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by Guy Baker
(originally published on wealthmanagement.com on June 17, 2025)

Conventional wisdom says that when stocks fall, bonds (particularly Treasurys) will pick up the slack. During April’s tariff announcements, however, stocks tumbled as expected, but bond yields rose, meaning their prices fell and didn’t come to the rescue. For many investors (and some advisors), 2022 felt like a déjà vu when both stocks and bonds tanked by double digits amid high inflation and a series of Fed interest-rate hikes.

Some clients may be fearful that bonds are no longer a reliable hedge against stock market volatility. I wouldn’t go that far, but now might be a good time to review the myths and misconceptions about bonds in your portfolio.

Seven Common Misperceptions About Bonds

1. Bonds are always safe. While it’s true that bonds are generally less volatile than stocks, they are not risk-free. When an investor purchases a bond, they lock in a coupon rate and a maturity value. But a lot can happen between the purchase date and the sell date. Bonds held to maturity expose investors to the risk of inflation and a loss of purchasing power. But that’s not all. The coupon rate prices in credit risk in case the issuer runs into financial difficulties and defaults. The higher the risk, the higher the coupon rate required to attract money. Investors must be aware of the risks associated with the bond terms and the credit risk.
   
   For instance, a 10-year bond earning 5% with an AA credit rating and a two-year bond earning 5% with an AA credit rating face entirely different risks if interest rates increase. The liquidation value will be impacted significantly more for the 10-year bond than for the 2-year bond. This impact is called duration risk. The longer the duration, the more a bond’s price will fluctuate in response to changes in interest rates. Generally, bonds will state their duration risk. If the duration risk is 4%, it means that for every 1% rise or fall in the interest rates, the bond value will adjust up or down by 4%. So, a bond with a face value of $100,000 would be expected to decline to $96,000 if the interest rate increased by 1%. However, if the investor holds the bond to maturity, they are contractually guaranteed they will receive the full face value (assuming no default).
2. Rising interest rates always hurt bonds. While it’s true that higher rates can negatively affect the price of existing bonds, it also means there are opportunities to invest in higher yields, thus benefiting long-term investors. Additionally, if the general economic climate suggests rates will come down, buying a 30-year bond with a 20% discount off its maturity value represents a substantial appreciation opportunity in the bond value, and the investor still receives the coupon rate annually.
3. Bonds are only for retirees. Bonds can play a crucial role in portfolio diversification for investors of all ages, as fixed income helps balance out risk and provides a steady income. The investor’s risk capacity—the amount of tolerable risk given their time horizon—is often very different from their risk tolerance—their comfort level with short-term volatility, such as what we are seeing today. Even for young investors and others with a high risk tolerance and/or a long time horizon, a modest allocation to bonds can help insulate a portfolio against stock volatility without sacrificing too much upside.
4. Government debt causes bond yields to skyrocket. Everyone is concerned about the federal government’s nearly $2 trillion annual deficit. Sure, large deficits can influence interest rates, but several factors determine bond yields, including investor demand and the Federal Reserve’s interest rate policy. Some investors may fear that the U.S. government will default on its obligations, thus making all outstanding Treasuries worthless. While anything can happen, a government default would have a catastrophic global impact and seems unlikely. Generally, our firm maintains a short-term approach in its bond portfolios to minimize duration risk. But in times when interest rates are likely to drop a full 100 to 200 basis points, investing in 30-year Treasuries can be an exceptionally good option.
5. Corporate bonds are too risky for retirees. Unlike investors in Treasuries, investors in corporate bonds must evaluate both credit risk and duration risk. Highly rated corporate bonds can be a valuable part of a diversified bond portfolio since they typically offer higher yields than U.S. Treasuries. Plus, the income stream is predictable, and the default rate, while higher than Treasuries, is relatively low compared to junk bonds and other lower-rated corporate debt.
6. Individual bonds only make sense for very large investors and institutions.  Conventional wisdom says an investor needs significant capital to achieve diversification with bonds and must constantly monitor which of their bonds are maturing. However, holding individual bonds (as opposed to bond funds) can be advantageous regardless of size. Here are three reasons why:
7. • Predictable returns since the investors receive fixed interest payments and since the principal is paid back in full at maturity, assuming there is no default.
   • Control. You can choose specific bonds that allow customization based on credit, maturity, and industry.
   • Tax benefits. Taxable bonds generate interest income that is taxed at ordinary income rates (federal and state), especially if the bonds are sold for a profit before maturity. But if the investor holds a bond until maturity, they avoid capital gains tax since their return is considered a return of basis, not a gain. Investors can also eliminate income taxation on bonds by investing solely in Treasuries (which are not taxed at the state or local level) and municipal bonds (which are tax-free at the federal and sometimes at the local level).

