Weekend Reading – Do you need bonds in retirement?

Great discussion, Mark. Your point about understanding why you hold fixed income really resonated with me. I recently wrote about what I call the “Bond Trap,” which is essentially the risk of locking into long‑duration bonds at yields that don’t compensate for the downside if rates stay higher for longer.
https://divistockchronicles.substack.com/p/why-you-might-be-walking-into-a-bond

What I found while digging into the data is that the environment we’re in today is very different from the decades when broad bond funds were a no‑brainer. Duration risk is now a much bigger factor, and many investors don’t realize how sensitive long‑term bond ETFs can be to even a 1% rate move. Meanwhile, the biggest players—like Dutch pension funds—are reducing long‑term exposure, and Buffett himself is sitting almost entirely in short‑term T‑Bills for the liquidity and optionality.

That said, your point stands: the “right” answer depends on the retiree. Some people genuinely value the stability of a 60/40 mix. Others, like you, prefer a blend of dividends, cash‑alternatives, and equity exposure. My takeaway is that fixed income isn’t dead—but the type of fixed income matters more than ever. Short‑term instruments (CBIL, ZMMK, etc.) behave very differently from broad market funds like ZAG, and understanding that difference can help retirees avoid surprises.

Really enjoyed your perspective here. It’s a good reminder that retirement planning isn’t about copying a model—it’s about matching tools to your personal risk tolerance and income needs.

I’m still a fairly firm believer in people following an investment/savings plan that suits their situation and personal foibles.

Some may very well have complete faith in the equity markets and businesses that occupy that venue, whilst others may be leery of taking on perceived risks that make them break into a cold sweat. People choose a path that they (and presumably any partner) are comfortable with. Kinda like beauty being in the eye of the beholder.

And just to wemble even more, people can change their methods as changes happen in their lives. Nothing ought to be carved in stone.

I’m with Gus, same experience. Besides a small cash-ish position in MM funds and corporate bonds I’m not keen on fixed income definitely not touching these things esp. not C or T bills.

I get the low volatility narrative but reality is bonds are risky, offer horrible risk adjusted returns and are crappy tax inefficient income generators. You do much better with defensive dividend stocks. I.e. ZAG, 5Y total return of 1.57%, has a Sharpe ratio of 0.69, XEI. 5Y return 110%, has a ratio of 3.1. Sharpe expresses how much risk you are taking relative to your return, higher is better you want to be at least at 1 >2 is preferred, >3 is GOAT territory. There is almost no metric where ZAG does better. Yes you do have a smaller max drawdown (-18% vs -45%) but ZAG’s smaller drawdown comes from your principle XEI ‘s mostly from your gains so you’d likely be ahead on $ value. (using Portfoliolab for this).

The level of bonds does not materially change the risk-return profile, a 60/40 like ZBAL is not materially safer then an 80/20 like ZGRO yet returns over the long term lag significantly (ZGRO +20% over 5Y). If bonds have near zero/negative inflation adjusted returns, provide negligible tax inefficient income, offer little downside protection and limit your overall returns why hold them?

To your point dividend stock proxies are a better way to go, i.e. FTS bought at $50 held for 5Y is worth $73 today add dividends and you had a 78% total return without losing one minute of sleep. Not only do you not need bonds in retirement imo you are better off without them.

Hello Mark,
Thanks for this great post !
In 2020 while discovering your website and trying to learn about investing in dividend growth companies I had a pure couch potato portfolio of fixed income and equity but when COVID hit my fixed income part crashed even harder than equities and you can check the Chart of VAB.TO it’s horrible return till now so I thought to myself where is the defensive action. In holding this plus the yields are horrible about 3% that doesn’t change so I sold it and sold the rest of the ETFs and went 100% equities and that will never change , after also discovering Henry Mah and Tom Connolly I had a 100% conviction in the strategy and never looked back , why would I hold an asset that provides no protection while it claims that it should and my income remains the same , but anyways like you always said personal investing is personal but I’m definitely enjoying the increased income that I get from my holdings just this week I got a 10% increase from MFC and GWO so who can beat that ? So yes for Us nothing but dividend growers about 85% allocation and the rest in VTI and QQQ and XAW and also couple of CC etfs.
Again that what works for us and we see the results but it might not work for others.
Have a great Family day long weekend.

Mark,

Having thought more about this question while working on my basement project, I’ve come to the firm conclusion that the answer to the question is “No!” There are two reasons: 1) the assumed protection provided by bonds can be attained by other means, and 2) guaranteed cash inflows may meet or exceed one’s spending.

Today, our cash inflows do not meet our spending, so we have cash, dividends, and bonds to fill the three to five year period of a major global market downturn. In approximately seven years, we expect our regular cash inflows to exceed our spending, and at that time, we can replace all bonds with stocks if we want. Having said that, our plan still calls for a 10% allocation to bonds and 10% to cash/GICs. The cash has a purpose, i.e., emergencies, but I’m not so sure why I can’t give up the bonds, despite my negative feelings toward them.

Perhaps a future post could explore the question: “Do you need fixed income in retirement?” The post could consider different forms of fixed income, and the pros and cons.

