Did you receive a savings bond as a kid? Maybe your parents tucked it away in the family safe or a safe deposit box. Or perhaps you purchased a CD as a way to grow your savings while ensuring the money wouldn’t be touched unless absolutely necessary.
Bonds and CDs have long been viewed as “safe” savings vehicles, but the investing world has changed significantly over the course of our lifetimes. Understanding the role these tools can play today is key to using them effectively.
In this article, we’ll review:
- The role bonds and CDs have traditionally played
- What’s different today
- How bonds and CDs can fit into a retirement plan
- Where the risks lie
The Role Bonds and CDs Have Traditionally Played
Bonds and CDs have historically served as sources of income and stability within an investment portfolio. Because many are backed by the U.S. government or insured institutions, they are often perceived as predictable and dependable, provided the terms are followed and funds aren’t withdrawn early.
Some individuals use savings bonds or CDs for near-term spending needs. If you know you’ll need funds for a new vehicle in a few years or a future remodeling project, these tools can align your savings with a specific timeline. This approach helps ensure the money is available when needed, while still allowing it to grow modestly along the way.
As retirement approaches, many investors gravitate toward lower-risk options. The goal is twofold: preserving savings while still allowing money to work on their behalf. This will lead many towards a higher allocation to bonds and CDs as retirement nears. That said, others remain comfortable with more risk, viewing retirement as another phase of long-term growth.
Personal preference and risk tolerance play a significant role, which is why there is no universal rule for when, or if, bonds and CDs should be included in a retirement plan.
What’s Different Today
Higher interest rates have made CDs and certain bonds more attractive than they’ve been in years. Since the rates tied to bonds and CDs are directly influenced by interest rates, periods of low rates offered little incentive to move funds out of high-yield savings accounts. As rates rise, that incentive increases.
While bonds and CDs are often grouped together, their structure matters:
- Individual bonds provide predictable cash flow and have a known maturity value, offering clarity around expected returns.
- Bond funds, which operate similarly to mutual funds, fluctuate in value and do not have a maturity date, making them better suited for long-term portfolio exposure rather than short-term needs.
- Short-term maturities offer flexibility and lower interest-rate risk.
- Long-term maturities may provide higher yields but come with greater price sensitivity.
- Bank CDs are straightforward, familiar, and provide the ability to calculate the exact future value.
- Brokered CDs can offer access to more competitive rates and a wider range of terms, but they require a clearer understanding of liquidity and holding periods.
Where’s the Risk?
Even traditionally “safe” investments carry risk. Understanding these trade-offs is essential.
- Interest-rate risk: When interest rates rise, the value of existing bonds can decline. While you’ll still receive interest and principal if held to maturity, the opportunity cost can be meaningful—especially for longer-term bonds purchased at lower rates.
- Reinvestment risk: When a bond or CD matures, future rates may be lower, making it difficult to replace that income at the same return/risk level. Those focused on risk avoidance may feel less impact, while others may be tempted to seek returns elsewhere.
- Inflation erosion: Even conservative investments can lose purchasing power over time if returns fail to keep pace with inflation.
Still a Thing—Just Not a One-Size-Fits-All Solution
Bonds and CDs are certainly still viable tools, but they are not a strategy on their own. Like any investment decision, their effectiveness depends on how intentionally they’re used and how well they align with your overall plan.
Reviewing your goals, retirement timeline, and risk tolerance is essential before making adjustments. If your priority is building confidence and sustainability into your retirement plan, bonds and/or CDs may be worth revisiting as part of a broader, well-coordinated strategy.
About Foundation Wealth Management
Foundation Wealth Management is a CPA-led organization, that provides financial planning services and tax planning support; services and outcomes vary based on each client’s circumstances. Our team includes qualified professionals, such as CPAs and CFP®s, who are integral to our service offerings. Our team includes 3 Certified Financial Planners: Burt Hutchinson, CPA, CFP®, Paul LaViola, CFP®, and Stephen McDade, CFP®.
As Fee-Only planners, we are compensated directly by clients rather than through commissions from brokerage or insurance products, which we believe helps align our services with client goals.
Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. All investments are subject to risk, including the possible loss of principal.
The client scenarios presented in this blog are entirely fictional and created solely for illustrative purposes. Any similarities to actual persons, entities, or events are purely coincidental and unintentional.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, Past performance is not a guarantee of future results.