7. Bond funds offer no control to individual investors. Unlike with individual bonds, investors cannot hold the bonds inside a bond fund to maturity or sell them prematurely if they wish. Further, bond fund returns are unpredictable. The income will vary depending on the mix of holdings based on coupon rates at the time of purchase. The greater the interest rate volatility, the wider the range of monthly distributions will be. Just know that funds buy and sell their holdings based on interest rate movements and capital inflows and outflows. Most investment managers hold bonds to maturity inside their fund. However, because of the fund’s broad diversification, the bond maturities will vary depending on the date of purchase. However, bond funds offer several advantages:

1. • Diversification. Which is very hard for smaller individual investors to achieve. Bond funds hold a large portfolio of investments, which mitigates the impact of defaults.
   • Liquidity. While an investor can sell individual bonds, a process is involved, and it may take time to find a buyer. With a bond fund, investors can typically liquidate their holdings within one day.
   • Lower transaction costs. Bid-ask spreads are typically larger for small transactions, which can translate to lower returns. Institutional asset managers, which buy and sell large quantities of bonds, can command higher prices for sales and lower prices for buys, which can add up to a transaction cost advantage over individual bond portfolios.
   • Professional management. Fund managers can find opportunities to buy bonds at a discount to take advantage of interest rate flow, which is very hard for individual investors to do.

Conclusion

In the final analysis, bonds are an important financial instrument for building a predictable income strategy for investors. Still, it is essential to understand that what is seen is not always what investors will get.

Key Findings:

• 44% say they currently have a plan for how they will take income in retirement
• 48% worry they will live too frugally and not enjoy retirement as much
• 45% worry about how to best take distributions from their retirement savings for

retirement income

Many Americans lack a plan for how they will draw from their retirement savings for income in retirement and worry about the funds lasting for their lifetime, according to the 2024 Annual Retirement Study done by a major life insurance company.

According to the study, “Without a solid strategy, the ongoing process of deciding how much money to withdraw from which account when can be daunting.” Less than half of all Americans nearing retirement (44%) say they currently have a plan for how they will take income in retirement. Boomers (67%) are more likely than Gen Xers (30%) or Millennials (33%) to say they have a retirement income plan.

“If you don’t know how you will draw from your retirement assets for income, then you aren’t ready to retire,” said Kelly Lavigne, VP of consumer insights at a major insurance company. “So much of retirement preparation focuses on accumulating assets – and that’s important – but it is critical to understand how those assets will be able to fund your life after you retire. To do that, you need to make important decisions like when to start claiming Social Security and examine what resources you have to fund your retirement.”

Nearly half (48%) worry about living too frugally and not enjoying retirement as much as they should. “Without a solid strategy, the ongoing process of deciding how much money to withdraw from which account when can be daunting,” Lavigne said. “A retirement income strategy will help reduce the number of ongoing decisions you need to make. One way to help reduce the number of decisions you need to make about retirement income is to incorporate an annuity into your portfolio that offers guaranteed lifetime income.”

What are the top risks to retirement income?

