 Personal Finance Power Point Presentation, Treasury Bonds and Retirement. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. Our Treasury Bonds, a good investment for retirement, which you can find online. Take a look at the references. Resources continue your research from there. This by the Investopedia team updated May 25, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping them in mind. We're now asking, are Treasury Bonds a good investment for retirement? Are Bonds a good investment? Investors must consider several factors, including the type of bond, how much interest the bond pays, and how long their investment will be tied up. So clearly, when we're thinking about investing safe for retirement, we usually want that kind of diversified portfolio, some in the equity, some in the fixed income, the fixed income, possibly being some of the bonds. As we get closer to the retirement goal, then we often are shifting from a traditional standpoint to more fixed income, having less exposure to the volatility as the time horizon of our investment lapses. So investors must also weigh their risk tolerance with a bond's risk of default, meaning the investment isn't repaid by the bond issuer. So when we're thinking about different types of bonds, we must consider that there are riskier bonds and less riskier bonds, and we'll have the risk reward payoff as we do for many other kind of investments. More risk possibly has the more ability or possibility for bigger gains. So the good news is the Treasury Bonds, the T bonds, are guaranteed by the U.S. government. So that should then remove the default risk almost to zero, which is great for people that are risk averse and for people that are getting possibly close to the retirement possibly who don't want to have the volatility or that risk involved because of the short time horizon, the need for the money soon. So they can be investments for those who are in or close to retirement as well as a younger investor who seeks a stable return. Bonds are debt securities that are issued by corporations and governments to raise funds. Investors purchase bonds by putting an upfront amount as an initial investment. So we're basically kind of like loaning money to the issuer of the bond, that being the government or the corporation, that's called the principal. When the bond expires or matures, called the maturity date, the interim of the bond time, the investors are paid back their principal in return. Investors usually receive a fixed periodic interest payment from the entity that issued the bond. So we're getting rent on the purchasing power or use of the money in essence called interest. So bonds including T bonds can be a good investment for those who are seeking a steady rate of interest payments. So we got that fixed income as the interest payments are paid on a steady basis as opposed to say dividends, which oftentimes are not as fixed, for example, or don't have to be, it's up to the corporation. So although bonds and treasury bonds are popular, they have some disadvantages and risks associated with them and may not be ideal for every investor. This article compares the pros and cons of treasury bonds and whether a bond is a good investment for younger investors and those who are approaching or in retirement. What are treasury bonds? Treasury bonds, T bonds are government debt securities that are issued by the U.S. United States federal government and sold by the U.S. Treasury Department. T bonds pay a fixed rate of interest to investors every six months until the maturity date, which is 20 to 30 years. However, the interest rate earned from newly issued treasury bonds tends to fluctuate with market interest rates and the overall economic conditions of the country. During times of recession or negative economic growth, the Federal Reserve typically cuts interest rates to stimulate loan growth and spending. As a result, newly issued bonds would pay a lower rate of return in a low-rate environment. Conversely, when the economy is performing well, interest rates tend to rise as demand for credit products grows, leading to newly issued treasuries being auctioned at a higher rate. So when rates are high, you would think that the treasury bonds look more interesting because then you're getting a return on it. When interest rates are quite low, the return is going to be a lower, basically, return. And you've got to think about how long you're going to lock that interest rate in and what you think the future is going to be looking like with regards to the interest rates. So types of treasuries, there are several types of treasury securities that are offered with various maturity dates. For example, treasury bills or T-bills are short-term bonds that have maturities from a few days to 52 weeks. Treasury notes or T-notes are very similar to treasury bonds in that they pay a fixed rate of interest every six months until their maturity. However, treasury notes have shorter maturity dates with terms of two, three, five, seven, and ten years. The ten-year treasury note is probably the most monitored of the treasury securities since it is often used as a benchmark for interest rate products such as loans. So because they're kind of set by the government and the government has that zero default kind of component to it, they can be used as a good benchmark, meaning tying other kind of rates to them such as when banks are dealing with loans. Treasury notes are often referred to as treasury bonds, which can make it confusing since the treasury bond is technically a bond with a maturity between 20 and 30 years. However, a treasury note and a treasury bond are essentially identical except for the maturity dates. Whether the treasury security is a bill, note, or bond, the interest earned is exempt from state and local taxes. However, the interest income is subject to federal taxes. Buying and selling treasury bonds. A treasury note