Whether or not Treasury bills (T-bills) make sense for your retirement portfolio depends in large part on how close you are to retirement. Making investment decisions for your retirement savings is all about balancing opportunity cost and risk.

Key Takeaways

  • T-bills are one of the safest investments, but their returns are low compared to most other investments.
  • When deciding if T-bills are a good fit for a retirement portfolio, opportunity cost and risk need to be considered.
  • In general, T-bills may be appropriate for investors who are nearing or in retirement.

T-bills are issued by the U.S. government and are considered among the safest investments in the world, so risk should never be a significant deterrent. However, the return on T-bills is typically quite low when compared to other types of securities, such as stocks, bonds, and mutual funds. This is why opportunity cost needs to be taken into account.

Opportunity Cost and T-bills Explained

Opportunity cost is a concept in microeconomics—it states that the real cost of any decision is the next-best alternative. For example, the opportunity cost of purchasing a $500 television is not really $500 but rather the next best use of that $500, such as the returns it might have earned if it were invested.

In the case of T-bills, the opportunity cost of investing is manifested in unrealized returns that might be had elsewhere in the market. T-bills are a short-term, fixed-income security. They are typically sold in denominations of $1,000 and have maturity dates ranging from a four to 52 weeks.

The longer the maturity date of a T-bill, the higher the interest rate it will pay.

The Treasury yield on a T-bill with a 52-week maturity is in the 2% range in 2019, significantly lower than the returns of the stock market. On the other hand, the stock market has much more risk.

Balancing Opportunity Cost and Risk

Investors nearing or in retirement typically allocate a large portion of their portfolio to income-producing, conservative investments to protect their nest egg. Younger investors, on the other hand, are in the accumulation phase of saving for retirement and are able to take on more risk.

Let's take a look at examples of balancing opportunity cost and risk as it relates to T-bills and younger and older investors.

A 25-Year-Old Investor

A 25-year-old worker who invests in T-bills for retirement is likely to earn only a fraction of what the average stock market returns would be over the next 40 working years. Since the worker is better able to absorb fluctuations in the market over the next several decades, there is very little reason to invest in T-bills for retirement.

A 60-Year-Old Investor

A 60-year-old worker, however, is a different story. With retirement much closer, Treasury bills offer very real security for any funds saved up to this point.

Workers at this stage in life have less time to recover from losses incurred by an aggressive portfolio in a bad market. The difference in returns between T-bills and equities is also much smaller because there is much less time for the difference to compound. This is not to say that T-bills are necessarily the worker's best bet, especially since the maturities are less than a year, but they make more sense for older investors.