predictably. A portion of your bond portfolio can be structured specifically to meet that gap, which allows your equity portfolio to take on more growth-oriented risk without putting your basic living expenses at risk.
Keep a Cash Buffer
Before bonds even come into play, I typically recommend keeping one to three years of living expenses (net of guaranteed income) in cash or cash equivalents like money market funds or short-term Treasury bills. This is your first line of defense against market volatility. If stocks drop significantly, you draw from cash rather than selling anything, giving your longer-term investments time to recover.[^5]
The cash buffer and the bond allocation work together. Cash handles the near-term. Bonds handle the medium-term. Equities handle the long-term. Each piece has a defined job.
Think About Where You Hold Bonds
Tax placement matters more than most people realize. Interest income from bonds is taxed as ordinary income, which can be higher than long-term capital gains rates. That makes tax-advantaged accounts a natural home for bonds in many cases.
One important note: I generally prefer to hold the most growth-oriented assets in Roth accounts, since those grow and are distributed tax-free. Bonds can work well in a traditional IRA or 401(k) depending on your overall tax picture. Whether bonds belong in a Roth account depends on your risk preferences and the composition of your overall portfolio. Municipal bonds, which generate interest exempt from federal income tax and sometimes state tax as well, can be a good fit for taxable accounts if you are in a higher bracket.[^6]
What to Do With This Information
If you are within ten years of retirement and have not revisited your bond allocation recently, here are a few practical steps worth taking.
First, understand what you actually own. Many people hold a single broad bond fund without knowing its average duration, credit quality, or yield. If your bond allocation is primarily in a long-duration fund, you are carrying more interest rate risk than you may realize.
Second, think about what job your bonds are doing. Are they providing income? Stability? Both? If you cannot answer that question clearly, the allocation may not be intentional enough to serve you well in retirement.
Third, consider whether a bond ladder makes sense for your situation. For clients who want predictable cash flow and lower sensitivity to rate changes, individual bonds with staggered maturities can be a more effective approach than a bond fund.
Finally, look at where your bonds are held and whether that placement is tax-efficient given your overall income picture. This is one of those details that is easy to overlook but can add up meaningfully over time.
The Bottom Line
Bonds are not obsolete in a retirement portfolio. Their role has shifted from a simple income generator to a more deliberate tool for stability, income floor construction, and sequence-of-returns protection. The current rate environment actually makes them more attractive than they have been in years. The key is being intentional about which bonds you hold, how long they mature, where you hold them, and what specific job they are doing in your plan.
References
[^1]: Board of Governors of the Federal Reserve System. "Open Market Operations." 2024. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
[^2]: Kitces, Michael. "Managing Sequence of Return Risk With Bucket Strategies Vs. A Total Return Rebalancing Approach." Nerd's Eye View. 2012. https://www.kitces.com/blog/managing-sequence-of-return-risk-with-bucket-strategies-vs-a-total-return-rebalancing-approach/
[^3]: Vanguard. "Bond duration: What it is and why it matters." 2023. https://investor.vanguard.com/investor-resources-education/fixed-income/bond-duration
[^4]: FINRA. "Bond Ladders." 2023. https://www.finra.org/investors/insights/bond-ladders
[^5]: Pfau, Wade. "The Case for Holding Cash in Retirement." Retirement Researcher. https://retirementresearcher.com/the-case-for-holding-cash-in-retirement/
[^6]: Internal Revenue Service. "Publication 550: Investment Income and Expenses." 2024. https://www.irs.gov/publications/p550
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