Individual Bonds vs Bond Funds – Which is Better for Retirees?

One of the most popular options for retirees is to invest in bonds. But should you buy individual bonds or a bond mutual fund? Which is better?

In this video, we’ll take a closer look at the pros and cons of each option so you can make an informed decision.

Individual Bonds vs Bond Funds – Which is Better for Retirees?

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Full transcript:


Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
One of the most important questions you’ll need to answer in retirement is how to invest your money to ensure it lasts your lifetime. Investing in bonds is a popular option for retirees. Should you invest in individual bonds or bond mutual funds, which is better? Today, we’re going to look at the pros and cons of each so you can make an informed decision. Hey, there, it’s Anthony and Alex with One Degree Advisors and we help you gain confidence in your retirement. So Alex, knowing the best way to create income in retirement, it’s a really important question. And it can be a challenge. There are a few key differences between individual bonds and bond mutual funds, though knowing these differences is really important. So can you tell us about individual bonds first?

Alex Okugawa 0:44
Individual bonds are debt securities typically issued by governments or corporations. And when you buy an individual bond, you’re essentially lending your money to the company or government who in turn agrees to pay you an interest rate along the way, and then return that principal amount at your maturity. Now, one of the main benefits of an individual bond is certainty, they offer a fixed rate of return, and you know when to expect to get your principal payment back.

Anthony Saffer 1:16
So and there are some drawbacks to individual bonds. I mean, one can just be the liquidity of how easy it is to sell. Or if you are able to sell it on a brokerage, are you taking a major discount between that bid and ask getting a lower price on it.

Alex Okugawa 1:29
Plus, the other thing is that you’re only guaranteed to get that principal back if you do hold it to maturity. I mean, if you need the money earlier, you risk not getting it all back. And then the other thing too is once that bond matures, what are you going to do with the money next, right? You have to think about, well, where am I going to invest this money next, which for a lot of folks, they just don’t want to deal with that extra hurdle every single time the bond matures.

Anthony Saffer 1:50
Yeah, there’s definitely a where you have to stay on top of it. And a lot of people don’t realize that if you sell it before maturity, then you possibly could get less. Okay, so let’s talk about bond mutual funds.

Alex Okugawa 1:58
Bond mutual funds are simply like a bundle of individual bonds all wrapped up. And your performance is simply based upon the performance of all the underlying bundle of bonds. Now, one of the main benefits of a bond fund is that it offers diversification. And this is because a bond fund is invested in multiple bonds. And you can spread it out over a variety of issuers, which can help minimize your risk. The other thing is, typically, bond funds are easier to buy and sell, which makes using them to manage a portfolio and manage the risk a lot easier, and it can give you better control.

Anthony Saffer 1:58
There are some other downsides to bond mutual funds as well, or even if we’re talking about ETFs, one could just be the cost, the expense ratio of that management that goes into it, you do have to compare if you’re paying a cost for the individual bonds, versus the expense ratio and a mutual fund, it’s important to compare those.

Alex Okugawa 2:57
The other thing is that bond funds don’t have a maturity date, right? It’s so it’s a little bit less certain than an individual bond, which again, that’s sometimes why people like that individual bonds because they do get some of that certainty.

Anthony Saffer 3:10
So let’s get to the punch line, which is better?

Alex Okugawa 3:12
I mean, it really depends on what you need for your specific situation, which again, I know, it’s like not what everyone’s looking for, but these are all just tools, and you have to use your tool in the right way. So an individual bond can be a great choice if you have a specific outcome that you’re trying to target. And I’ll just give you an example. Let’s say you had $100,000. And you need this $100,000, for let’s just say, a construction project in 12 months. That could be a case where an individual bond makes a lot of sense, you have a defined outcome and you’d have a defined time period and when you need the funds. On the other hand bond funds can be a good choice when you don’t have a specific timeframe or end date. But you need to manage risk, you need to create systematic income and honestly, you just need something that is going to help make that easy for you.

Anthony Saffer 4:03
Yeah, there really is no one size fits all. And we do have our opinions on it. Most of the costs and bond ETFs especially certain mutual funds, they’ve come down so much that getting that diversification. And if you’re not after that specific timeframe, we do tend to lean towards funds. We recorded a video previously talking about the bond losses of 2022 they were historical in nature. I posted a video on that and people can watch that above. Again, it’s Anthony at One Degree Advisors and if you’d like to learn more about how we can help you gain confidence in your retirement, please go to

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