With cash paying higher yields than most bonds, retirees have started to ask if they should get rid of bonds. Here’s one such email:
Since bond funds (BND) have done nothing the last ten years, what would be your thoughts on someone (retired) setting 3 years worth of living expenses aside (cash, CD’S, MM, etc.) and investing the remainder in equity index funds.”
In this video I’ll explain why bonds are a better, long-term investment than cash, particularly for those in retirement.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
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REVEALED: Best Investment During Inflation
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Cash vs Bonds in Retirement: Weighing Your Options for Financial Security
Planning for retirement involves making many crucial financial decisions, among which is determining the ideal mix of cash and bonds in your retirement portfolio. Both cash and bonds have their own benefits and drawbacks, and understanding the differences can help you navigate the path to a secure retirement.
Cash, as the name suggests, includes any liquid assets you hold, such as savings accounts, checking accounts, money market accounts, and certificates of deposit. Bonds, on the other hand, are fixed-income securities that represent a loan made by an investor to a borrower, typically a corporation or government entity. They offer fixed interest payments over a specified period, and the principal is repaid at maturity.
Before deciding how to allocate your retirement funds between cash and bonds, it is crucial to consider a few key factors.
1. Risk tolerance: Cash is considered less risky as it does not fluctuate in value, making it an ideal option for individuals who prioritize security and are risk-averse. On the other hand, bonds can be subject to price volatility and changes in interest rates.
2. Income needs: Assessing your income needs during retirement is crucial for proper financial planning. Cash holdings are readily accessible, allowing you to withdraw money as needed. Bonds provide a regular fixed income stream, which can be particularly beneficial for retirees who require predictable income to cover living expenses.
3. Inflation protection: Inflation erodes the purchasing power of your savings over time. While cash does not offer protection against inflation, bonds may provide a hedge. Treasury Inflation-Protected Securities (TIPS) are designed to maintain the value of the principal and adjust the interest payments based on inflation.
4. Diversification: Diversifying your investment portfolio is fundamental for mitigating risk. Allocating a portion of your retirement funds to bonds can provide diversification benefits, as bonds tend to perform differently compared to cash. This can help offset potential losses during market downturns and preserve your capital.
Once you have considered these factors, striking the right balance between cash and bonds in your retirement portfolio is crucial.
For retirement emergency funds or short-term expenses, maintaining a portion of your savings in cash is wise. Experts recommend keeping at least six months’ worth of living expenses readily available in cash to cover unforeseen expenses and provide peace of mind.
Regarding bond allocation, it is essential to consider your age, investment goals, and risk tolerance. A common rule of thumb is to subtract your age from 100 to estimate the percentage you should allocate to bonds. For instance, if you are 60 years old, around 40% of your retirement portfolio could be allocated to bonds. However, this is a general guideline, and individual circumstances should be taken into account.
Lastly, it is crucial to review and adjust your cash and bond allocation periodically. As you progress through retirement, your investment objectives may change, and rebalancing your portfolio will ensure that it aligns with your new goals and risk tolerance.
In conclusion, determining the ideal mix of cash and bonds in your retirement portfolio can be a complex decision. Balancing the need for liquidity, income, inflation protection, and diversification is crucial for achieving long-term financial security. By carefully evaluating your circumstances and consulting with a financial advisor, you can create a retirement portfolio that supports your unique needs and goals.
CASH in Portfolio Visualizer is meaningless. It would need to use highest yielding CDs and online savings accounts across maturity durations found from the search sites such as bankrate etc, and ignore CDs from bank of America at 0.001%
EVERY TIME THIS GUY SCROLLS **BND** on the screen he ALWAYS QUICKLY FLYS BY THE ******NEGATIVE 13% return for 2022. This is NOT by mistake. He INTENTIONALLY MISLEADS. I WARNED his viewers about staying in BND early in 2022 and he DEFENDED staying in it.
Now it might actually make sense to INVEST some of that CASH back into the BND I sold January 22.
Thank you Rob. Good one
Hi Rob–Hope I'm not suffering from recency bias: BND (our only bond fund and 90% of fixed assets) has let us down twice. Last year of course and in the midst of COVID. During March 2020 reached rebalancing bands simultaneously with bond implosion. Rebalanced anyway but not fun. These facts seem to argue for fixed assets which won't implode at exactly the most inopportune time–the Buffett formulation for holding cash. Still holding on to BND in hopes of better times ahead. At 76 we will not make wholesale changes but am evaluating whether or not to migrate to more cash by the time we hit 80. Can't make that much difference to terminal wealth and would provide for more certainty under almost any circumstance. All the best
Cash vs bonds is a horrible option…what about equities? Don't do click bait Rob.
Thank "God" for YouTube and highly articulate, informative nerds like Rob Berger! 🙂
Lately I've been considering buying dividends stocks for retirement, I've set-asides $450K to invest but along the line, I get cold feet, maybe because I'm a rookie and have no idea what I'm doing, please I could really use some guidelines.
Serious question, what is the advantage of buying a bond “fund”? Why not just buy bonds directly? Of course you have to reinvest them when they mature but that takes like 2 minutes. That way you can always choose the best interest rate. Only advantage I can think of is that someone is reinvesting it for you and you don’t have to worry about it.
Good video Rob. Could you talk about the possibility of making money on bonds if inflation and rates come down. If fed rate come down won’t the value on bonds go up? Thx
I am just retired at 65 and have a fairly good understanding of the economics of bonds, equities, and cash. Much of the theory discussed seems to be like shooting a bullet. Pull the trigger and the portfolio is locked in as far as aiming it. Pull the trigger and whatever will be, will be.
At this stage of my retirement I am still interested in managing the portfolio, more like flying an airplane with corrections along the way.
