Individuals saving for retirement usually use a variety of investments to accumulate funds over time. This can include stocks, mutual funds and cash accounts. In some instances, Treasury bonds (T-bonds) are added to the portfolio as a way of decreasing the overall risk.
Investopedia’s recent article asks “Is a Treasury Bond a Good Investment for Retirement?” The article says that those benefits don't make these instruments equally appropriate for all investors as a significant part of their retirement portfolio. A big factor is the investor's age when buying the bond.
The return on most T-bonds is tied to the five-year Treasury rate. Many have a lengthy term. Therefore, T-bonds offer a low annual return—about 3% in recent years. As a result, the returns on T-bonds are hardly keeping pace with inflation, which has been in the 2% range. Those earnings also are less than those for less conservative investments, like the stock market, which have yielded many times the returns for T-bonds over time.
Even so, there's still a small space in a retirement account of a young investor for the safety and steady interest payments provided by T-bonds.
The amount of T-bonds one should consider having in a portfolio, depends on factors such as your level of comfort with risk. However, a rule of thumb is that investors should formulate their allocation among stocks, bonds and cash by subtracting their age from 100. The result shows the percentage of a person’s assets that might be invested in stocks, with the rest spread between bonds and cash. So with this formula, a 25-year-old should consider holding 75% of their portfolio in stocks and just 25% in cash and bonds.
As you near or begin retirement, adding bonds and other safer investments as a majority of your retirement portfolio can be wise. With their consistent interest payments and guarantee by the federal government, T-bonds can offer a great income stream after the paychecks end. T-bonds are available in shorter terms than traditional savings bonds, or EE bonds, and can be staggered to create a continuous stream of income for retirement.
There’s one type of Treasury bond that even offers a measure of protection against inflation and its effects on the buying power of your portfolio.
These inflation-protected T-bonds are called I bonds. They have an interest rate that combines a fixed yield for the life of the bond, with a portion of the rate that varies according to inflation.
Reference: Investopedia (June 4, 2019) “Is a Treasury Bond a Good Investment for Retirement?”