Americans identified the greatest risks to their retirement income. Ranked in the top three risks to retirement income were:

• Inflation – Everyday costs increasing (42%)
• Outliving money (35%)
• Health care costs (32%)
• Stock market dropping (31%)
• Unexpected expenses – Spending too much and running out of money (30%)

The question always comes up whether a financial professional can provide meaningful benefits to their client when evaluating retirement income strategies. What is the best way to take distributions? Studies show that 45% of Americans worry about how to best take distributions for retirement income. Is there a best way? In our opinion, the answer is a resounding yes. The Wealth Teams Retirement Solution can identify the best mix of fixed, equity, and alternatives to build a consistent, stable income that will last through retirement.

“When figuring out how to draw from your assets for retirement income, you want to include risk mitigation strategies that can help address worries about running out of money, the impact of inflation, how to reduce taxes, and managing the rising health care costs, especially long-term care,” Lavigne said. “That strategy may include incorporating an additional source of consistent, reliable, and possibly increasing income. A financial professional can help create a strategy for how to effectively turn your retirement assets into income that can last a lifetime.”

This 2024 Annual Retirement Study was conducted using an online survey in February and March 2024. The sample size was 1,000 individuals who were age 25+ in the U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered. Another criterion was investable assets of $150k+. The study included an oversampling of Black/African Americans (416 responses); Hispanic (398 responses); Asian/Asian American (366 responses).

Increasing income potential provided through annuities that offer a built-in or optional Income Benefit riders increase income with market growth. These riders have an additional annual rider fee.

Annuities can help meet retirement goals by providing tax-deferred growth, a death benefit during the accumulation phase, and a guaranteed income through retirement. Plus, many have a two-times multiplier for long-term care on the guaranteed income. If having a guaranteed income is important to the investor, then an annuity should be considered.

Originally posted at MoneyGeek.com on July 8, 2024

Our research indicates some consumers are considering whether to fund a Roth IRA or permanent life insurance to plan for retirement. Why might they be making this comparison?

How much life insurance do I need? Families often ask this question when they must balance their protection against premiums. Most prospective buyers of insurance (PBOIs) weigh the probability of death with the cost. Should I self-insure or leave the coverage to an insurance company? PBOIs have asked this core question throughout my 60 years of helping them decide what to do.

Assuming the PBOI decides to buy coverage, the next question is how much to buy and, invariably, what kind of insurance makes the most sense. For younger families, the premium cost is almost always a deciding factor. However, setting aside the discussion of term insurance versus a form of permanent insurance, the amount boils down to funds needed to cover four basic factors:

• Medical expenses and funeral costs
• Credit card and other short-term debts.
• Pay off the mortgage.
• Educational sinking fund for children

Income stability for the family determining a reasonable amount for these four categories will help the PBOI decide on the amount of coverage.

Assuming a family of four earns $100,000 a year, owns a home, and is under 40, the total insurance coverage could be $4,000,000. How did that number get determined?

Both a subjective and objective analysis help to reach the number. The objective part is just math; the subjective part relates to how much coverage the family needs based on lifestyle choices. I have heard it said that life insurance is a love gift. When someone walks out, the money walks in. Death is always shocking and usually unexpected. Families with adequate coverage can better endure the chaos and uncertainty that death brings. Families with little or no coverage face a difficult situation.

I can think of two situations that are very real and current.

