Bonds, CDs, and Your Retirement

As retirement approaches, many financial professionals suggest allocating a portion of your savings to more conservative, lower-risk options. The ideal mix depends on personal factors like your target retirement ageand overall risk tolerance.

Conservative strategies often involve bonds, certificates of deposit (CDs), or similar assets that generally carry less market risk than stocks. Still, these instruments come with trade-offs—particularly in a low interest rate environment.

Why Interest Rate Risk Matters

Interest rate risk is a critical consideration when evaluating fixed-income investments like bonds and CDs. As rates rise, the value of existing fixed-rate assets tends to fall, since new offerings provide better yields. This dynamic can erode your portfolio’s purchasing power or lead to losses if you need to sell before maturity.

Retirees often rely on steady income and capital preservation. But holding long-term bonds in a rising rate environment may lock in returns that trail inflation—reducing your real income over time. At Foxcove Financial, we help clients assess these trade-offs and explore insured alternatives that may offer more protection, predictability, and growth potential.

What Are Some Upsides for Bonds and CDs?

A primary advantage of bonds and CDs is their relative stability. Unlike stocks, which can swing with market conditions, bonds generally repay their full face value at maturity when held for the entire term.

Certificates of Deposit (CDs) are insured by the FDIC, offering federal protection. U.S. Treasury securities—such as T-bills, T-notes, and T-bonds—are backed by the full faith and credit of the U.S. government. Similarly, agencies like Freddie Mac and Fannie Mae offer securities with indirect federal backing.

Don’t Overlook the Trade-Offs

While these guarantees offer security, they often come at the cost of lower interest. That can make it difficult for your money to keep up with inflation over time.

Given current rates, both CDs and Treasury securities may be exposed to inflation risk. Long-term holdings, such as 30-year Treasuries, may lock in lower yields for decades—potentially missing future rate increases.

See table below for a side-by-side comparison of bonds and CDs:

Feature	Bonds	CDs
Issuer	Government, Municipalities, Corporations	Banks and Credit Unions
Insurance/Backing	Depends on issuer (Treasuries backed by U.S. gov’t)	FDIC-insured up to $250,000
Interest Rate	Typically higher, varies by risk	Lower, fixed
Liquidity	Can be sold before maturity (may lose value)	Early withdrawal penalties apply
Risk Level	Varies by issuer and term	Low

What Happens to Bonds When Interest Rates Go Up?

When interest rates rise, new bonds become more appealing. To adjust, investors may try to sell existing bonds in the secondary market—but since those older bonds offer lower yields, they often sell at a discount.

This drop in resale value can lead to capital losses for investors who sell before maturity.

A Quick Look at Municipal Bonds

Municipal bonds are typically viewed as safe investments, offering tax-free interest at the federal level and often at state and local levels as well. In return for this tax advantage, they generally pay lower yields than taxable alternatives.

They tend to benefit higher-income investors seeking to reduce their tax exposure. For middle- and lower-income investors, taxable bonds with higher yields—even after taxes—may provide better overall returns.

What About Corporate Bonds?

Corporate bonds typically offer higher interest rates than municipal or government bonds, but they come with added risk. If the issuing company experiences financial trouble, it may default on interest or principal payments.

To gauge risk, bonds receive safety ratings. U.S. Treasuries have the highest ratings and lowest default risk. Lower-rated bonds are more speculative and carry a higher risk of loss.

Bonds rated below BBB or B++ are known as “junk bonds.” While they offer higher potential returns, they also carry increased risk and are more suitable for investors willing to accept volatility in pursuit of income.

See table below for a breakdown of bond types by risk and return:

Bond Type	Typical Interest	Risk Level	Common Use Case
Treasury Bonds	Low	Very Low	Capital preservation
Municipal Bonds	Moderate	Low	Tax-advantaged income
Corporate Bonds	Higher	Moderate to High	Income generation
Junk Bonds	Highest	High	Speculative income

Alternatives to CDs and Bonds

Some options offer the potential for higher interest than CDs or bonds—while still protecting your principal.

Fixed Annuities

Fixed annuities provide a guaranteed interest rate and offer more stability than riskier investments. They sit between ultra-conservative assets like CDs and higher-risk vehicles such as junk bonds.

Insurance companies that issue annuities must meet state-mandated reserve requirements, keeping enough capital to back their guarantees.

Unlike the federal government, insurers can’t print money or raise taxes. Their guarantees are supported by robust financial reserves, adding confidence to the annuity contract.

Fixed Index Annuities

Fixed index annuities offer the potential for interest based on market index performance—while still protecting your principal from loss.

These contracts are tied to benchmarks like the S&P 500 Price Index. When the index increases, a portion of that growth is credited to your annuity. If the index declines, no interest is earned—but your principal remains intact.

While not guaranteed, fixed index annuities have historically delivered stronger returns than CDs or traditional fixed annuities over time—without direct market risk.

What Are Some Other Advantages That Annuities Offer?

Fixed and indexed annuities grow tax-deferred, meaning your account’s earnings accumulate without taxation until withdrawals begin.

This tax advantage applies whether the annuity is held personally or within an IRA or employer-sponsored retirement account. Once distributions begin, the income is taxed as ordinary income.

Perhaps most notably, annuities can offer a guaranteed lifetime income stream—even if the account is depleted. Annuities are the only financial vehicle designed to provide income for life.

Comparing Bonds, CDs, and Fixed Annuities

See how bonds, CDs, and fixed annuities compare across several key dimensions:

Feature	CDs	Bonds	Fixed Annuities
Principal Protection	✅ Yes – FDIC-insured	❌ No – May lose value if sold early	✅ Yes – Backed by insurer reserves
Guaranteed Interest	✅ Yes – Fixed rate	❌ No – Market-based yield	✅ Yes – Locked rate or indexed formula
Tax-Deferred Growth	❌ No	❌ No	✅ Yes
Lifetime Income Option	❌ No	❌ No	✅ Yes – With annuitization
Market Downside Protection	✅ Yes	❌ No	✅ Yes
Liquidity	❌ Early withdrawal penalty	✅ Can sell, may lose value	❌ Surrender charges may apply