High Yields Turn Baby Boomers Into Bond Buyers

"When it comes to the baby boomers' run of investing luck, timing has been on their side.

Decades of stellar stock-market returns produced by a series of bull markets that began in 1982 coincided with boomers' prime working years and made their nest eggs grow.

Their good fortune continues in retirement. The recent surge in interest rates that sent bond yields near a 15-year high is the "single best economic and financial development in 20 years" for retirees, said Joe Davis, global chief economist at Vanguard.

That shift is turning the stock-loving Woodstock generation into bond buyers. With current yields on 10-year U.S. Treasury notes at 4.23%, boomers, ages 59 to 77, have reason to move money into the more conservative investments. The Gen Xers behind them -- now around ages 43 to 58 -- are eyeing those moves, too.

This moment presents new opportunities for investors in or near retirement to use bonds to reduce risk and generate steady income, financial advisers say.

"There was no alternative to stocks," Roger Rouse, 54, a software engineer from Mequon, Wis., said of the years since the 2008 financial crisis. He and his wife, Deb, 56, who recently retired, had about 75% of their nest egg in stocks earlier this year. Rising bond rates prompted them to move some money from stocks into a ladder of individual Treasury inflation-protected securities, or TIPS, that mature at intervals over 30 years.

The Rouses plan to cover their basic living expenses in retirement with their bond investments. Eventually they will supplement that income with Social Security. The couple now has about 50% in stocks.

Others are paring back on stocks, too. Last year, 45% of Vanguard 401(k) investors over age 55 who actively managed their money held more than 70% of their portfolios in stocks. In 2021, 47% held that much in stocks. This year through Oct. 31, investors overall pulled $98 billion from stock funds and channeled $170 billion into fixed-income funds, according to fund tracker Morningstar.

Younger adults should generally have stock-heavy portfolios for one simple reason: returns.

U.S. large-company stocks have delivered an inflation-adjusted annual return of 7.1%, on average, since 1926, compared with 1.8% for U.S. intermediate-term Treasury bonds, according to Morningstar.

Once workers reach their 50s and 60s, the risks of holding a high percentage in stocks can become harder to tolerate. If the market tumbles, retirees needing cash might have no choice but to sell shares at bargain prices, raising the risk of depleting their savings.

The more investors earn on bonds, the less they need to hold in stocks to meet retirement goals, said Brendan Mullooly, an adviser in Wall Township, N.J.

When bonds were yielding 2%, someone with 40% in bonds who needed a 5% overall return had to earn at least 7% on their stocks, he said. But with bond yields above 4%, as they are now, that same person can hold less than 60% in stocks and still have high odds of earning 5% on the portfolio, Mullooly said.

Retirees often seek to generate some or all of the retirement income they need from dividends and interest payments to save at least some of their principal for heirs or unexpected expenses. With the low bond yields of the recent past, some loaded up on dividend-paying stocks to provide money to live on.

Now bonds look like the better bet. "If you want income, I would suggest you get it in fixed income," said David Blanchett, head of retirement research at PGIM, the asset-management arm of Prudential Financial. The yield on the S&P 500 index is around 1.6%.

Some advisers recommend that retirees set aside one to five years of living expenses in cash to avoid having to sell stocks at depressed prices. 

But cash didn't earn much.

Now, with three-month Treasury bills yielding nearly 5.4%, "it's easy to make a case for holding cash," said Mullooly.

The juicy short-term yields mean some investors scoff at longer-term bonds yielding just over 4%, said Davis at Vanguard.

But if the Federal Reserve lowers interest rates, as many expect in 2024, the rates on newly issued CDs, money-market funds and short-term Treasury notes might fall, so longer-term products should be in the mix, said Rob Williams, managing director of financial planning at Charles Schwab. 

He suggests investors consider locking in today's yields by purchasing a ladder of individual Treasury notes that mature over the next one to seven years.

There is always a risk that interest rates could head higher, causing bond prices to fall. But today's high yields would help offset the losses on bond prices.

For most investors, bonds should be part of a portfolio that also includes stocks. Most retirees need some stocks to ensure their nest eggs grow over time, said Paul Auslander, a financial planner in Clearwater, Fla., who recommends a 60/40 split for many older investors.

Last year, with stock and bond prices down, some were concerned a traditional 60/40 portfolio mix might no longer be viable. But "the death of the 60/40 portfolio has been greatly exaggerated," Auslander said." [1]

1. High Yields Turn Baby Boomers Into Bond Buyers. Tergesen, Anne.  Wall Street Journal, Eastern edition; New York, N.Y.. 12 Dec 2023: A.12.