1. Georgia’s husband died and left her with three boys under 18 and all of the household expenses. She was a stay-at-home mom, and her loving husband left $1,500,000 in insurance. She did not pay off the house and used the $60,000 of income ($5000 a month) generated from the insurance capital to pay bills and provide schooling for her boys. Instead of a solid four-year college, they will attend a local junior college and hope to qualify for a scholarship.House payments and taxes erode 50% of Georgia’s monthly income. That leaves roughly $2500 a month for life. She is doing fine, but there is little left over for extras after auto insurance, repairs, gas, utilities, and the unexpected. Inflation makes it harder to make ends meet, leaving her only one option: spending capital. But that option reduces the income that the capital can generate. It is a downward spiral that will leave her with very little in retirement unless she can get a reasonable job. Things would have been much different if her husband had bought $3,000,000 of insurance instead of $1,500,000.
2. Rose is 63 and not in good health. She usually works three days a week but cannot work more than four hours daily. When her husband passed, he left her with his IRA and social security. She owns a house with a $175,000 remaining mortgage. She inherited $400,000, which includes a $150,000 life insurance policy. A lot of money for many, but at age 63, Rose can barely make ends meet. Her total income with social security is $50,000 a year. She pays $2,000 in monthly expenses over and above the mortgage payment. She has no long-term care insurance. No retirement. She has no source of capital or income available to her. If her husband had purchased $500,000 of insurance, her prospective life in retirement would have been much better. As it stands, she can get by, but with inflation, she likely will run out of money if she lives another ten years.

The purpose of relating these stories is not to make you feel sorry for them but to point out how better planning would have helped these widows through their life circumstances. Many families do not think about buying life insurance. The extra $200-$500 a month in premium seems like a waste of money until there is no money because of death or disability.

Remember, everyone pays for life insurance. They either pay the premium costs amortized over a lifetime in small increments or pay the cost in expenses, causing deprivation and hardship because they have no money available to pay to keep a house over their heads or put food on the table. Not buying sufficient insurance has a cost that is difficult to measure and not defined until death occurs.

The Roth IRA is an excellent tool for creating wealth in retirement. However, one problem with it is the significant annual contribution limitations. A way around this limitation is to contribute to a ROTH alternative inside a retirement plan or to convert a large IRA to a ROTH by paying the taxes now instead of deferring them until retirement. Regardless of the method used to deposit money into a ROTH, having a tax-free income is appealing and drives many tax and funding decisions.

An alternative to the traditional ROTH is to use investment-grade life insurance by purchasing a policy specifically designed to reduce the cost of insurance so the cash value buildup is optimized. This strategy reduces the emphasis on insurance and allows the policy owner to grow their money inside the policy, with results similar to a ROTH.

How do a Roth IRA’s contributions and contribution limits compare to premium life insurance payments?

Think of a house purchased 20 years ago. The mortgage is much lower due to principal reductions, and the house’s value has grown with appreciation and inflation. The house owner can refinance and pull out money (sometimes significant capital) to invest and spend as appropriate. The money from the refinance is tax-free, deferring the tax until the house is sold sometime in the future. Life insurance works similarly. The buyer purchases the insurance today and deposits premiums over 20 years. The premiums accumulate in the policy’s cash value net of the insurance cost.
At the end of 20 years, it is possible that the premiums paid have doubled in value inside the policy. At this point (although 20 years is arbitrary), annual loans can be made against the policy’s values. These loans can be treated as income and have the same characteristics as ROTH distributions.

You can do the math. In both cases, the premiums and ROTH deposits are contributed from after-tax income. The growth is inside the policy, and the ROTH is not taxed until the policy is canceled. (You might never cancel the policy, thus deferring the growth until death, when it would be tax-free.) The growth in a ROTH is never taxed, even when the ROTH is fully depleted. The family inherits the residual ROTH account, which may have very little left inside it. Unlike the ROTH, life insurance has a remaining death benefit for the family.

The big math question is simple but needs to be analyzed thoroughly. Will the ROTH outperform the life insurance? There are various ways to do this analysis. Using a qualified insurance specialist to help with this study would be very beneficial. Eventually, the study should show that the outcomes are similar. However, because there is no contribution limit on an insurance policy, using the insurance product could create a more significant outcome than the ROTH.

Originally posted at WealthManagement.com on May 9, 2025

With the stock market at all-time highs and volatility normal, it’s easy for retirees and near-retirees to get complacent about sequence risk, one of the biggest dangers to a retirement nest egg and investor’s peace of mind. No one knows exactly when the next big market correction will occur, but when it does, as we saw in 2000-2003 and 2008-2010, the sequence of returns risk (a sudden drop in the market extending over an extended period) can wreak havoc on retirement projections and planning.