is sold by the treasury department via an online auction. Once the note has been purchased by an investor, there are two options. The investor can hold the bond until maturity, in which case the initial amount invested would be paid back when the bond matures. If the investor holds the bond to maturity, the amount that was invested in guaranteed to be paid back by the U.S. government. The investor also has the option of selling the bond before it matures, so we can hold the bond until maturity, get the original investment back, and get possibly the interest payments. Or we could sell the bond and try to get the cash at an earlier point, which you should be a generally good bond market for that because they're secure basic bonds. So the bond would be sold through a broker in the secondary market, meaning you're not buying it from the issuer, now you're dealing from investor to investor, called the bond market. However, investors should be aware that their initial investment is not guaranteed if the bond is sold early through the bond market. In other words, they may receive a lower amount than what they had initially invested. So if you sell it on the secondary market, it depends on the market conditions as to whether you're going to get more money for it or not. If you wait until maturity, you will be paid out in accordance with the agreement on the bond. So young investors, the interest paid from treasury bonds tends to underperform for returns that can be generated from investing in equities. So if you've got a long timeframe before retirement, young investors, then obviously the balancing of the portfolio might look different than someone that's close to running up on retirement. So however, the rate earned from bonds should outpace inflation or the pace of rising prices, which tends to hover around 2%. All that said, there's still room for T-ponds in a young person's retirement account, which can benefit from steady interest payments associated with these securities. So young investors are often saying, hey, I've got a long time horizon. I want to invest in the stocks because they're likely to have a bigger rate of return over a long time horizon. However, you're still going to have those down dips in the market from time to time, which is nice to have the bonds because although they're not going to have a significant return, they're typically not going to go down below the premium that have been invested in the bonds and therefore can balance out the portfolio to some degree. The weight of that balancing might change from younger investors possibly weighted more on the equity side to older investors for retirement, weighting possibly more on fixed income like bonds. For example, a steady return can help to reduce volatility or fluctuations in the value of an investment portfolio. Using bonds to help partially offset the risk of loss from other investments helps to achieve diversification, meaning not all of your money is in one type of investment. Also, T-bonds are backed by the full faith and credit of the U.S. federal government, meaning investors won't lose their initial investment. However, since younger investors have a longer time horizon, they typically opt for investments that offer long-term growth. As a result, T-bonds tend to represent a minority share of a younger person's investment portfolio. The precise percent should be carefully determined based on the investor's tolerance for risk and long-term financial objectives. So when we think about basically what the actual percentages should be for how much is in bonds versus stocks, for example, you can go over normal heuristics, that would be the general kind of recommendations, and then of course you have to take into consideration your personal risk tolerance levels. But remember, the risk tolerance levels, you need to consider them in alignment or with regards to the time horizon, which should be one of the major factors you're looking at. If you have a longer time horizon that you would think would have a significant impact on your asset allocation, possibly putting more towards the equity side than you would if you had a shorter time horizon. So a rule of thumb formula for portfolio allocation states that investors could formulate their allocation among stocks, bonds, and cash by structuring 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 could be spread between bonds and cash. By this formula, a 25-year-old investor would consider holding 75% of the portfolio in stocks while splitting the remaining 25% between cash and bond investments. Investors near or in retirement. Retirees often buy bonds to generate an income stream in retirement. So if you're an older person, then you're in retirement or getting close to retirement, then you might actually be living on the investment stream. That would be what we would like to be doing. I would like to have my investments not dipping into the principle, but just live it on the proceeds of just bonds, the most secure thing out there, and just letting the principle sit and ride, that would be great. So their portfolio allocation changes and tends to become more conservative. So as a result, the portion of the portfolio that's composed of bonds tend to rise. A portfolio that includes treasury notes, bills, or notes provides safety and helps to preserve their savings since treasuries are considered risk-free investments. If you're sitting in retirement with enough treasuries that you're basically earning enough interest, even though there's a lower rate of return on them than stock market, for example, but it's more guaranteed and you're able to just live off of the treasury interest without dipping into the principle at retirement, that's nice. That would be a good place to be. So with their consistent interest payments, T-bonds can offer an ideal income stream after the employment paychecks cease. Also, bond maturity dates can be laddered