Should retirees buy Treasury bonds?
For retirees, who often rely on investment income to cover living expenses, Treasury bonds are a popular choice due to their stable and predictable payments. Tax benefits: The interest income from Treasury bonds is subject to federal income tax but exempt from state and local income taxes.
Inflation. Every economy experiences inflation from time to time, to one degree or another. T-bonds have a low yield, or return on investment. A little bit of inflation can erase that return, and a little more can effectively eat into your savings.
For retirees looking to manage their taxable income, the Vanguard High-Yield Tax-Exempt Fund could be a good pick. It straddles a happy place between high-yield and tax efficiency by investing primarily in investment-grade municipal bonds.
If investing in a tax-sheltered account, like an individual retirement account (IRA) or a 401(k), the tax benefits that Treasuries provide disappear, because earnings in these types of accounts are not subject to income taxes.
Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
longer-term CDs appear to offer materially higher yields than Treasuries with the same maturity.” “Appear” is the crucial qualifier.
- Report interest each year and pay taxes on it annually.
- Defer reporting interest until you redeem the bonds or give up ownership of the bond and it's reissued or the bond is no longer earning interest because it's matured.
I bonds are backed by the government and protect you from inflation because when inflation increases, the combined rate increases. While I bonds are still a great investment, Orman says CDs and Treasury Bills may be better for the long run.
Terms may apply to offers listed on this page. Suze Orman has a "serious" amount of money invested in I bonds, which comes as little surprise to her fans as she's been pushing them for much of the last year. I bonds are Treasury savings bonds with an interest rate that changes based on inflation.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
What is one downside to investing in Treasuries?
Consistent Income: For investors seeking a steady income during retirement, long-term treasuries, such as Treasury notes and bonds, offer regular interest payments. Cons: Interest Rate Risk: Long-term treasuries are more sensitive to changes in interest rates than short-term ones.
Interest income, which is typically paid on a semiannual basis. Whether this income is taxable will depend on the issuer. Interest from corporate bonds is generally taxable at both the federal and state levels. Interest from Treasuries is generally taxable at the federal level, but not at the state level.
2024 Investment Outlook
U.S. Treasury yields have trended higher in 2024. Yields on the benchmark 10-year U.S. Treasury started the year below 4%, but in early April moved above 4.5%. Bonds in the current environment appear to offer investors more attractive long-term opportunities.
It is possible to lose money in a Roth IRA depending on the investments chosen. Roth IRAs are not 100% safe, but they offer the potential for growth over time. Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money.
- Age 65 – 70: 50% to 60% of your portfolio.
- Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk.
Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk.
If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.
Treasury bonds, notes, or bills sold before their maturity date could mean a loss, depending on bond prices at the time of the sale. Simply put, the face value is only guaranteed if the Treasury is held until maturity.
The reason why? The interest you earn on your CDs is subject to both federal and state income tax while only federal income tax applies to interest income from Treasurys—not state or local tax. By calculating your tax burden on a CD versus a Treasury, you can get an idea of what would be more lucrative for you.
Bonds typically pay a fixed amount of interest (usually paid twice per year). Interest from corporate bonds and U.S. Treasury bonds interest is typically taxable at the federal level.
Which Treasury bonds are tax free?
Key Takeaways
The interest you receive from muni bonds is free from federal taxes but there may be state or local taxes or both. Beware: If you receive Social Security, your bond interest will be counted as income in calculating the taxable amount of your Social Security income. That could increase the amount you owe.
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|---|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
On a personal level, Buffett isn't a fan of bonds either. He has about 99% of his wealth in one stock—Berkshire Hathaway.
Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes.
- Vanguard Total World Bond ETF (BNDW)
- Vanguard Core-Plus Bond ETF (VPLS)
- DoubleLine Commercial Real Estate ETF (DCRE)
- Global X 1-3 Month T-Bill ETF (CLIP)
- SPDR Portfolio Corporate Bond ETF (SPBO)
- JPMorgan Ultra-Short Income ETF (JPST)
- iShares 7-10 Year Treasury Bond ETF (IEF)
- iShares 10-20 Year Treasury Bond ETF (TLH)
