How to Use Bonds Effectively for Retirement Income

Stocks and bonds going down in 2022 might still be fresh in your mind and now we’ve seen multiple banks closed by regulators causing nervousness over cash savings. Is anything safe?

We want to help you sleep good at night so we are going to address how to invest based on when you need your money. How should you allocate between cash, bonds and stock? And why each of these are important to your retirement plan.

How to Use Bonds Effectively for Retirement Income


Full transcript:


Anthony Saffer

Anthony Saffer 0:00
Banks got burned when depositors started withdrawing their money. The primary issue is that banks had invested in long-term bonds for money that was needed now. Today we’re going to discuss why this was a problem, how you could unknowingly be making the same mistake as the banks in your retirement investments, and how a simple change can reduce this common risk to your retirement income. Hey there, it’s Anthony with One Degree Advisors, and we help you gain confidence in your retirement.

A few banks, including Silicon Valley Bank were closed by regulators after deposits started withdrawing their money in droves. Those bank runs that happened. So, what was notable here is that the banks had generally not invested in low-quality assets, they invested in bonds issued by the US government, that’s about as safe as you can get by most standards. The problem was that they invested in bonds that were still years away from maturity.

We posted a video recently called bank failures, what retirees should know, and what to do now, which will post in the notes if you’d like to get caught up. And by the way, if you’re not subscribed to our channel, we’d love to have you subscribe, so you can stay up to date on topics that will help you gain confidence in your retirement. So, here’s the thing. If you’re retired and taking income from your investments, you could be making a similar mistake as the banks by investing in long-term investments for short-term income needs. I want to show you why this is a problem and how you can also easily fix it.

First, a quick refresher on how bonds work. So you know that the Federal Reserve has increased interest rates at the fastest pace, in decades. It’s been quite dramatic. So what happens is when interest rates increase as they have over the last year or so, bond values decrease, we call this interest rate risk. And that may seem counterintuitive. But the reason for this is, if you or even the bank is holding a bond paying, let’s say 1%. But it doesn’t mature for another 10, 20, or 30 years. But meanwhile, new bonds, let’s say increase their interest by 2%. Investors on the open market will only buy your 1% Bond if they can buy it at a significant discount. In other words, the value is dropped, at least for now until the bond matures back to its face value.

That’s where the banks got into trouble because they had to sell these long-term bonds at substantial discounts because they needed the cash today to pay depositors. So when you’re taking retirement income, there are some similarities and some differences to the banks. So we don’t have time to expand too much on this. But the main difference in this analogy is your own bank, you’re really not at the mercy of other people deciding when to withdraw money, but the concepts are the same, in that you really don’t want to be in a position to be forced to sell your assets for regular income. Or perhaps you have a home project that’s coming up, and you don’t want to sell those at a significant discount when you need the money.

Here is a solution. For money you need in the near term, you want to use short-term maturing assets, you want cash or bonds that will mature quickly rather than 10, 20, or 30 years down the road. And you may have heard this in relation to stocks, which are volatile, you don’t want to be forced to sell when the stock markets are down. So yes, you do need some stocks or real estate for long-term growth. But you don’t want to be forced to sell those for near-term income. And it’s really similar with your bonds. Take your income from short-term conservative assets. Cash is the ultimate short-term asset. But bonds also have various maturities like one two or three years and even mutual funds or ETFs can have a duration, which can give you an idea of the maturity length and the sensitivity to interest rates.

Here’s an example and it’s not an endorsement for this fund, but it gives you an idea that this fund has a relatively short duration, in this case nearly two years. So you may choose to have enough cash for six months to two years, and then layer funds with various maturity lengths such as this on top of that. We recently posted a video that dives deeper into the best places to invest your retirement money, and how those decisions have a lot to do with your timeframe for when you need the money. You can see that above or in the notes below. Thanks for watching and please drop a comment about how you use bonds in your retirement portfolio. And if you’d like to learn more about how we can help you gain confidence in your retirement, please visit us at

Transcribed by

The One Degree Blog

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