to create the continuous stream of income that many retirees seek. Laddering basically means that you're not going to have all your bonds basically become due at the same time or mature at the same time, end at the same time, but rather ladder them or stagger them so that they have maturing dates that come due at different time frames. And then you can get more exposure, possibly buying more bonds at those time frames. So 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. So those are supposed to hedge against the inflation to some degree, giving a little bit more less risk, in other words, to the investor. Of course, that less risk usually comes with a lower return. So government bonds versus corporate bonds. Corporate bonds are also debt securities that are issued by a corporation. Just like treasury bonds, corporate bonds have their advantages and disadvantages. Typically, corporate bonds pay interest payments, which can be based on a fixed rate throughout the life of the bond. The interest payment can also be based on an averaged interest rate, meaning the rate can change based on market interest rates or some type of benchmark. When a corporate bond matures, the investor is paid back the principal amount that was invested. So they work in a similar fashion when you're looking at the corporate bonds. It's just now we're issued by the corporation. A corporate bond is backed by the corporation that issues the bond, which agrees to repay the principal amount to the investors. However, when paying corporate bonds, the initial investment is not guaranteed. As a result, corporate bondholders have default risk, which is the risk that the company may not repay its investors their initial investment. So hopefully with large corporations that's still fairly low, but it's more likely that a corporation is going to default, not be able to pay their debt obligations than the government, which can print money and tax people if they need to pay their debt obligations. So when the initial investment for a corporate bond is repaid or not dependence on the company's financial viability, since investors there is usually more risk with corporate bonds, they tend to pay a higher interest rate than treasury securities. So the fact that you have two people that you can be investing in, the government, which has almost zero risk because they can print money and raise taxes or a corporation, you're going to invest in the government unless the corporation gives you a greater return, which they are going to have to do, which they do in order to compete. So conversely, treasury bonds are guaranteed by the U.S. government as long as the investor holds the bond until maturity. As a result, treasury bonds typically offer a lower interest rate than the corporate counterparts. Retirees should consider the risk tolerance making a decision as to whether to purchase a corporate bond or a treasury security. So if you've got your money in very secure, high quality corporate bonds, you would still think they're pretty secure, but the corporations could default. They could go under. If you're going into less secure or smaller corporations, then they're more likely to offer a bigger rate of return, but again, they're even more likely to default. So now you're taking on a risk that might be more comparable to the risk you're trying to avoid by not investing in the stock market because now you're in basically retirement. So it would be nice if you could just sit in retirement, have your money in the most secure bonds out there with the treasury bonds, and live off the interest rate that's not that high, but if you have enough invested it could be significant, but then of course you can mix things up, look at the corporate bonds, and possibly looking at the more secure corporate bonds and so on. So also, the time horizon is important when buying a bond, meaning how long the investment will be held. If a retiree is going to need the money within a few years, a treasury bond might not be the best choice considering its long maturity date. Although a treasury bond can be sold before its maturity, the investor may take a gain or loss, depending on the bond's price in the secondary market at the time of the sale. Tax considerations should also be considered before purchasing any type of bond. Please consult a financial advisor before deciding whether purchasing a corporate bond or U.S. Treasury security is right for you. Advantages of treasury bonds. Although treasury bonds can be a good investment, they have both advantages and disadvantages. Some of the advantages of bonds include steady income. So clearly this is nice because you basically have that stream of interest payments. Treasury bonds pay a fixed rate of interest. Now, notice if you're young, you might be saying, I don't want the interest payments really because I'm earning money right now. I'm trying to invest for retirement. So I'm really trying to get a growth thing happening at that point in time. When you're in retirement and you don't have the wages, you're living off of something, possibly the fixed income, possibly something like bonds, then you want the income and you would like to see it be somewhat consistent so you can plan on it. So treasury bonds pay a fixed rate of interest, which can provide a steady income stream. As a result, bonds can offer investors a steady return that can help offset potential losses from other investments in their portfolios such as equities risk-free. Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal. In other words, investors that hold the bond until maturity are guaranteed their principal or initial investment. Treasury bonds can also be sold before their maturity in the secondary bond market. So we're holding on to the note. We got the interest payments that we're going to have. We can hold it until maturity and get paid back, but we can also sell it on the secondary market fairly easily because it's a very secure note, a secure bond. And so we might not be able to sell it for the same price, but in that way it's similar in liquidity, for example, to say stocks, which you can basically buy and sell and be fairly liquid in that case. You're subject to gains and losses dependent on the market conditions, maybe not so much fluctuation as the stock market, but fluctuations with market interest rates will cause the price of the bonds to fluctuate, but you have that option. So in other words, there is so much liquidity, meaning an ample amount of buyers and sellers, investors can easily sell their existing bonds if they need to sell their position. It's not like other stuff. You bought some TV or something. It's not like you can easily sell it oftentimes. It takes a little bit of work. Usually if you've got the bonds, then you could typically sell it pretty easily because they're somewhat standardized and so on. So many investment options. Treasury bonds can also be purchased individually or through other investment vehicles that contain a basket of bonds such as mutual funds and exchange traded funds. So oftentimes individual investors may not buy individual bonds these days. You could, but you might also be saying, hey, I would like to balance out my portfolio using some other tools, possibly a mutual fund that is a bond-related mutual fund or possibly a mutual fund that has a mix between the bonds and the equities, possibly even a mutual fund where that mix changes, targeting and adjusting the mix between bonds and equities fixed income and equity as you get closer to the goal, that goal possibly being retirement. So here's a U.S. 10-year Treasury note yield 1990 to 2021 from Investopedia Disadvantages of Treasury Bonds. Despite the advantages, Treasury bonds come with some distinct disadvantages that investors should consider before investing. Some of the disadvantages include lower rate of return. So the interest income earned from a Treasury bond can result in a lower rate of return versus other investments such as equities that pay dividends. Equities typically have the capacity to have higher returns, but they come also with the volatility, the possibility, greater possibility of losing money, not just the interest loss but principal loss. So dividends are cash payments paid to shareholders from corporations as a reward for investing in their stock. Basically it's a return of the equity or the income of the corporation to the owners in essence the shareholders. And then we've got the inflation risk. Treasury bonds are exposed to inflation risk. Inflation is the rate at which prices for goods in an economy rise over time. So if we're holding on to the bonds, it's kind of like the inverse of us having a mortgage, right? If we're the one loaning the money and interest rates go up, then we would like to be able to have that money so that we can then up or re-up our loan that we're making so that we can get a higher return on our investment. For example, if prices are rising by 2% per year and Treasury bonds pay 3% per year, the investor realizes a net return of 1%. In other words, inflation or rising prices erodes overall returns on fixed rate bonds such as Treasuries. So you've got that eroding of the return if inflation goes up. But again, that eroding although bad may not be as bad if there was like a recession or something where the equities actually went down to the point where you're losing principal investments in the equity. That's why the bonds could be used as kind of like a hedge even though they may not be as exciting to build a lot of growth or jumps up in the market. They can be used as a hedge to hedge off those downsides. So interest rate risk just as prices can rise in the economy so too can interest rates. So as a result, Treasury bonds are exposed to interest rate risk. So if interest rates are rising in an economy, the existing T bond and its fixed interest rate may underperform nearly newly issued bonds which would pay a higher interest rate. So in other words, a Treasury bond is exposed to opportunity cost meaning the fixed rate of return might underperform in a rising rate environment. So realized laws, although Treasury bonds can be sold before they mature, please keep in mind that the price received for selling it may be lower than the original purchase price of the bond. For example, if a Treasury bond was bought for $1,000 and was sold before its maturity, so you didn't wait till maturity, we sold it before that, the investor might receive only $9.50 in the bond market depending on the market conditions. Investors are only guaranteed the principal amount if they hold the T bond until maturity. Pros and cons, the pros include pay steady interest income, risk free, T bonds can easily be sold before maturity can be bought via the ETS and mutual funds. What are the cons? Lower rate of return versus other investments like equities as market interest rates rise, T bonds may underperform, inflation can erode interest income, bonds sold before maturity can realize a loss. Why would investors and bonds be a bad idea? Whether a bond investment is a bad or good depends on the investor's financial goal and market conditions. If an investor wants a steady income stream, a Treasury bond might be a good choice. However, if interest rates are rising, purchasing a bond may not be a good choice since the fixed rate of interest might underperform the market in the future. Please remember, when you purchase a Treasury bond, the fixed rate of interest for the bond never changes regardless of where market interest rates are trading. Unfortunately also, if the interest rates are going up but you also think there's a recession that is happening, then there might not be any good place to put your money and you may still run to basically bonds or fixed income in that environment to try to limit their losses to where they could have on the