Why Bonds Should Be Part of Your Retirement Portfolio

Explore the resurgence of bonds as an attractive investment option for your retirement portfolio, with the 10-year Treasury yield its highest since 2008. Micheal Baum CFP®, RICP®, discuss how bonds can provide diversification, stability, and regular income in retirement portfolios, while also examining tax implications.

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Transcript

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We started in the market update, talking a lot about stocks and the good news there. But we have good news for investors who are interested in bonds and the bond market, as well as they're finally offering attractive interest rates and can play an important role in most retirement portfolios. The ten year treasury yield has risen to a respectable 4.25%, which is a notable rebound from the shockingly low level of 0.55% in 2020. So just think about, you know, 0.55% is not getting anybody excited. It's not even really keeping up with inflation in most instances. So four and a quarter. Much more attractive, much more exciting. In fact, the ten year treasury yield hasn't been this high since the onset of the great financial crisis in 2008. Wow. That is quite a change. Now, explain what this means for investors. Well, the treasury bond that I just cited is typically the benchmark off of which other bond interest rates are set. So, as a result, the entire universe of bonds is offering higher yields than were available just a few years ago. For example, corporate bonds can have interest rates that range from 5.5% to 7.5%, depending on credit quality. And municipal bonds can yield north of 4%. All right. So again, these are attractive rates, and I'm sure some of our listeners are now wondering why they should consider bonds when stocks have traditionally provided higher returns. What's your take on that? Well, it's a good question. Its true that over the long term, stocks have been the surest way to grow an investment portfolio and beat inflation. But bonds can play a crucial role, too. So besides providing interest income along the way, bonds offer diversification and act as a shock absorber in investment portfolios. Every so often the market experiences corrections, or even a bear market. So, for example, in 2022, the S&P 500 fell by 24.5%. A portfolio that includes a mix of stocks and bonds may not fall as sharply as a portfolio that only owns stocks. So bonds can provide important stability during those volatile times. All right, so that makes sense. It sounds like bonds can help manage risk in a portfolio, but are there any other benefits to including bonds? Yeah, absolutely, Gary. So bonds also provide regular interest income that investors can use to live off of instead of needing to sell stocks that may be depressed after a market downturn, or this income can be used to actually buy more stocks when prices are low. Its worth noting that as of June 2024, the S&P 500 has climbed more than 50% since the 2022 bear market, demonstrating how market downturns are often followed by rallies. And that's where the bond portion of your portfolio can help sustain you during those times when the market, when the stock market is down or actually provide income that you can use to buy low. All right, let's talk about the tax implications of bond investments. What do you got for us? Of course, it's important to be tax efficient with bond investments. So the interest paid by investment grade corporate bonds gets taxed at local, state, and federal levels. So they should typically be held in a tax advantaged account like a 401K or an IRA. Treasury bonds, on the other hand often subject to federal income tax, but exempt from state and local taxes. So you get a little bit of a break there and then. Municipal bonds are often not taxable at the federal level and may also not be taxable at the local or state level. So there's some different tax implications to different types of bonds that you want to be aware of and the ideal placement what types of accounts you hold, those bonds in is something to think about and also depends on your individual tax situation, which is why it's crucial to work with a financial advisor who can help you optimize that portfolio structure. Again, great information, Mike. And as we wrap it up here, what would you say to listeners who are considering adding bonds to their retirement portfolio? Right. So now's an excellent time to review your portfolio in general and consider the role that bonds can play. I mean, most of portfolios will have at least some component of bonds unless you're 100% risk on and in equities. But with yields as attractive as they are right now, the potential for that extra stability bonds can be a valuable component of a well diversified retirement portfolio. The right mix of stocks and bonds, of course, is going to depend on your individual circumstances, including your age, your goals, your risk tolerance, and your investment time horizon, which is how long you anticipate you have until you'll need to rely on those funds. For more information regarding wealth management and customized financial planning with Weiss, Hale & Zahansky Strategic Wealth Advisors, please visit whzwealth.com Weiss, Hale & Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial network member FINRA SIPC, a Registered investment advisor, fixed insurance products and services offered through CES Insurance agency. They practice at 697 Pomfret Street Pomfret Center, Connecticut 06259 392-A Merrow Road, Tallinn, Connecticut 06084 They can be reached at 860-928-2341 Weiss, Hale & Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals while providing absolute confidence and unwavering partnership for life.