At times like these, retirees, particularly those in early retirement and near retirement, are particularly vulnerable to sequence-of-returns risk. Sequence risk refers to the devastating impact poor investment returns will have on a retiree’s investment account if the market drops precipitously in the early retirement years. Sequence risk can cause a retiree’s income to drop significantly over their lifetime or induce an inescapable downward spiral where they could even run out of capital.

Taking distributions when the market has precipitously declined effectively “costs” the retirement plan more than it can sustain and often prevents recovery. This decline results in the need for major economic adjustments to forthcoming distributions and lifestyle—something everyone wants to avoid as they age.

The graphic below shows the impact of sequence risk on three investors who started taking distributions in 1973, 1974, and 1975, respectively. The assumptions were based on each investor withdrawing $25,000 a year of income, plus inflation.

The outcomes are quite different depending on when each investor started taking distributions—Investor 1 (starts in 1973), Investor 2 (starts in 1974), and Investor 3 (starts in 1975). Assuming each investor began with $500,000 in a balanced portfolio, evenly split between stocks and bonds, and rebalanced monthly, they achieved significantly different long-term results. We assumed the portfolios were the retirees’ sole source of income for 35 years of retirement. All also assume all three withdrew $25,000 per year (5%), adjusted for inflation—higher than the popular 4% rule of thumb but more aligned with what retirees want to receive in annual income.

Without considering withdrawals,

• The 1973 retiree had a long-term return of 7.12%.
• The 1974 retiree had a long-term return of 8.81%.
• The 1975 retiree had a long-term return of 14.12%.

Further, after factoring in withdrawals, they experienced widely divergent outcomes. The 1973 retiree, who left work in a severe bear market decline, would have run out of money after just 24 years in retirement. By postponing retirement just one year, however, the 1974 retiree— who left work at the tail end of the 1973-74 bear market—would have run out of money after 31 years. The 1975 retiree who left work at the beginning of a bull market saw substantial growth in their retirement account. She was able to leave a bequest of about $135,000 after 40 years of retirement.

Again, here are some of the biggest dangers of sequence risk:

• Impact on portfolio longevity. If a retiree experiences negative returns early in retirement and withdraws funds from their portfolio during those years, they can deplete their nest egg much faster than expected, potentially leading to a premature failure in their portfolio. Once a downward spiral begins, it’s difficult to escape it.

• Sequence matters. The order in which investment returns occur significantly impacts a portfolio’s overall growth and longevity. Experiencing negative returns early in retirement can be more detrimental to a retiree’s long-term distributions than experiencing the same negative returns later in retirement, i.e., after the portfolio has had more time to grow.

• Withdrawal rate considerations: Sequence risk is closely tied to a retiree’s withdrawal rate. Higher withdrawal rates increase the impact of sequence risk. Potential negative returns could deplete the account faster when a larger percentage of the portfolio is withdrawn.

Four ways to minimize sequence risk

1. Maintain Spending Flexibility. Here, we maintain a balanced investment portfolio while allowing for flexible spending. We mitigate sequence risk by reducing spending after a portfolio decline, allowing more money to remain in the portfolio so it can take part in any subsequent market recovery. However, the retiree has less spendable income during this period.

Withdrawing a constant percentage of remaining assets minimizes the sequence of returns risk. It is important not to put too much pressure on the portfolio during the early retirement years. While a constant withdrawal percentage can reduce the pressure, if the portfolio drops 20% to 30% in one year, as the market has in the past, withdrawing an income only increases the amount the portfolio has to recover. This dangerous strategy can cause a depletion of assets in the future.