equity side of things. So in any case, also investors and bonds and selling them in the secondary market before their maturity can lead to a loss similar to other investments such as equities. As a result, investors should be aware of the risk that they could lose money by purchasing and selling bonds before their maturities. If an investor needs the money and the next year or two, Treasury bonds with lower maturity dates might not be a good investment. Are bond funds a good investment? Bond funds can be a good investment since funds typically contain many types of bonds which diversifies your risk of a bond defaulting. So when you have a bond investment, you might have exposure to multiple bonds which diversifies at least within the bond area. You might also have a mutual fund, for example, that invests in multiple different kinds of assets, giving you more diversification. So in other words, if a corporate experiences financial hardship and fails to repay its bond investors, those who hold the bond in a mutual fund would only have a small portion of their overall investment in that one bond. As a result, they would have less risk of financial loss than had they purchased the bond individually. However, investors should do their research to ensure that the bonds within the fund are the type of bonds that you want to buy. So you want to make sure when you're investing in mutual funds, you're looking possibly by class, for example. You might be using like an index fund, for example, and making sure that you have the mix of bonds that you're looking for. Government bonds, what type of government bonds, corporate bonds, what type of corporate bonds mix between them. Some kind of diversification between them depends on the funds you're looking at. Sometimes funds can contain both corporate bonds and treasury bonds, and some of those corporate bonds might be high-risk investments. As a result, its performance to research the holding within a bond fund before investing. Are bonds a good investment in 2022? In 2022, the interest rates paid on bonds have been slowly rising because the Federal Reserve has begun raising the Federal Reserve rate. If investors believe that interest rates are going to continue to rise in the next couple of years, they may opt to invest in bonds with short-term maturities if they are interested in higher yields. Alternatively, due to the inverse relationship between interest rates and bond prices, fixed security prices will continue to decline if the Federal Reserve continues to raise rates. So bonds are often sought after as a hedge against market volatility and equity uncertainty. As public equity markets remain turbulent through 2022, those seeking to minimize losses may find shelter with fixed securities. During prior periods of recession, bonds have recorded losses, yet those losses have not been as large as equity or alternative investments. So are we going into a recession and bonds might be safer than equities in that case? Are we going into a place of rising interest rates? If so, maybe you don't want to be locked into the long-term bonds, but possibly the short-term bonds. So when they become due, you may be able to get into the longer-term or higher-rate bonds that might have to be issued at that point. So there are several risk factors for investors to consider during 2022 as the Federal Reserve navigates scaling back monetary policy. Equity markets are at high risk for volatility. Alternatively, by not scaling back monetary policy fast enough, the Federal Reserve risks runaway or prolonged inflation. So both conditions have negative implications for bond markets in terms of pricing and future purchasing power. Treasury bonds, notes, and short-term Treasury bills are often purchased by investors for their safety. Whether purchasing a Treasury security is right for you depends largely on your risk tolerance, time horizon, and financial goals. Please consult a financial advisor or financial planner when considering whether to purchase any type of bond versus other investment. So can you lose money investing in bonds? Yes, you can lose money when selling a bond before its maturity date since the selling price could be lower than the purchase price. Also, if an investor buys a corporate bond and the company goes into financial difficulty, the company may not repay all or part of the initial investment to bondholders. So this default risk can increase when investors buy bonds from companies that are not financially sound or have little to no financial history. Although these bonds might offer higher yields, investors should be aware that higher yields typically translate to a higher degree of risk since investors demand a higher return to compensate for the added risk of default. What are the best bonds to buy? Knowing the best bonds to buy largely depends on the investor's risk tolerance, time horizon, and long-term financial goals. Some investors might invest in bond funds which contain a basket of debt instruments such as exchange-traded funds. Investors who want safety and tax savings might opt for Treasury securities and municipal bonds which are issued by local state governments. Corporate bonds can provide a higher return or yield but the financial volatility of the issuer should be considered. What's the bottom line? Bonds can find a place in any diversified portfolio whether you're young or in retirement. Bonds can provide safety income and help to reduce risk in an investment portfolio. Bonds can be mixed within a portfolio of equities or ladder to mature each year providing access to cash when they mature. Investors should consider some exposure to bonds as part of a well-balanced portfolio whether they're corporate bonds, Treasury bonds, or municipal bonds. However, it would be a mistake for investors to assume that bonds are without risk. Instead, they should do their homework since not all bonds are created equal.