Retirement investing used to be relatively straightforward. Retirees in the 1950s and 1960s would buy bonds, live off the interest and keep their principal intact. Then a shift came with higher inflation of the 1970s and the need for increasing income. Dividend paying stocks filled this gap. Stocks also provided the added benefit of share price appreciation or capital gains. Additionally, principal could be spent down over time, and retirees could rely on four sources of portfolio income: interest, dividends, capital gains and principal.
Today, Federal Reserve policy has pushed interest rates to near all-time lows, reducing the benefit of bond interest. Do bonds still have a place in the portfolio? Yes!
- Bonds have some of the lowest correlations with stocks. In other words, if stocks zig, bonds usually zag. According to Vanguard research, investment-grade bonds returned more than 8% during the global financial crisis while stocks declined approximately 34%. Even at the start of the 2020 pandemic when stocks fell 16%, bonds returned 1%. In fact, 71% of the time bond returns are positive in months when stocks are negative. 
- Bonds provide one of the best sources when rebalancing with stocks. Buy low and sell high, right? When the next stock market correction arrives, sell what is high (presumably bonds due to their low correlation) and buy stocks low.
- There has been a recent increase in yield (i.e., interest rates). And while a rising yield means declining bond prices, that rising yield also means higher interest payments to bond investors in the future.
- Finally, bonds limit risk. An all-stock portfolio might be okay for a 20 something starting to save for retirement, but that is too much risk for a retiree that needs income from their portfolio next month.
Of course, retirement income planning goes well beyond interest, dividends, capital gains and principal. Deciding when to receive Social Security, choosing the right pension option, withdrawing from accounts tax efficiently, minimizing investment expenses, locating assets in the right types of accounts, planning for health and long-term care expenses and annual tax planning are all important decisions. WisMed Financial can help with your current or upcoming retirement.
Please contact Mark Ziety, CFP®, AIF® 608.442.3750 with questions.
 Aliaga-Diaz, PhD, Roger, “Rising rates don’t negate benefits of bonds” Vanguard, April 2021. Accessed April 2021.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society
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