Many companies featured on Money advertise with us. Opinions are our own, but compensation and
in-depth research may determine where and how companies appear. Learn more about how we make money.
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
Q: I am leaning toward buying individual bonds and creating a bond ladder instead of a bond fund for my retirement portfolio. What are the pros and cons?—Roy Johnson, Troy, N.Y.
A: If you’re worried about interest rates rising—and many people are—buying individual bonds instead of putting some of your retirement money into a bond fund has some definite advantages, says Ryan Wibberley, CEO of CIC Wealth in Gaithersburg, Maryland. There are also some drawbacks, which we'll get to in a moment.
First, some bond background. Rising interest rates are bad for fixed-income investments. That’s because when rates rise, the prices of bonds fall. That can cause short-term damage to bond funds. If rates spike and investors start pulling their money out of the fund, the manager may need to sell bonds at lower prices to raise cash. That would cause the net asset value of the fund to drop and erode returns.
By contrast, if you buy individual bonds and hold them to maturity, you won't see those daily price moves. And you’ll collect your interest payments and get the bond’s face value when it comes due (assuming no credit problems), even if rates go up. So you never lose your principal. “You are guaranteed to get your money back,” says Wibberley. But with individual bonds, you will need to figure out how to reinvest that money.
One solution is to create a laddered portfolio. With this strategy, you simply buy bonds of different maturities. As each one matures, you can reinvest in a bond with a similar maturity and capture the higher yield if interest rates are rising (or accept lower yield if rates fall). All in all, it's a sound option for retirees who seek steady income and want to protect their bond investments from higher rates.
The simplest and cheapest way to create a bond ladder is through government bonds. You can buy Treasury securities for free at TreasuryDirect.gov. You can also buy Treasuries through your bank or broker, but you'll likely be charged fees for the transaction.
Now for the downside of bond ladders: To get the diversification you need, you should hold a mix of not only Treasuries but corporate bonds, which can be more costly to buy as a retail investor. Generally you must purchase bonds in minimum denominations, often $1,000. So to make this strategy cost-effective, you should have a portfolio of $100,000 or more.
With corporates, however, you'll find higher yields than Treasuries offer. For safety, stick with corporate bonds that carry the highest ratings. And don't chase yields. "Bonds with very high yields are often a sign of trouble,” says Jay Sommariva, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.
An easier option, and one that requires less cash, may be to build a bond ladder with exchange-traded bond funds. Two big ETF providers, Guggenheim and BlackRock’s iShares, now offer so-called defined-maturity or target-maturity ETFs that can be used to build a bond ladder using Treasury, corporate, high-yield or municipal bonds.
Retire With Money
Sign up to receive key retirement news and advice.
Of course, bond funds have advantages too. You don't need a big sum to invest. And a bond fund gives you professional management and instant diversification, since it holds hundreds of different securities that mature at different dates.
Funds also provide liquidity because you can redeem shares at any time. With individual bonds, you also can sell when you want, but if you do it before maturity, you may get not get back the full value of your original investment.
There’s no one-size-fits all strategy for bond investing in retirement. A low-cost bond fund is a good option for those who prefer to avoid the hassle of managing individual bonds and who may not have a large sum to invest. “But if you want a predictable income stream and protection from rising rates, a bond ladder is a more prudent choice,” Sommariva says.
Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.
Read next: Here's the Retirement Income Mistake Most Americans Are Making
FAQs
Keep Maturities to 10 Years or Less: If you do decide to pursue higher rates with longer maturities, make sure that they're 10 years or less. Longer-term bonds are much more sensitive to the increases in interest rates that will lower the market value.
Why are my bond investments losing money? ›
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Can you lose money on an investment bond? ›
Investments in Fixed income are generally classified as defensive but are not completely risk free. You can lose money if you leave a bond investment before the maturity date. You also need to consider the borrower's creditworthiness and its ability to meet its future financial obligations.
What are the ways to lose money on bonds? ›
You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments. When you buy or sell a bond, the commission is built into its price. The investment firm marks up the price of the bond slightly to cover the costs of selling the bond.
How can I save money on bonds? ›
Go to www.treasurydirect.gov and use the Savings Bond Calculator. Each year, buy as much as $10,000 of electronic Series I, $10,000 of electronic Series EE, and $5,000 of paper Series I. Earn interest for up to 30 years. Redeem anytime after 12 months.
What are bonds expected to do in 2024? ›
For bond investors, these conditions are nearly ideal. After all, most of a bond's return over time comes from its yield. And falling yields—which we expect in the second half of 2024—boost bond prices. That boost could be especially big given how much money remains on the sidelines, looking for an entry point.
Will bond funds recover in 2024? ›
As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.
What is the safest bond to invest in? ›
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
What happens to bonds during a recession? ›
Bonds, particularly government bonds, are often seen as safer investments during recessions. When the economy is in a downturn, investors may shift their portfolios towards bonds as a "flight to safety" to protect their capital. This shift increases the demand for bonds, raising their price but reducing their yield.
What is the 10 year rule for bonds? ›
If you withdraw in the 10th year, one-third of your bond income is taxable, with a 30% tax credit applicable. Any withdrawals after 10 years offer the most significant tax benefit, as all income from the bond is tax-free.
If you own shares of a bond ETF, you might have a sinking feeling seeing the market value of your investment dip as interest rates increase. However, it's worth noting that rising interest rates can't last forever, and bond ETF prices are likely to recover once rates go lower.
Should I keep my money in bonds? ›
We suggest investors consider high-quality, intermediate- or long-term bond investments rather than sitting in cash or other short-term bond investments. With the Fed likely to cut rates soon, we don't want investors caught off guard when the yields on short-term investments likely decline as well.
Can you live off of bonds? ›
Most People Cannot Live Off Interest When They Retire
Unfortunately for most people using just interest from bonds won't be enough. Interest rates are just too low compared to inflation. As a simple calculation assume you have $80,000 a year in annual expenses in retirement.
How much is a $100 savings bond worth after 20 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
And, more importantly, are they the right choice for your needs? Traditional savings and money market accounts allow you to earn interest and access your money right when you need it. Bonds, on the other hand, grow slowly in value and are worth the most after 20 to 30 years.
What is the best way to invest in bonds? ›
Buying bonds directly from the U.S. Treasury: The U.S. federal government allows you to buy Treasury bonds directly through a service called Treasury Direct. This method allows you to avoid a middleman and, thus, avoid fees you might normally pay a broker.
Why are my bonds falling? ›
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Will bond funds ever recover? ›
We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.
Is now a good time to invest in a bond fund? ›
He says, "Interest rates are now back to almost 30-year norms. Whether you want to build a portfolio with Treasury, municipal, investment-grade corporate, or high-yield bonds, you can get respectable yield and you could do well as rates plateau. You could do even better when interest rates head back down again."
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
