What Percentage of Retirement Funds Should Bonds Be?

Bonds can help you counter the ups and downs of stocks.

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When you save for retirement, you can adjust your portfolio through the years to reflect your needs. For example, when you are young, you can afford to take some risks because you have time to recover lost money. As you approach retirement, you may want to consider safer investments, such as bonds. Once you understand the benefits of mixing bond holdings with stocks and other investments, you can choose the percentages that fit your needs and expectations.

The Age Rule

Some investors follow this rule of thumb: Subtract your age from 100 and put that percentage in stocks. Put the rest in bonds. For example, at age 50 you would put 50 percent of your money in stocks and 50 percent in bonds. At age 70, you would have 30 percent in stocks and 70 percent in bonds. Because you have individual needs, you don’t have to take this piece of Wall Street folk wisdom as a hard-and-fast rule. Instead, use it to remain aware that you should reduce your risk as you approach retirement. You can do this by increasing your bond holdings as you age. Bonds tend to be less risky than stocks over the long haul.

Overall Mix

You don’t have to choose a bond vs. stock mix. You can balance your portfolio with money market funds that keep your money in cash with banks, certificates of deposit that earn interest on cash you place in your local bank and real estate investment trusts that pool investors’ money to purchase properties that provide income and increase in value. If you have some of these investment instruments, you can re-evaluate your risk. For example, money market funds and certificates of deposit offer safety. If you have a percentage invested safely already, you can cut back on the percentage you put into bonds. Let’s say an investor at age 50 with 25 percent of her portfolio in certificates of deposit can put 25 percent of her remaining investment money in bonds. Then she can put the remaining 50 percent in stocks for growth potential. This 25-25-50 allocation keeps half of her investments relatively safe.

An Aggressive Approach

If you need to make up for lost time, you may choose a smaller percentage of your portfolio to put in bonds. Bonds do not tend to grow in value and provide interest income instead. You can keep some of that income by putting a small percentage in bonds and most of your portfolio in stocks. For example, you could choose a mix of 30 percent bonds and 70 percent stocks. If your strategy pays off, your stocks could grow in value while you keep some of your money somewhat safe in bonds.

Bond Ratings

If you buy so-called junk bonds, you are not getting safety. These pay high interest rates but offer high risk as well. Ratings agencies rate the credit of companies so you have guidelines. Since bonds are essentially a loan on your part to a company, you need to know that company’s creditworthiness. The Securities and Exchange Commission recognizes 10 nationally recognized statistical rating organizations. The percentage of bonds in your portfolio depends on how much safety you want. Make sure you get that safety by only buying high-grade bonds. Then your percentage allocations will make sense.