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Should You Lock in a 5% Return For 20 Years?

Updated: May 14

Summary of transcript below:

The 20-year treasury yield eclipsed 5% in October and the 10-year isn't far behind.

This jump in yield on the long end of the curve started a few months ago and economists are still baffled as to the reasons why.

Some say it's due to a strengthening economy.

Others cite the supply of bonds is too high or demand is too low.

I won't opine on that today and instead want to address the recent run-up in long-term yields and its impact on investors nearing or in retirement.

I can already see what some investors may be thinking about with regards to these juicy long-term yields and their portfolios in retirement.

Consider the 4% rule which states that an investor can safely withdraw 4% of the value of their portfolio each year and likely never run out of money in retirement.

Also consider that the 20-year U.S. Treasury yield surpassed 5%.

So if you're someone in your mid-60s and about to retire, are highly risk-averse and plan to follow the 4% rule, you may be thinking, "Why not put all of your money in 20-year bonds paying 5%?"

You're guaranteed be 1% ahead each year if you're earning 5% in interest and only taking out 4%.

More importantly, U.S. Treasury bonds are of the highest credit quality, thus there's really no risk of default as you'll likely receive 100% of the par value of your bonds at maturity.

And if we assume that an average life expectancy is 85 to make the math simple, a 65-year old retiree applying the 4% rule and investing 100% of their money in 20-Year Treasurys at today's yield of 5% is sitting pretty.

Seems almost too good to be true, doesn't it?

That's what I want to dive deeper into today.

While I believe some portion of a risk-averse retiree's investment strategy should be in intermediate and/or long-term treasuries, investing your entire nest egg in 20-Year U.S. government bonds may not be your best course of action.

Like with any investment that yields an attractive return, there are always risks. Here are 5 risk factors that should be addressed before investing in long-term bonds.

1 Inflation

Inflation compounds annually, much like market returns. If inflation persists at 4% per year for the next 10 years, the cost of goods and services will be substantially higher than today.

A bond with a fixed rate of interest does not work like this. Accordingly, inflation will, over time, surpass the current fixed-interest payment of your bonds and erode your purchasing power.

2 Growth

The success of the 4% rule was dependent upon a portfolio invested in bonds AND stocks. The reason is so the equity portion would grow over time and counter the impact of inflation, while the fixed income bucket would provide income and stability.

Now, if the Fed cuts interest rates, long-term bond prices will spike and investors in fixed income would actually see some growth.

However, that growth is limited to the amount and duration of rate cuts and, as we've seen in 2022, could easily go the other way with the TLT, an ETF tracking long-term treasurys, losing 31% in value.

Unless you've amassed a substantial amount of money and can comfortably live off of a small fraction of it, you'll likely need to have some type of equity allocation within your investment strategy to get that long-term growth.

3 Mistaking Current Yield With Yield-to-Maturity

A bond's yield-to-maturity is the total interest to be earned over the life of the bond if held to maturity. This is MUCH different than the bond's current yield, or even it's stated coupon rate.

Accordingly, you have to be careful when purchasing individual bonds as they could be trading a steep discounts to par, meaning the bulk of the 5% yield, using the 20-Year Treasury example, may not be realized until year 20.

For example, a 20-Year Treasury bond I reviewed recently boasted a 5% yield-to-maturity. Looking at the details, however, I found the coupon payment was only 2.875% and the bond was trading at 73 cents on the dollar. This was a 30-Year bond originally issued in 2013 that had dropped substantially in value due to rising rates, thus explaining the deep discount.

To summarize, bonds are highly complex financial instruments for the average investor and should be carefully researched and analyzed before purchasing, especially if said purchase represents a large portion of your portfolio.

4 Liquidity and Duration Risk

Like with any investment instrument paying a fixed rate of income, liquidity may be an issue if you ever needed to draw more than the fixed interest payment per year.

The only constant in life is change. So even if you tell me today that you're content with your current modest lifestyle and don't anticipate any major changes, life happens. Splurging on a big family vacation. Incurring unexpected health costs. Deciding to relocate.

Literally any number of variables could force you to dip into the principal of your portfolio.

And if you're invested 100% in long-term bonds AND interest rates continue to rise, that principal could fall drastically like it did in 2022 when the TLT which tracks long-term treasurys lost 31%.

So you have to account for liquidity and the unexpected in retirement as both are critical to long-term success.


Investing all of your money in treasury bonds may sound risk-free but trust me, it's anything but.

And that risk is more psychological than financial.

It's not easy to remain content with your decision to be 100% in government bonds when your friend is bragging about her 30% return or your neighbor claims his stock portfolio is up triple-digits over the past 10 years. So you have that peer pressure if you will.

Then there's the financial media to contend with that has the uncanny ability to instill fear of being in, and fear of missing out on the markets within a matter of minutes.

If you're not working with an advisor and just going it alone managing your investments in retirement, there's a risk you could be tempted to change a well-thought out, carefully constructed strategy because idiot Bob down the street doubled his money in 3 days on an A.I. stock.


Does it make sense to tie your money up in treasury bonds for 20 years at 5%?

For most people, this likely isn't be the best course of action as the risks, including inflation, lack of growth, the complexity of the fixed income market and liquidity far outweigh the benefits.

To quote Les Brown: "If you do what is easy, your life will be hard. But if you do what is hard, your life will be easy."

It's easy to spend 5 minutes searching online for the safest, highest-yielding investment to plunk all of your savings into. It's hard to cover the rising cost of things in retirement or to fund that unexpected emergency expense when your money is tied up in one security for two decades.

On the other hand, it's hard to assess risk in the markets, build a comprehensive financial plan, construct a diversified investment portfolio and consistently rebalance your investments. It's easier to live the retirement you want when you have these things in place.

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Image by Aaron Burden


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