Bob

For our retirement we hold no fixed income products in our personal investment accounts and likely never will. Our approach is to consider each form of retirement income (we have 8 in 2025), and classify it as equity or fixed income. 90% of our 2025 income will come from fixed income sources such as DB(1) pension, CPP (2), OAS (1) and this also means 90% of our income has some inflation protection which we didn’t have while working.
Should the 10% equity portion go to zero we are still fine.
I also considered what would happen when one of us passes. Although income would drop, the survivor will have enough guaranteed, inflation protected income from just the DB pension, CPP and OAS to meet their needs. There is also plenty of room in the budget to adjust. I sleep fine.

I am far from an expert but for my 2 cents I look at fixed income to include bonds preferred GIC’s. Anything for the most part that will produce a regular income stream for me in retirement. For my money I also look at dividend stocks as bonds or fixed income. I also consider my CPP and OAS as one very nice big bond fund. It certainly meets the criteria of producing an inflation protected stream of income. Our portfolio has about 5% in long term bonds which we bought last year when we thought rates were going to start going down. We also have a 3 year GIC ladder There was a time when your retirement was expected to be shorter say 10 years or so if you retired at 65. But now if you retire at 65 the odds of at least you or your spouse living into your 90’s is fairly good if not both of you if both are healthy at 65. Therefore for my money you need to keep a higher amount in stocks. We are comfortable having 80% or higher in stocks and the rest in bonds preferred and GIC’s. We also have been accumulating cash in HISA and GIC’s so the first 3 years of cash withdrawals are covered. No more reinvesting of dividends or interest payment. It all goes into HISA I want to protect against the sequence of risk issues when we retire. From my calculations with our cash flow set up this way we should be fine for 10 years or so before we would have to do any sells for income. Everyone is certainly different and view risk different. However at the end of the day when you are retired it’s all about how well you sleep at night. I am hoping for us sleeping won’t be a concern. We shall find out sometime this year if I am right about that. Cheers Mark.

I haven’t had bonds for years. Since retiring I have stopped the drips except for the TFSA and accumulate the cash in the RRIF into a ISA until the end of the year when I make a withdrawal. Dividends in my non- registered account go into my cash bucket at EQ where they earn higher interest. Periodically I buy a GIC if the bucket has more than I need. I look at my CPP and OAS as bonds which cover about half of my regular expenses. As my interest in or ability to travel lessens, I will use that budget for extra gifting. Now I am in a condo with minimal maintenance requirements, my emergency fund is not as high as it was before. Cash and GICs in all accounts total about 10 to 12% of my portfolio.

Once a year I reevaluate my position and budget and act accordingly. I don’t spend much time tinkering and make sure to add to my TFSA every January, where I invest in dividend growth stocks.

Since retiring nearly 11 years ago I’ve owned bonds for about 6-7 years early on. I prefered corporate bonds BBB+ and hold to maturity so my outcome is known, but did have some $$ in a bond etf. I hold no CAD bonds now, since pre covid but do have a sizable amount in VUSB, for safety, currency arbitrage and while waiting for a better entry point for US equities, if that happens. I always use a broker ISA and GICs for most of my FI allocation which started at 50% in retirement and is now at about 18%, as planned.

Like Bob I really dislike them. Ha.

I started out on the 60/40 portfolio partly from being a reader of Moneysense and other research. Having watched the dynamics over the last 20 years you get a sense of comfort even with the last rise of interest rates that saw big losses on my bond ETF’s. (They have recovered but not fully) It was categorized as “A once in a lifetime event”. So now retired for 9 years I think I will continue on this route. When I started retirement my spreadsheet calculations indicated I needed to average 4.5% on my investments (RRSP/TFSA, stock account). (The 60/40 portfolio has easily beet that) For me, I don’t have the desire to change if I know the current method will produce what we need.
I have primarily dividend paying stocks in our TFSA so i am enjoying the yearly raise that my TFSA provides but will keep on the current path.

No bonds or bond ETFs in our accounts. Never really acquired the desire for them. Did have some convertible debentures in the past (prior to DIY) but those were a product that was sold to us versus something we wanted. Big mistake, won’t ever use them again.

We’re more a GIC kinda family and now utilize a good amount mostly as our safety net.

My story …
When I first started investing I didn’t have a clue about the stock market. I thus started out as a bond guy because I thought they were “safe”. That was over 40 years ago. Nope – companies go bankrupt or nearly bankrupt and are then sold to another and your discounted bonds are exchanged for stock. Happened to me! When I was a TD client before the advent of online trading platforms they insisted on me holding ATT Canada at a favorable rate. When the company ran into trouble they STILL insisted “don’t sell it!!” (they said) and I hanged on to it, or should I say it hung me! ATT Canada was sold to Manitoba Telecom and I was given stock worth 32 cents on each dollar of my original bond purchase. Oh boy … god knows what the guys in the TD “boiler room” were getting paid to tell me all that malarkey.

I swore that would never happen to me again … well … I’m trying my best. So then my portfolio consisted of stocks and preferreds which I bought at a discount in 2008 – the Preferreds were sold or called eventually. The latter were nice but I regret not buying MORE dividend growth stocks. I’m 72 with a nice mix of growing income stocks, with growing yields on stocks I’ve never sold since 2009 – like Royal, Metro and CN Rail. What’s not to like when you hold such beauties for growing retirement income? I would say that after the first 10 years of dividend growth most effectively become “bondified”. PATIENCE! Of course dividends get cut … thinking about BCE for example … but that’s why you should own about 20 to cover the risk. I’ve had cuts but in the long haul everything worked out great.