Individuals saving toward retirement typically use a variety of investments to accumulate funds over time, including stocks, mutual funds, and cash accounts. Sometimes, Treasury bonds (T-bonds) are added to the mix, often as a way to reduce the overall risk of the portfolio.

T-bonds are indeed safe and dependable as investments go. Unlike equities, these instruments pay a steady rate of interest throughout the bond term, and the interest payments are exempt from both state and federal taxation. What's more, T-bonds are backed by the full faith and credit of the U.S. federal government.

Those benefits, though, don't make these instruments equally appropriate for all investors as a significant part of their retirement portfolio. A key consideration is the investor's age when purchasing the bond.

Young Investors

The return on most T-bonds are tied to the five-year Treasury rate, and they often have a lengthy term. Because of these characteristics, T-bonds offer a relatively low annual return, in the 3% range in recent years.

At those levels, the returns on T-bonds are barely outpacing inflation, which has been running in the 2% range. Those earnings also trail those for less conservative investments, such as the stock market, which have yielded many times the returns for T-bonds over time.

That said, there's still room within the retirement account of even a young investor for the safety and steady interest payments provided by T-bonds. But these instruments should form only a minority of your holdings.

How large or small that minority should be will vary by factors that include your level of comfort with risk. But one rule of thumb 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 might be invested in stocks, with the rest spread between bonds and cash. By this formula, a 25-year-old should consider holding 75% of their portfolio in stocks and just 25% in cash and bonds.

Investors Near or in Retirement

As you approach or begin retirement, making bonds and other safer investments a majority of your retirement portfolio can make increasing sense. With their consistent interest payments, and reassuring guarantee by the federal government, T-bonds can offer an ideal income stream after the paychecks end. 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 even offers a measure of protection against inflation and its effects on the buying power of your portfolio. Inflation-protected T-bonds, known 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.