What your bonds are actually for.

You opened your brokerage statement in 2022 already braced for your stocks to be down. That part, everyone saw coming. So your eye went straight to the other column, the bond side, the part you keep precisely so the whole thing does not move at once. And it was down too. Not a little. That year, almost everyone who held bonds saw the same thing: down high single digits, and in some accounts well into the double digits, on the holdings a salesperson years ago had once called the conservative ones. The Bloomberg US Treasury Index, which tracks the U.S. government-bond holdings many conservative accounts rely on, returned about -12.5 percent in 2022, its worst year since the index began in 1973.¹⁵ That year the broader Bloomberg US Aggregate Bond Index returned about -13 percent, far and away the worst calendar-year loss in the index's history, which reaches back to the 1970s.¹⁶ In its November 2022 Financial Stability Report, the Federal Reserve documented that yields on long-term Treasury securities rose notably over 2022, driving broad declines in fixed-income prices across the year.¹⁴

You read it again to be sure you had the right line. You had done the responsible thing for years. You kept a real share of your money in bonds, the part that was supposed to sit still while stocks did the moving. Then both columns went the same direction in the same year, and the one that was supposed to hold simply did not.

So you are left with a fair question, and it deserves a real answer rather than a reassurance. If bonds can fall in the same year stocks fall, what are you holding them for at all?

The honest version is this. Bonds were never the "safe" part of your portfolio, whatever anyone told you when they sold them to you. They are a tool. Like any tool, they do their job when they are matched to it and let you down when they are not. So it is worth being plain about what the job actually is, and then about why the last couple of years have quietly made bonds more useful to you, not less.

What bonds are actually for

You do not own bonds to get rich. Over a retirement that may run thirty years, your stocks do the growing. The job of the bond is quieter, and it is easy to underrate right up until the morning you need it. It is to make sure that when stocks have a bad year, you are not the one forced to sell them at the bottom to cover your own bills.

That sounds small. On the worst day it is the whole thing.

Think about the difference it makes to you in practice. A market falls 25 percent early in your retirement, the way markets sometimes do. If you are holding a few years of spending in cash and short-term bonds, the drop is something you read about rather than something you have to act on. You leave your stocks alone and let them find their way back, because nothing is making you sell. If instead it is all in stocks, that same drop reaches into your grocery money. You sell shares at the bottom to eat, and those shares do not come back when the market does. They are gone, sold at the worst price, while everyone else's recover. Same market, two very different retirements, and the thing that separated them was not being clever. It was whether you had a buffer or you did not.

That buffer is the real point of bonds. They are the part of the plan that lets the rest of the plan live through a bad stretch without you having to do anything drastic in a month you are not thinking clearly.

You do not buy high-quality bonds to get rich. You buy them so that a bad market cannot reach into your pocket and make the decision for you.

Why the math changed

For most of the 2010s and into 2020, bonds barely paid you anything. The ten-year Treasury yield averaged about 0.9 percent in 2020.¹ After inflation, plenty of high-quality bonds were quietly losing ground, so the cash they handed you each year did not keep up with what your life cost. In those years holding them really was almost all about steadiness and almost none about income, and you were right to wonder what you were paying for.

That has changed, and it changed in your favor. By 2024 the same ten-year Treasury yield averaged roughly 4 percent.¹ This matters more than the plain numbers let on, because for a bond you hold to maturity, the yield you buy at is most of the return you are going to get. The arithmetic that made bonds feel pointless for a decade has largely turned over. The buffer that protects you now pays you something real to hold it, which is a better deal than the one your parents' retirement bonds offered for years.

Match the bond to when you will spend the money

The most useful way to think about your bonds in retirement is not as a percentage of your portfolio. It is as a calendar of your own life.

The money you are going to spend in the next year or two has one job above all others, which is simply to be there when you reach for it. That points to cash and very short, high-quality holdings, where a bad market barely moves the value and your near-term spending is not at the mercy of a headline.

The money you expect to need over the next several years can sit a step out, in short to intermediate high-quality bonds. You give up a little yield in exchange for keeping the swings small enough that you do not flinch when you open the statement.

The money you will not touch for a decade or more can afford to do more, including some protection against inflation through Treasury Inflation-Protected Securities, whose principal rises with the consumer price index.² Over a retirement that can last thirty years, the slow erosion of what your dollars buy, not any single bad month, is the risk that quietly does the real damage to the life you are trying to fund.

Notice what this does for you. It replaces the unanswerable question, "what percent of me should be in bonds," with a question you can actually sit down and answer: "when will I spend this money?"

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It trades an unanswerable question, what share should be in bonds, for one you can actually answer: when will I spend this money?

