Written by Jonathan Vance, CFP®, EA
Over the 50-year time period from 1975 to 2025, United States stocks have provided an average annual rate of return of 11.93% as measured by the S&P 500 index.
Alternatively, you can purchase 10-Year US Treasury Securities for an interest rate of around 4.73% right now depending on your exact source.
11.93% is more than 4.73%, and both you and I likely wouldn’t say no to extra money, so the answer is simple: Just buy stocks, don’t even mess around with bonds, right?
Well, not exactly.
I do not intend to hand you a vague, one-word answer like "diversification" as my reasoning for saying no. Instead, I will spend the remainder of this blog post providing actionable context as to why so many Certified Financial Planner (CFP®) Professionals, including myself, continue to recommend simple, tailored stock-and-bond portfolios for near-retirees and retirees in 2026.
The single biggest factor I use in determining if, and if so, how much bond exposure I recommend to clients is this:
If you’re within 5 - 10 years of retiring or are already retired, the answer to that question is almost always at least some number greater than $0.
During your working years, your portfolio has one job: grow as large as possible. You consistently add new savings, meaning market dips are opportunities to buy shares at lower prices.
Once you retire, the math changes. The moment you begin taking regular withdrawals, portfolio volatility transforms from a simple statement value fluctuation into a structural risk that needs to be addressed.
As mentioned above, the preceding 50 years of S&P 500 returns have been significantly higher than the next decade of forward-looking interest payments from 10-year US Treasuries. So why would a rational, logical investor intentionally select the lower-returning asset class?
I have 2 primary reasons:
Many investors are already aware that buying a broad, diversified stock portfolio (such as an S&P 500 index fund) is not a guaranteed investment. You are purchasing fractional ownership across a basket of publicly traded corporations. You partake in the underlying earnings, dividends, and asset growth of those companies over time, which historically has compounded at that 11.93% annualized rate for the time period referenced above.
However, the next year, decade, or even longer could look very different. There is no law stating that the S&P 500 index or any other stock index must match its historical average moving forward. I do not point this out to suggest that you should live in fear or panic-sell your equities. Rather, it is a simple matter of fact that is easy to overlook.
Even if we assume that stocks will deliver that exact same average annual return of 11.93% per year over the next 20 years, there is also zero guarantee that the growth will arrive in a smooth, predictable pattern.
According to historical data from JP Morgan, the average intra-year decline of the S&P 500 between 1980 and 2025 was 14.2%. Mind you, these are normal intra-year pullbacks. If you held $100,000 in stocks, you could reasonably expect that balance to drop to $85,800 at some point during a typical calendar year before potentially recovering. That is standard behavior for equity markets.
Of course, some years deliver drawdowns that are far sharper than average. In recent memory, the COVID-19 market panic caused a market drawdown of approximately 34% in just 30 days.
Imagine you were on an extended vacation during those 30 days. You open your Charles Schwab app upon returning home to find that your $100,000 stock balance is suddenly worth $66,000. It’s easy to imagine that you or I may feel a little uneasy while seeing such a dramatic price change in a relatively short amount of time.
However, feeling uneasy is not my primary concern. I would be far more concerned if you were actively relying on a portion of that $100,000 to fund your next few months of property taxes, health insurance premiums, and groceries while your account now sat at a fraction of its former value.
Selling equities during a market trough can inflict permanent mathematical damage on a portfolio.
Suppose you need to pull $5,000 per year from your $100,000 stock portfolio to supplement Social Security income. As luck would have it, you need that $5,000 on the exact trough day when your holdings have dropped to $66,000. Household bills cannot be paused, so you sell $5,000 of stock at the lower prices, leaving a balance of $61,000.
Over the next year, the stock market rallies by 51.6%, returning to its original peak. Let us calculate your ending balance:
Without withdrawals, your $100,000 portfolio would have dropped to $66,000 and recovered back to $100,000. After taking $5,000 out, you might expect to have $95,000. Instead, your balance is $92,476, leaving you $2,524 short.
Why did this happen?
Just as the laws of compounding work in your favor when you are systematically adding money during your career, the inverse can also be true. By selling stock units at “the bottom”, you permanently eliminate the precise shares that would have generated the 51.6% rebound in our example.
This is a simplified example of sequence-of-returns risk in action.
Investing 100% of your net worth in price-volatile asset classes right as you transition into retirement can be dangerous, especially if your early retirement years happen to contain well below average returns or extreme downward price fluctuations.
The danger is not merely that your account balance drops temporarily on paper. The true danger is that forced liquidations during downturns can prematurely drain your capital, increasing the odds that you may run out of money before you run out of life.
If a 100% stock allocation carries too much sequence-of-returns risk for a retiree, how should you structure your portfolio instead?
While there are dozens of perfectly fine ways to construct a multi-asset portfolio, I prefer a framework that is simple to execute, low-cost, and liquid enough to adapt as your spending needs evolve.
To build an asset allocation tailored to decumulation, we must answer two core operational questions:
The asset bucketing framework is one of the most intuitive and practical tools for determining your ideal stock-to-bond ratio. Rather than picking an arbitrary percentage based on your age, you map your allocations directly to your expected cash flow needs.
Let us look at a practical example:
Meet Michael and Holly, a retired couple who need to withdraw $60,000 per year from their total investment portfolio to meet their living expenses, accounting for an estimated 2.5% annual inflation rate. Their forward-looking portfolio withdrawal needs would look like this:
While there is no single rule for how many years of fixed income you should hold, most financial planners suggest keeping between 5 and 10 years of net portfolio withdrawals outside of the stock market.
