informed decisions blog

Blog116: Investing In Bonds In Retirement

24th June 2019

Paddy Delaney

Investing in Bonds, particularly in retirement (or once we stop working full time!) is the norm. If you are a member of an Occupational Pension scheme or you have a mass-market pension fund you are more than likely signed-up to LifeStyling on your scheme. We covered it in Blog 53. What LifeStyling will do is move a large chunk of your pension or investment portfolio from Equities and into Bonds as you approach your ‘normal retirement age’. Can be a good thing, can be a not-so-good-thing.

This week I aim to share a short piece outlining the key aspects of Bonds, how they work, what you need to know about them if investing in them, and how they can stand to benefit/hinder investors in the mature stages of their financial planning. We will focus on Bond funds, and Bond Index Funds specifically in this weeks’ edition.

What Are Bond Index Funds?

A Bond Index Fund is a fund which invests in a broad selection of individual Bonds. It does so in order to deliver returns in line with a broad Index. For example, if I wanted to achieve the average returns of all Bonds available across the globe I have 2 options to do so. Option A is to buy into every single Bond on offer around the world. Practically impossible! Option B is to buy into a Global Bond Index which will invest in a broad sample of what is on offer globally. An Index can offer this access, and simultaneously offer diversification as within an index you could have upwards of 10,000 individual holdings.

Bond Index Funds take a ‘passive’ as opposed to ‘active’ approach to delivering returns and stability for investors. There is no fund manager trying to pick and time the purchase and sale of various individual Bonds within the portfolio of Bonds. Vanguard, Blackrock and Fidelity each offer some of the world’s largest Bond Index Funds. They do so at very low cost, often at 0.15 to 0.2% annual management fees. They also offer considerably solid performance versus what is on offer via active management.

What Returns Can I Get From Bond Funds?

The rationale for investing in Bonds has historically been to bring a level of diversification to an investment or retirement fund portfolio. We are not, or at least shouldn’t be, investing in them in the hope of achieving significant rates of returns. If you are looking for highest potential returns over the long term then Equities are the stand-out asset class. It is clear to see the long term returns of a simple Global Equity Index Fund below. Increasing in value over the past 10 years from €100,000 to €340,000. This is an average annualised return of 13%

Don’t expect this level of growth (340% over 10 years!) to continue – it has been an exceptionally positive period of returns. The average returns over the past 115 years have been in the region of 10.5% on such Global Equities, meaning a €100,000 investment would grow to €250,000 or so over 10 years. While it’s not €340,000 it still ain’t bad!


If, on the other hand, you are looking for greater stability but at the expense of returns then Bonds are among the most reliable asset-classes. Below you will see that the above’s equivalent, a Global Bond Index, has grown from €100,000 to €155,000. Again, it is positive returns to the tune of 55% capital growth over a 10 year period. This equates to an average annualised return of 4.4%.




Sure beats the rates achieved on deposit accounts! I regularly see cases whereby Bond Funds are charging annual fees of 2% or so – for a BOND FUND! This makes it really really difficult to make any real returns. If you are paying 2% for holding Bonds in a pension or investment portfolio you really will struggle to do anything other than lose money in real terms.

Should I Invest In Bonds In Retirement?

In retirement you face a very significant Head-wind when trying to manage their income from an ARF. This head-wind causes people concern, fear about the future, and can result in some very costly mistakes. If you have an ARF you are battling the erosive power of inflation on your actual pot, management fees on your pot, a ‘leak’ of 4/5/6% of your pot being taken out every year, and of course a desire to have your income increase in line with inflation every year. That is a significant drain on your pot – a pot that you hope will last you for 20, 30, 40 years!

In a very simplified world we could say that sure look, just invest 100% of your pot in Equity. That has delivered the optimum returns over the long term. Last week we saw the huge variance of success between a Bond-focused and an equity-focused portfolio in retirement based on the historical data. But does that mean one should have little or no Bonds in their retirement portfolio? Not necessarily.

One of the primary reasons you might choose to have a significant portion of Bonds in your portfolio is in order to minimise volatility (and yes we know that it is volatility that delivers the returns over the long term – it is this ‘risk premium’ that allows Equity owners to gain double-fold the returns of Bonds). This is particularly the case in the initial years of an ARFs life. We covered Sequence Risk in Blog 90 and Podcast 112. If you have not had a look then it could be an opportune time to do so.

How To Measure Volatility?

I’ve often made the case that volatility is not the same as risk. Essentially volatility is a measure of the level of ups and downs of a particular fund or asset. It shows how widely a fund’s return will deviate from the average over a particular period.

For example, if your fund or portfolio had an average return of 4%, and it had a volatility rating of 8, it would suggest that the range of it’s returns over the period had swung between +12% and -4%. If, on the other hand your fund/portfolio had returned an average of 6% with a volatility rating of 5, the range of returns over the period would have been +11% to +1%. Ideally, I guess, people want the greatest return for the least volatility. They are looking for some silver bullet – despite all the snake-oil salesmen it really doesn’t exist.

  • The volatility rating of the Global Equity Index above is 10.8
  • The volatility rating of the Global Bond Index is 2.5

These very plain and clear numbers will suggest that we will see some pretty wild movements on the former, and very gentle swings on the latter. Depending on the % of income we want to take and the duration we want to take it for an investor will need to determine what is the optimum approach for them. And that is even before getting into the different ways of diversifying with each of these 2 primary asset classes. There is a lot to factor-in.

Last week we saw how a retirement income’s probability of success was fully doubled by altering it’s equity/bond split. Another factor, and one we will consider in the coming weeks is the level of inflation-adjusted income we take each year. We will explore what affect that has on one’s chances of making their ARF last at least just as long as they do!


Oh, Thanks to feedback from a listener last week I want to clarity that you do not need to take your 4% each year from your pension from 61 years of age. It is only if you have funds in an actual ARF that the 4% rule applies. Oh, no blog next week – devoting some valued time to the new website!





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