Where you hold them matters as much as which ones

Here is a fact that catches people off guard. The interest from most of your bonds is taxed as ordinary income, at the same rate as a paycheck, not the lower rate that applies to many stock dividends and long-term gains.³ That one fact quietly shapes a few decisions about where your bonds should live.

For many families it works out better to hold taxable bonds inside a retirement account, where the interest can grow without handing the government a slice every year, and to keep more tax-friendly investments in a regular brokerage account, so each kind of money sits where it is taxed the least. Treasury interest carries a smaller perk worth knowing about: it is exempt from state and local income tax.³

If you are in a high tax bracket and you are holding bonds in a taxable account, municipal bonds are worth a look, because their interest is generally free of federal income tax.⁴ They usually advertise a lower rate than a comparable taxable bond, so the number that actually matters to you is the after-tax yield, what you keep, not the one printed on the label.

One more thing tends to catch people after the fact rather than before. Bond interest counts toward the income tally Medicare looks at. Past certain levels, that adds a surcharge, called IRMAA, on top of your normal Medicare premiums.⁵ For 2026, the standard Medicare Part B premium is $202.90 per month, the base amount on top of which any IRMAA surcharge is added.¹⁷ IRMAA begins once modified adjusted gross income passes 109,000 dollars for a single filer or 218,000 dollars for a married couple filing jointly.¹³ A year with a lot of interest, or a large move of money from a traditional IRA into a Roth, called a Roth conversion, stacked on top of it, can quietly raise the Medicare bill you get two years later. The years before the law starts forcing money out of your retirement accounts, currently from age 73 and rising to 75 for younger savers, are often when this coordination matters most for you.⁶ These are good things to map out with your tax advisor ahead of time rather than learn about from a higher premium notice you did not see coming.

The risk most people misjudge

When people call bonds "safe," what they usually mean is that a bond does not lurch around the way a stock does. That is mostly true for short-term, high-quality bonds. It is not true for all of them, and the gap between those two facts is where a lot of careful people got hurt.

What bit careful investors in 2022 was duration. Duration is a measure of how sensitive a bond's price is to changes in interest rates. When rates rise, bond prices fall, and the longer the bond, the harder it falls.⁷ Here is the part worth sitting with. The people hurt worst that year were often the ones who thought they were being the most careful. They held funds with reassuring names, "long-term government" or "total bond," and never realized those carried the most duration risk of all. The label said steady. The holding was anything but. A long-term bond fund can wear the word "conservative" and still drop sharply in a year when rates jump, and if your steady bucket is quietly full of it, you may be carrying more risk than the name on the statement ever told you.

Two other risks are worth naming plainly, because they decide who actually gets paid back and who keeps up. Credit risk is the chance the borrower does not pay you back at all. It is very low for U.S. Treasuries, higher for corporate bonds, and higher still for high-yield bonds, which behave more like stocks and belong, if anywhere, in a small slice rather than at the core of the money you are counting on.⁸ The SEC defines a high-yield corporate bond as one that offers a higher rate of interest precisely because it carries a higher risk of default.¹⁸ And inflation risk is the slow one, the one you feel in your seventies and eighties rather than this year. A fixed payment that felt comfortable when you set it up can buy noticeably less of your life two decades on.

When holding a lot of bonds makes less sense

More bonds are not always better for you. A few situations call for fewer, and it is worth being honest about whether one of them is yours.

• If a pension and Social Security already cover your essential spending, you may need a smaller bond cushion, because that steady income is, in effect, already doing the bond's job of keeping you off your stocks in a bad year.
• If a particular pot of money has a very long horizon and you can genuinely leave it alone, a heavy bond allocation can cost you growth you did not need to give up, growth that might have gone to your grandchildren or to the years of your retirement you cannot yet picture.
• If nearly all your savings sit in tax-deferred accounts, some of the tax advantages of certain bonds matter less to you, because the account is already doing the sheltering.

The thread running through all of it is the same. The right amount of bonds for you follows from your spending, your other income, and your taxes. It does not come from a rule of thumb like 60/40 that knows nothing about your life. The 60/40 name simply describes a mix of 60 percent stocks and 40 percent bonds. Even the SEC treats that split as a personal decision that depends on your time horizon and your tolerance for risk,¹² and it declines to endorse any single formula, noting there is no one asset allocation model that is right for every financial goal.¹¹

The quiet part

Bonds are not exciting, and they are not meant to be. Their whole purpose is to be boring on the one morning you most need something to be boring, so the rest of your money can do its slower work and you can close the laptop and go back to your day without watching it.

Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.

If you would like to think through how much of your portfolio should be doing that job, and where it ought to sit for tax purposes, we are glad to talk it through. You can find a time on our schedule page whenever you are ready.