If Michael and Holly have a total investment portfolio of $1,500,000, funding a 5-to-10-year stable spending reserve leads to an overall target asset allocation somewhere broadly between 80% Stocks / 20% Bonds and 60% Stocks / 40% Bonds.
Which target is right for your situation?
This question cannot be answered with absolute certainty because future stock returns are unknown. If equity markets experience a strong, uninterrupted bull run over the coming decade, keeping a smaller 5-year fixed income bucket will leave you with a larger total net worth at the end of that period.
Conversely, if the market experiences extended flat periods, stagnant economic growth, or severe bear markets, having a 10-year fixed income allocation will protect your portfolio more effectively.
Financial decisions always involve trade-offs. Your goal is not to find a non-existent perfect formula, but rather to identify an allocation strategy that aligns with your personal risk tolerance, floor cash flow needs, and overall retirement vision.
Fixed assets come in many structures. The simplest category is cash and cash equivalents, including high-yield savings accounts, money market funds, and short-term Certificates of Deposit (CDs).
Money sitting in a checking or high-yield savings account maintains a stable nominal value. Aside from what you spend, a dollar today remains a dollar tomorrow.
Bonds represent a second major category of fixed assets. A bond is a debt instrument issued by an entity, such as the US Federal Government, a municipality, or a corporation. When you buy a bond, you lend capital to the issuer in exchange for regular interest payments and the return of your principal balance at maturity.
I want to make something very clear: Bonds represent a broad asset spectrum. A US Treasury Bill maturing in 3 months behaves very differently from a “junk” rated corporate bond maturing in 10 years. Both are “bonds”, but they are very different investments.
When organizing your spending buckets, keep two core evaluation criteria in mind:
If you need to spend money next month or within the coming year, that capital should not be exposed to asset classes that experience regular price swings in my opinion.
Cash and cash equivalents excel in this role. While a money market fund yielding 3% to 4% is unlikely to outpace inflation over long periods of time, generating high returns is not its primary function. Its purpose is to remain stable so you can pay your property taxes, cover insurance costs, and book vacations without worrying about what market indexes did yesterday.
What about capital you do not need this month, but will definitely need over the next 2, 5, or 8 years?
This intermediate time horizon creates a classic financial planning dilemma. Investing these funds entirely in stocks can be risky because equity drawdowns can take several years to recover. However, holding too many years of spending needs in cash can expose your purchasing power to inflation drag over time.
In my opinion, this can be an excellent use case for high-quality, investment-grade bonds.
Unlike cash, bond market values can fluctuate daily based on interest rate movements. However, bonds are legally structured to return your initial principal amount at maturity, provided the issuer does not default.
For example, if you purchase a $1,000 investment-grade bond with a 3-year term and a 5% coupon rate, you would expect to receive $50 in interest each year for three years. At the end of year three, your original $1,000 principal is returned to you.
While short-term interest rate shifts can cause the underlying market price of a bond to fluctuate prior to maturity, two practical principles apply to high-quality bond allocations:
Investment-grade bonds can serve as a tool to fill the intermediate gap in a retirement plan. They often offer a higher long-term expected return than bank cash while maintaining a smoother year-to-year ride than stocks.
To see how a multi-asset allocation protects a retiree during market downturns, let us return to our $100,000 portfolio example.
Instead of holding 100% in stocks, suppose you structure your account with a mix of cash, investment grade bonds, and equities:
Now, let us re-run the 34% stock market drop scenario. For clarity, we will assume that your cash balance and investment-grade bond holdings fully maintain their value during this stock drop.
When the market sell-off occurs, the stock portion of your portfolio drops from $60,000 down to $39,600 while we assume the cash + bonds remain worth $40,000 combined. Your overall portfolio balance drops from $100,000 to $79,600.
You still need your scheduled $5,000 withdrawal for living expenses. Instead of selling depressed stock holdings, you draw down your $5,000 cash balance.
Because your stock holdings remain completely untouched, your equity shares sit peacefully at $39,600, waiting for the market to recover.
When the market bounces back by 51.6% as it did in our earlier example, let us calculate the value of your remaining equity shares:
$39,600 x 1.516 = $60,000 (Rounded)
Adding your remaining $35,000 bond allocation back in, your total portfolio balance sits at $95,000.
Notice the difference?
By insulating your immediate living expenses with cash and short-to-intermediate bonds, you avoided selling equities at a discount. Your portfolio recovered to its full expected value of $95,000 (minus your $5,000 withdrawal), saving you from the $2,524 loss caused by reverse compounding in the 100% stock scenario.
What happens if equity markets don’t recover for two or three consecutive years, just as was the case in the early 2000s?
Your portfolio buffer continues to work as intended. If stocks remain at their $39,600 valuation in Year 2 when you need your next $5,000 distribution, you could choose to leave your stocks alone and draw $5,000 from your $35,000 bond bucket instead.
Two full years into a bear market, your asset allocation looks like this:
Holding cash and high-quality bond funds can buy you time. It reduces the likelihood that you’ll need to sell a considerable amount of high volatility growth assets (stocks) during dramatic downward price fluctuations, effectively mitigating sequence-of-returns risk and keeping your retirement income plan on track.
While an 11.93% historical return on equities looks appealing on paper, average returns without context can lead to flawed financial decisions in retirement. During your career, your financial goal was primarily wealth accumulation. As you approach and enter retirement, you enter a new goal of ensuring your retirement lifestyle remains adequately funded.
Bonds are not designed to outperform the S&P 500 or deliver dramatic capital appreciation. Their purpose is to provide stability, consistent yield, and an operational buffer against market declines.
By structuring your retirement portfolio into dedicated cash, bond, and stock buckets, you can build a more resilient framework.
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