Are Treasury Bonds a Good Investment for Retirement?

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Because Treasury bonds, also called T-bonds, are backed by the U.S. government and offer stable returns, they can be a good retirement investment when part of a diversified portfolio. The role T-bonds play in your investing strategy depends on the level of risk you're comfortable with and how much time you have until retirement.

What Are Treasury Bonds?

Treasury bonds are a low-yield, fixed-income investment issued and backed by the full faith of the U.S. government. They're debt securities, meaning they represent a loan an investor makes to a borrower. When you buy a T-bond, you're essentially lending money to the U.S. Department of the Treasury.

Treasury bonds pay interest every six months at a fixed rate determined when the bonds are auctioned to the public. They continue to collect interest until their maturity date, at which point the Treasury repays the bond's full face value.

Before you evaluate what part T-bonds could play in your retirement investing, consider the following characteristics of T-Bonds:

  • Face value: Also called par value, face value is the amount of money the issuer pays the bondholder when a bond reaches maturity. T-bonds are sold in multiples of $100 in face value.
  • Bond price: This is what you actually pay for the bond, which can be lower, higher or equal to the bond's face value.
  • Discount: T-bonds sometimes sell at a discount, meaning you'll pay less for the bond than its face value. It's also possible for T-bonds to be sold at a premium, meaning you pay more for the T-bond than its face value.
  • Interest or coupon rate: A bond's interest rate is often called a "coupon rate," a phrase dating back to when bonds were paper. T-bonds pay interest as a fixed percentage of the bond's face value. For example, a $1,000 bond with a 3% coupon would pay 3% of $1,000, or $30, per year.
  • Maturity: A bond's maturity is how long it will continue paying interest. Once the bond reaches maturity, the issuer pays the bondholder back the bond's full face value.
  • Yield: A bond's yield is the return an investor can expect to receive from it. There are different ways to look at Treasury bond yields, such as coupon yield, which is the same as the bond's annual interest as a percent of the bond's price, and yield to maturity, which is how much a bondholder will earn if they hold their bond until maturity.

For example, if you buy a $1,000 T-bond with a 2% coupon and a 30-year maturity for $980, you could expect to receive $20 per year in interest, in the form of two yearly payments of $10 each. Your bond's price is $980, its discount is $20, and its interest is 2%, paid until the end of the 30-year maturity, at which point you'd be repaid the $1,000 par value.

How Long Are T-Bond Maturities?

Treasury bonds are sometimes confused with Treasury notes and bills. Each Treasury security has different maturity lengths:

  • Treasury bills: Maturities of four, eight, 13, 26 or 52 weeks
  • Treasury notes: Maturities of two, three, five, seven or 10 years
  • Treasury bonds: Maturities of 20 or 30 years

Maturity periods play an important part in determining whether a debt security is a good buy for your portfolio. Generally speaking, you should only buy a debt security like a bond if you're prepared to hold it until maturity. If you aren't positive you can lose access to your investment for 20 or 30 years, consider investing in shorter-term bills or notes instead.

You can choose to sell your bond before maturity through a broker, but you risk losing money as the face value of the bond isn't guaranteed if you sell early through the secondary market.

You can use bond maturities to your advantage. One popular way to use bonds is to create a maturity ladder, staggering the maturities of your bonds in order to create a steady stream of income in retirement.

Are Treasury Bonds a Good Investment?

Treasuries may be a good investment for investors seeking a low-risk savings vehicle and a steady stream of income. But their low returns also make them unlikely to outperform other investments, such as mutual funds and exchange-traded funds.

Before you invest in Treasuries, consider the pros and cons below.

Pros of Investing in T-Bonds

  • Little risk: It's virtually impossible to lose money with a T-bond, making it a highly safe investment vehicle. Those nearing retirement might choose to allocate more of their portfolio to bonds to minimize their exposure to risk, and all investors can use them to keep a portion of their portfolio risk-free.
  • Predictable returns: T-bonds pay regular returns on a twice-yearly frequency. This makes them potentially ideal for retirees, for whom preserving wealth and setting up a steady stream of income are top priorities.
  • Liquidity: Treasury bonds can be bought and sold in $100 increments through TreasuryDirect.gov. You can also buy and sell T-bonds through a brokerage or invest in a mutual fund or exchange-traded fund that contains Treasury securities.
  • Tax benefits: The income you earn in interest from your T-bonds is subject to federal income tax, but it's exempt from state and local taxes.

Cons of Investing in T-Bonds

  • Modest returns: T-bonds have low yields and aren't likely to outpace returns from other investment vehicles, such as stocks, which have a historical average annual return of 10.3%, according to data from Vanguard. In contrast, in December 2021, the average yield for a 30-year T-bond was just 1.85%. You can find daily T-bond yield rates on the Treasury Department's website.
  • Inflation risk: Because T-bonds have low fixed-rate yields, there's a substantial risk that your bonds won't outpace the rate of inflation, which would erode your money's spending power.
  • Selling at a loss: If you hold a Treasury bond until its maturity date, the U.S. government guarantees to repay your principal investment. But selling T-bonds through the secondary market carries no such guarantee, meaning that if the current market price for bonds is lower than what you paid, you could realize a loss.

Additional Investment Opportunities

You have many options for saving and investing toward retirement. By diversifying your investments and gaining exposure to a mix of assets, you'll help protect your portfolio from market volatility by offsetting exposure to risk.

Retirement Accounts

A 401(k) or traditional IRA offers tax-advantaged savings growth by allowing you to invest pretax dollars. When you tap into your funds in retirement, your 401(k) and IRA withdrawals are taxed as income.

If your employer offers a 401(k) match up to a certain percentage of your compensation, it's a good idea to contribute at least enough to maximize it. After that, consider funding your 401(k) to the maximum allowable contribution.

You can also start a Roth IRA, which allows you to invest money after tax and accrue interest tax-free. You'll also be able to withdraw your earnings tax-free in retirement.

Other Assets

You can also consider investing directly in individual stocks and bonds or in groups of stocks and bonds through mutual funds, exchange-traded funds or in an index fund that tracks to a group of stocks, such as the S&P 500. Another way to diversify your portfolio is by investing in real estate.

Keep in mind, though, that active investments including stock and real estate portfolios require extensive time, energy and expertise to manage effectively. A trusted financial advisor can help you create a smart strategy for managing your investments.

The Bottom Line

T-bonds are a way to diversify your portfolio with a low-risk asset that can offer a predictable stream of income. But their returns are low, which presents its own risks, especially when inflation is high.

To develop a plan for investing for your future or preserving your wealth during retirement, consider working with a financial planner to review your finances and goals.

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