2. Reduce Volatility (When It Matters Most). Individuals should not expect constant spending from a market-based portfolio since the likelihood of volatility is too high. Those who want an upside and are willing to accept volatility should be flexible with their spending and consider abstaining from withdrawals until the storm passes. Retirees can reduce volatility by building a portfolio based on distributions instead of growth. They can set aside expected distributions into a bucket and then invest the remaining portfolio without withdrawing funds.

Spending should be kept constant if the portfolio is “de-risked.” To get constant spending, investors could look to hold fixed-income assets to maturity or use risk-pooling assets like income annuities or other fixed assets. Other approaches to reducing downside risk (volatility in the undesired direction) could include using a rising equity glide path in retirement. The path starts with an equity allocation that is even lower than typically recommended at the start of retirement but then slowly increases the stock allocation over time. Doing so can reduce the probability and magnitude of retirement failures. This approach reduces vulnerability to early retirement stock market declines that cause the most harm to retirees.

Asset allocation could also be managed with a funded ratio approach, in which more aggressive asset allocations are used only when sufficient assets are available beyond what is necessary to meet retirement spending goals. Finally, financial derivatives or income guarantee riders can be used to place a floor on how low a portfolio may fall by sacrificing some potential upside.

3. Buffer Assets – Avoid Selling at Losses. Here, the retiree uses other assets available outside of the financial portfolio from which to draw after a market downturn. Returns on these assets should not be correlated with the financial portfolio since the purpose of these buffer assets is to support spending when the portfolio is otherwise down. An old strategy in this category is to maintain a separate cash reserve — say two or three years of retirement expenses — separate from the rest of the investment portfolio.

While buffering assets is a safe approach, one disadvantage is that the cash reserve could have otherwise been invested to seek higher returns than cash provides. Cash can be a drag on the portfolio, and in recent years, more attention has been focused on using other alternatives.

4. Bucket Strategy: This involves segmenting a retirement portfolio into different “buckets” or asset pools, each serving a different purpose (e.g., short-term cash needs, medium-term investments, long-term growth).

The idea behind this strategy is to access cash in the short term so a retiree does not have to worry about stock market fluctuations. Theoretically, they shouldn’t have to sell their investments during a down market to fund their annual withdrawals.

Here are some suggested allocations for each of the three buckets:

a. The Immediate Bucket contains short-duration CDs, T-bills, high-yield savings accounts, and other similar assets. Ideally, clients hold enough cash in the immediate bucket to fund up to two years of living expenses.

b. The Intermediate (Middle) Bucket covers expenses from Year 3 through Year 10 of retirement. Money in the intermediate bucket should continue to grow to keep pace with inflation. However, investors will want to avoid investing in high-risk assets. Possible financial instruments include longer-maturity bonds and CDs, preferred stocks, convertible bonds, growth and income funds, utility stocks, REITs, and more.

c. The Long-Term Bucket contains investments that align with historical stock market returns. These assets grow a retiree’s nest egg better than inflation and allow them to refill their immediate and intermediate buckets. Here, we place a diversified portfolio of stocks and related assets. It should be allocated across domestic and international investments, ranging from small-cap to large-cap stocks.

Conclusion 

Ultimately, a good retirement program protects capital, reduces financial (and psychological) risk, and provides a long-term investment framework that can weather any financial storm.

Dr. Guy Baker, CFP, CEPA, MBA is the founder of Wealth Teams Alliance (Irvine, CA). He has been listed in the Forbes 250 Top Financial Security Professionals List and authored  Maximize the RedZone, a guide for business owners as well as The Great Wealth Erosion, Manage Markets, Not Stocks and Investment Alchemy. He also wrote “How to Choose a financial Advisor.  Among his many awards and honors, he received the 2019 John Newton Russell Memorial Award for lifetime service achievement in the life insurance industry. 

“My goal is a portfolio I can justify to myself today, based on the information available now. Because unexpected returns will dominate the outcome, I won’t judge my choice on what the portfolio delivers tomorrow.” — Kenneth R. French