Nearing retirement? Stocks seem safer right now than they really are. Here's why you should add more bonds.

By Brett Arends

Investors who want to buy bonds have an embarrassment of options

Almost all major fund companies offer low-cost bond index funds.

A 5-year U.S. Treasury note BX: TMUBMUSD05Y, backed by the full faith and credit of the United States government, will pay you a guaranteed income of 3.8% a year in the current market. A 10-year Treasury note BX: TMUBMUSD10Y will pay you 4.3%. Corporate bonds issued by BAA-rated investment-grade blue-chip companies will pay you an average of 5.9% a year. Riskier high-yield bonds will pay an average of around 6.7%.

Inflation-protected Treasury bonds, backed again by the U.S. government, will guarantee to beat inflation by anywhere between 1.2% and 2.6% a year, depending on what maturity of bond you buy.

And a lifetime-income annuity for someone turning 65 right now will pay you nearly 8% a year, no matter how long you live. (The rate is a little lower for women, who typically live longer than men, whose rate is a little higher.)

All of which may be of special interest to the thousands of Americans who are now turning 65 every day, during the era known as "Peak 65."

It may all also be of special interest to the millions more who are over 50, or 55, and who are thinking of retiring - or hoping to - in the reasonably near future.

Investors who want to buy bonds have an embarrassment of options, from traditional mutual funds to exchange-traded funds. Or they can buy individual bonds, a practice that has some advantages but also involves another layer of complexity. Those buying bonds through funds should, as usual, take a close look at fees as well as performance. Almost all major fund companies offer low-cost bond index funds.

Bond income is usually taxed more heavily than income from stocks, so where you have the option, it's typically better to hold your bonds and bond funds in a tax-sheltered account, such as an IRA, and your stocks in your taxable accounts. (Though as ever with taxes, there are always complications. And most municipal bonds, issued by states and cities, are exempt from federal income tax.)

The obvious response to this is: Who wants boring old bonds when the stock market makes you so much money? Looking at recent years, you can see the argument. Over the past three years, the S&P 500 SPY has made you total returns of 88%. The bond market, as measured by the iShares U.S. Aggregate Bond ETF AGG? Just 15%.

What's not to like?

Many investors obviously agree. Vanguard's most recent "How America Saves," an annual report surveying the investment allocations of its clients, found that among those nearing retirement, ages 55 to 64, the average client held 64% of their investments in stocks.

There are three countervailing arguments that should prompt individuals, especially those nearing retirement, to give bonds a closer look.

The first is that the well-known phenomenon of recency bias, where our brains give too much weight to recent events, is distorting our picture of stocks and bonds.

Actually, there's a one in four chance that the stock market will lose you money over the next five years in real, purchasing-power terms.

That's not me talking, that's history. Since the 1920s, the so-called real return on the S&P 500, meaning the return in constant dollars, has been negative in 24% of all five-year periods.

That's also been the case in 12.5%, or one in eight, of all 10-year periods. You ended up poorer than you started.

It's something investors are apt to forget after several years of booming double-digit stock-market gains.

It may be an especially important data point right now, when the stock market is about as expensive as it has ever been in relation to fundamentals, and signs of euphoria are visible all around.

The second argument is that bonds are now hopelessly out of fashion on Wall Street, which is usually a sign that an asset is underpriced, and stocks are hopelessly in fashion, which is often a sign that an asset is overpriced.

It is almost with perfect timing that the latest fund-manager survey shows that the big-money crowd running the world's leading investment institutions has almost no interest in owning bonds - the generally safer alternative to stocks.

The third argument? Below the surface, the economy seems to be turning, and the outlook for bonds may be better than many realize.

Van Hoisington, a veteran bond manager in Austin, Texas, who specializes in Treasury bonds, cites eight different signs that inflation is on its way down.

These range from the slowing economy, rising labor-market slack and stagnant real wages to the disinflationary - or deflationary - effect of artificial intelligence.

"The high multiplier manufacturing sector dropped 68,000 jobs in 2025, with eight consecutive declines in the second half of the year," he writes.

Factors likely to cut inflation include tariffs, he adds. Tariffs are a tax, and that means they take money out of people's pockets. So they will boost prices in the short term, but in due time they will be a headwind for the economy. A study published in November by two economists working with the Federal Reserve Bank of San Francisco looked at 150 years' worth of U.S. tariff history and concluded that over time, tariffs slow the economy, raise unemployment and lower inflation.

(OK, so tariffs are up in the air while the Supreme Court makes a decision. But for now they stay in place, and President Donald Trump has vowed to find a way to keep them even if the court throws out his current policies.)

All of which means bonds are worth a second, or even a third, look - especially if you're hoping to retire soon, or soonish.

-Brett Arends

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02-07-26 1415ET