You Have Decades Before You Retire. Why You Still Want Some Money in Safe Bonds.

Young workers want the majority of their savings in stocks, but not necessarily all of it. (Dreamstime)

Key Points

• Financial advisors recommend considering both investment horizon and risk preference when allocating fixed income for young investors.
• The traditional ‘age in bonds’ rule is outdated; the ‘120 rule’ suggests subtracting age from 120 for stock allocation.
• Current market conditions, with long-term Treasury yields near two-decade highs, make a compelling case for including fixed income.

Financial advisor Cathleen Tobin works with a high-earning engineer in her late 20s at a big technology company. Even though her client has years to go before retirement, Tobin isn’t recommending an all-stock portfolio.

That’s because the young client based in Brooklyn, N.Y., is also saving for a near-term goal. She is planning to buy a house in about five years, and needs to save up the down payment. What’s more, the engineer doesn’t feel comfortable investing 100% in stocks, which can be volatile.

“When I think about fixed income for young people, horizon plays a role. When do you need the money and how flexible is the date?” Tobin says. “The other factor is risk preference.”

The key to long-term growth in the stock market is giving your money time to grow. If you yank money out of the market for a house down payment—or because stocks’ gyrations have you spooked—you can miss out in a big way.

If you left a $10,000 investment in the S&P 500 index between July 1, 2005 and June 30, 2025, your investment grew to $66,737, according to J.P. Morgan Asset Management’s Guide to Retirement. Missing the market’s 10 best days would cut that gain by more than half.

So how should a person determine how much of their portfolio should be in stocks and how much should be in fixed income?

The traditional rule of thumb was that your percentage of bonds should equal your age—a 70-year-old should be 70% in fixed income. That’s too conservative and dated, says Dave Sharpe, a wealth manager at Savvy Advisors in Lake Geneva, Wisconsin. He prefers the 120 rule, which entails subtracting your age from 120 to determine the percentage of your portfolio that should be in stocks, he adds.

“A 30-year-old investor certainly doesn’t need 30% in bonds, because they’ll lose that long-term growth potential by having that high of an allocation,” Sharpe says. “But if you took 120 minus 30, then you’re down to 90% equity and 10% [in fixed income] so it’s a much more accurate, in my opinion, allocation to fixed income and bonds.”

Like with most generalities in personal finance, this rule of thumb doesn’t take into account your exact situation. The best way to determine your portfolio makeup is to consider your risk tolerance and goals.

Take Tobin’s client again. On the retirement side, the client is maxing out her 401(k) and building tax-free retirement savings through mega-backdoor Roth contributions via her workplace plan. Her retirement savings are mostly equities, given she’s likely to be working for more than 30 years before retiring.

For the down payment in five years, she is saving about 20% of each paycheck in a taxable brokerage account. This year, it is invested at roughly 65% equities and 35% tax-efficient bonds, like municipal bonds and Treasuries that mature around the time she will need the money.

“Because this money is earmarked for a goal that is only five years away, we want to protect a portion of the funds from market volatility,” Tobin says. “Each year the allocation will shift, to increase the fixed income holdings and decrease equities. This is so that by the time she is ready to make her down payment, she won’t have to worry about a market decline eating into her down payment.”

Today’s investing landscape allows investors to benefit from bond yields in a way they haven’t been able to in recent years: Yields in long-term Treasuries bonds were this year pushed near their highest level in almost two decades. And while for years low interest rates were a tailwind for sectors like equities and real estate, higher interest rates eventually could change that tailwind into a headwind, Warren Pierson, co-chief investment officer at Baird Asset Management, said in early September.

All this makes a “compelling case to have some fixed income in your portfolio,” Pierson says—no matter what age you are. “Those going with all equities or no fixed income could be exposing themselves to a fair amount of risk.”

If you are looking to diversify with bonds, you may want to consider some of the best total market bond exchange-traded funds (ETFs) and mutual funds picked by Morningstar, such as the Fidelity Total Bond Fund and Vanguard Total Bond Market ETF. Both invest in high-quality bonds.

If you want ultimate safety, cash is another alternative. The yield on Treasury bills is still around 4%.

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