Individuals saving for retirement typically rely on a variety of investments to accumulate funds over time, including stocks, mutual funds, and cash accounts. In many cases, Treasury bonds (T-bonds) are also folded into the mix, as a method of reducing the overall risk of the portfolio.
T-bonds are indeed safe and dependable investments. Unlike equities, these instruments pay a steady rate of interest throughout the term of the bond. Furthermore, these interest payments are exempt from both state and federal taxation.
Lastly, T-bonds are backed by the full faith and credit of the U.S. federal government. But these attributes don't equally benefit all investors. In fact, depending on their age, certain investors stand to gain from T-bonds, over others.
- All retirement accounts should contain at least some portion of Treasury bonds in the asset allocation mix as they offer steady interest income over the life of the bond.
- The older the individual is, the larger the percentage of T-bonds in their portfolio while the younger investor should have a smaller percentage of t-bonds in their portfolio.
- The rule-of-thumb formula holds that investors should formulate their allocation among stocks, bonds, and cash by subtracting their age from 100.
The return on most T-bonds are tied to the five-year Treasury rate, and they often have a lengthy term. and offer a relatively low annual return. This level should outpace inflation, which has been hovering at about 2%. T-bond earnings have likewise trailed returns generated from less conservative stock investments.
All that said, there's still room for T-bonds in a young person's retirement account, which irrefutably benefits from the steady interest payments associated with these vehicles. But even so, T-bonds should represent a minority share of such individuals' portfolio holdings. The precise percentage should be carefully determined by an investor's risk profile.
Generally speaking, however, a rule-of-thumb formula holds that investors should formulate their allocation among stocks, bonds, and cash by subtracting their age from 100. The resulting figure indicates the percentage of a person’s assets that ought to be invested in stocks, while the remainder should be rest spread between bonds and cash. By this formula, a 25-year-old investor should consider holding 75% of his portfolio in stocks, while parking the remaining 25% in cash and bond investments.
This Investment Will Remain A Boomer’s Best Friend
Investors Near or in Retirement
The closer one comes to his or her retirement age, that larger the T-bond portion of his or her portfolio should be. Eventually, T-bonds should claim a majority of an investors asset allocation mix.
With their consistent interest payments and reassuring guarantee by the federal government, T-bonds can offer an ideal income stream after the employment paychecks cease. T-bonds are available in shorter terms than traditional savings bonds, or EE bonds, and can be laddered to create the continuous stream of income that many retirees seek.
One type of Treasury bond that even offers a measure of protection against inflation called inflation-protected T-bonds—also referred to as I bonds—have an interest rate that combines a fixed yield for the life of the bond, with a portion of the rate that varies according to inflation.