My thinking on cash and bonds is hold enough to survive a stock market swing such as we have just experienced. I am thinking 3 to 5 years of living costs. Any thoughts on looking at the portfolio from this angle? Of course as I approach 80 years old I probably don't want to be worrying about managing the portfolio and will revert to "Bullet" mode shoot and forget. 🙂
Hi Rob, could you possibly advise me on how to allocate my 401k investments over a 1:1 session ( paid ) of course
My spouse and I are semi-retired 30 somethings living partially off of our portfolio. The portfolio is 80/20 stocks/bonds, with all of the bonds being in T Bills right now. The stocks are split about 60/40 US/International. Is this a good allocation for our situation? We still have some residual income streams, so right now our withdrawal rate is tracking pretty low, so far about 2% for 2023. Would be interested to hear your take if this is a good portfolio allocation for our situation.
How about put the money in high yield savings until the interest rate goes down then move it elsewhere? Zero risk and ultimate flexibility to withdraw whenever you want. Seems like regional banks are gonna have to keep the high yield interest rates for awhile due to a few closures and bad press.
What do you think of buying treasuries and then leveraging them to sell put options for income? I did it before with equities, but started getting margin calls in 2022 as the market fell. With treasuries I make 5+% plus no margin calls.
Sometimes I have to laugh at the lack of willingness people have to do some real investing in real assets. I've bought multiple homes that I rent out and managed myself for a dozen years and have since handed them over to a property manager. I can sleep at night knowing the rent will come 99 pct of the time and the value of the homes will normally rise in price with inflation. I can also raise the rents with inflation.
Food for thought: Place a sizable portion of your capital/savings in fixed-income securities like treasury bills, corporate bonds, government securities, debentures and let it grow. It will take you far I promise.
I appreciate your video. I hold vwenx as my primary retirement fund. It is essentially 65% equity and 35% bonds. Do you think it would be better to hold an etf like schd for the equity portion and add bnd as the bond portion in lieu of holding all in vwenx? I hold a large portion in a taxable account. Let me know your thoughts. Thanks.
Thanks for the nice analysis. Thanks for the Sunday newsletter, also. It's one of the few newsletters I look forward to receiving. I like the links to your videos that I may not have gotten around to watching when notified earlier in the week. Fie on the comment spammers!
I'll save you some time, don't invest in bnd or anything like it when rates are going up. Money market funds and cds are paying 4.5% and higher. Fed is nearing rate increases then move to bnd and similar funds.
New subscriber. Don't Bond Funds change their yield on a monthly basis? You stated the BND will pay 4% for as long as you hold it. I don't think that's true. Also, is it better to own actual bonds vs. bond funds? Why do you own bond funds vs actual bonds? Thanks. By the way, I just subscribed to NewRetirement and going thru the classes right now.
So instead of a pure bond fund, I hold about 28% of my portfolio in VWIAX. This is also my 3-8 year bucket, with up to 3 years in cash and short term T-Bills, and the 8+ year bucket or about 63% in equities. Any opinion in using VWIAX in this manner instead of BND?
I appreciate your approach to teaching.. To my understanding this just proves how much we need an edge as investors because playing the market like everyone else just isn’t good enough, we just need to hold onto our hopes and wait to see how things turn out because market movements are almost always unpredictable. In my portfolio, I'm noticing more red than green and my retirement is edging closer by the day.
This is such a great analysis and perfect level of explanation. I learn more about finance from listening to Bob than anyone else combined. I really appreciate these videos Bob. Quote of the day from this video: "and the answer to that question is……… nobody knows!"
Are you using bond and t bills terms interchangeably? Are you calling cash the same as a CD? Cause it is throwing me off when listening to the video
Interesting topic(s). I hold about 80% equities and 20% fixed income assets. I went a little over on equities because I have a guaranteed pension and social security will also be risk-free income. For my fixed income assets I currently have it all in 1 year CDs paying over 5.25% and some in I-Bonds we bought last year. I am out of bond funds until we get interest rate increases leveled out. Bonds have not done well the 1+ years and rates may continue to go up until inflation is under control. Bond funds will continue to suffer as the fed raises rates. I felt pretty safe taking 1 year CDs and may get back into bond funds if rates have level out in the next 9 months or so. That could be timing the market, I guess, but I felt good taking a guaranteed 5.25% for a year.
Bonds aren't Bond Funds. I've found them to be quite different.
Rob, you don't mention or factor in RISK between cash and bonds…. shame on u. Only kidding, You're a great asset to us.
I'm a little confused about why you hold 1 yr in cash. Hopefully you can help. If I have 1 yr in cash when am I using it? If I pull out of cash for monthly expenses, am I continually selling Bonds to replenish cash, and if so, why not just have Short Term bond funds and sell that monthly for expenses? Thank you.
Bob: as a general guide, as we enter retirement (mid 60’s) and beyond:
-What portion (%) of my ASSETS should be INVESTED (stocks, bonds, real estate, etc) and what portion should be in CASH or near cash (MM) accounts?
-How would this ratio change every 1, 5 or 10 years?
-Parallel to that how should I allocate my INVESTMENTS between Bond and Equity/Real Estate (exclusive of home)?
-How would the portion of my INVESTMENTS in DIVIDEND PAYING EQUITIES change in the EQUITY portion of my INVESTMENTS?
Thank you,
A new Subscriber.
Hello Bob, my daughter is 21 years old and I would like to help her with her investing. We are thinking 70% in S&P 500 index fund, 20% international market index fund, 10% in US bond index. My question is that does she really need to invest in bond market at young age? Or invest all in stock? Thank you so much,
Gurevich
If you used a low penalty rolling 3-5 year CD ladder it would have outperformed a cash fund and the bond funds. Cash funds through brokerage houses are poor alternatives