Should You Consider Bonds for Your Retirement Savings — or Is It Too Late?
Written by
John Csiszar
Edited by
Jenna Klaverweiden
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Bonds are popular with many retirees, as they pay a regular stream of income and are considered more conservative than other investments. But their relationship with changing interest rates can make them more problematic than some investors might understand.
With the Fed slated to begin a campaign of interest rate cuts in September 2024, is it still worth considering bonds for your retirement savings — and is it too late? Here’s a look at how bonds and interest rates interact, what the interest rate environment looks like, and whether or not it’s a good time to add bonds to your retirement portfolio.
How Do Bonds and Interest Rates Interact?
Bonds and interest rates have an inverse relationship. When interest rates rise, bond prices fall, and vice versa.
If you owned a 10-year bond that paid 4% and market interest rates rose to 5%, your bond’s price would fall because investors would demand the higher-yielding bonds currently available in the marketplace. Similarly, if rates were to fall to 3%, your bond would be in more demand due to its higher yield, so its price would increase.
How Do Fed Rate Cuts Affect Bonds?
Although the Fed doesn’t directly control market interest rates, it does dictate the federal funds rate. This is the rate that banks charge one another for overnight loans. While this might not seem like something that affects average Americans, changes in the federal funds rate have an effect on nearly all market interest rates.
If the Fed cuts rates — as it has indicated it will do in September 2024 — banks could soon lower their rates on everything from credit cards to mortgage loans to high-yield savings accounts. This should help prop up bond prices.
How Have Bonds Performed in 2024?
Markets are forward-looking instruments. This means they often make moves ahead of the actual events that affect them. As the market has known for some time that the Fed will likely begin lowering interest rates in the second half of 2024, rates have already begun to fall, and bond prices have begun to rise.
In April 2024, for example, 10-year Treasury bonds were yielding about 4.74%, but that rate had fallen to 3.67% by Sept. 10, a significant move for bonds. Even though bonds suffered losses in the first half of the year, the 10-year Treasury has posted a year-to-date gain of 4.66%.
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Is This a Good Time To Buy Bonds for Your Retirement Portfolio?
While it’s true that bonds have made a major move upward in price since mid-2024, it’s likely not “too late” to buy bonds for your retirement portfolio. In fact, it might be a great time. For starters, even with the recent big move, 10-year Treasurys are up just a bit over 4% on a year-to-date basis, perhaps leaving room to run. And although some of the possible Fed rate cuts are likely already built into bond prices, if the Fed continues to cut into 2025, rates will continue to fall, providing support for further gains.
But regardless of how significant this round of potential rate cuts proves to be, you should construct a retirement portfolio with a long-term perspective. You’ve likely heard the adage that you shouldn’t try to time the stock market, and the same holds true with bonds and interest rates.
One popular strategy that helps negate the factor of changing interest rates is building a bond ladder. This involves buying bonds that mature every year for a set period, such as 10 years. With this scenario, if you had $100,000 to invest in bonds, you’d invest $10,000 in bonds maturing in one year, $10,000 in those maturing in two years, three years and so on, up to 10 years. That way, you’d have bonds maturing every year, giving you money to reinvest at the end of the ladder. If rates fall, your bond values will grow, and if rates rise, you’ll be reinvesting money at higher rates.
Should You Consider Bonds for Your Retirement Savings?
In a nutshell, here are some reasons bonds are popular with retirees:
- Safety of principal, particularly for government-issued bonds
- Fixed income payments until maturity
- Return of capital at maturity
- Less volatile than stocks
- Tax-free income, in some cases
- May provide capital gains, if interest rates fall and they are sold before maturity.
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