Most retirement plans hold bonds for one reason: to have money that doesn’t fall with the stock market when it is time to spend. But “bonds” covers funds that behave very differently. Some barely move. Some rose sharply in the 2008 crash, then fell almost as hard as stocks in 2022. Some protect against inflation, and some fall alongside stocks in a crash.
Two things explain most of the difference: how long a fund’s bonds take to mature, and who issued them. This guide shows both with the actual results of the largest bond ETFs, so you can match each fund to the job you need it to do.
The three jobs bonds do in retirement
Cash and short-term funds
Money for the next year or two should not swing. In 2022 the median cash-like fund returned +0.2% and the median short-term fund -6.6%. Income follows short-term interest rates, which can fall quickly. Compare cash-like funds.
Treasury funds
When stocks crash, investors buy Treasuries. The Treasury funds old enough to have lived through 2008 gained a median +20.0% while stocks fell by more than half. The longer the maturity, the bigger the cushion, and the bigger the risk when rates rise. Compare Treasury funds.
TIPS funds
Treasury Inflation-Protected Securities raise their principal with consumer prices, so they protect what your money can buy. Short-term TIPS funds move less with interest rates; the median TIPS fund returned -8.2% in 2022. Compare TIPS funds.
Core bond funds
A core fund such as BND or AGG mixes Treasuries, mortgage bonds and corporate bonds in one fund. It does each job partly: it gained in 2008 (median +7.4%) but lost 14.4% in 2022. Compare core funds.
Maturity: the interest rate dial
When interest rates rise, existing bonds lose value, because new bonds pay more. Long-dated bonds lose the most, because their lower payments are locked in for longer. Each dot below is one of the largest bond ETFs: how long its bonds take to mature, against what it did in 2022.
The Treasury funds line up almost perfectly: in 2022 the losses grew from 10.3% for IEI (about 4.7 years) to 29.3% for TLT (26 years) and 38.1% for the zero-coupon fund ZROZ. The same dial works in reverse: when rates fall, the long funds gain the most.
Credit: what happens in a crash
Who issued the bonds decides how a fund behaves when stocks crash. Treasuries are backed by the US government, and investors flee to them in a panic. Corporate bonds, and especially high-yield bonds, depend on the same companies whose stocks are falling.
| Group (median fund) | Avg. maturity | Avg. coupon | Cost | 2008 crash | 2022 drop | 5 yr |
|---|---|---|---|---|---|---|
| Core bond funds | 12.5 yrs | 4.11% | 0.04% | +7.4% | -14.4% | +0.1% |
| Short-term bond funds | 2.9 yrs | 3.84% | 0.04% | +8.7% | -6.6% | +2.0% |
| Cash, T-bill and ultra-short funds | 1.5 yrs | 3.83% | 0.15% | +2.8% | +0.2% | +3.8% |
| Treasury funds, intermediate to long | 14.8 yrs | 3.56% | 0.05% | +20.0% | -25.3% | -5.0% |
| Inflation-protected (TIPS) funds | 2.9 yrs | 1.3% | 0.03% | +3.1% | -8.2% | +1.5% |
| Municipal bond funds | 13.5 yrs | 4.68% | 0.18% | +3.3% | -10.2% | +0.6% |
| Corporate bond funds | 10.3 yrs | 4.86% | 0.04% | -6.8% | -17.1% | +0.8% |
| High-yield bond and loan funds | 5.2 yrs | 6.62% | 0.3% | -32.9% | -14.3% | +3.8% |
| US stocks (SPY), for comparison | — | — | — | -55.2% | -24.5% | +12.6% |
Medians across the largest funds in each group of our bond ETF list; 2008 covers only funds that existed then. 2008 crash = October 9, 2007 to March 9, 2009.
High-yield funds pay the most, but in 2008 the median one lost 32.9%, close to a stock fund’s loss, at exactly the moment a retiree would want to sell bonds to avoid selling stocks. That is why most retirement plans keep their bond money in high-quality funds and treat high yield, if they hold it at all, as part of the risky side of the portfolio.
Year by year, by bond type
| Bond type | 2008 | 2013 | 2020 | 2021 | 2022 | 2023 | 2024 | Worst year |
|---|---|---|---|---|---|---|---|---|
| Cash (T-bills) BIL | +1.6% | -0.1% | +0.4% | -0.1% | +1.4% | +4.9% | +5.2% | -0.1% (2015) |
| Short-term Treasuries SHY | +6.6% | +0.2% | +3.0% | -0.7% | -3.9% | +4.2% | +3.9% | -3.9% (2022) |
| 7–10 year Treasuries IEF | +17.9% | -6.1% | +10.0% | -3.3% | -15.2% | +3.9% | -0.6% | -15.2% (2022) |
| 20+ year Treasuries TLT | +34.0% | -13.4% | +18.1% | -4.6% | -31.3% | +2.8% | -8.1% | -31.3% (2022) |
| TIPS TIP | -0.5% | -8.5% | +10.9% | +5.7% | -12.2% | +3.8% | +1.6% | -12.2% (2022) |
| Core bond market AGG | +7.9% | -2.0% | +7.5% | -1.8% | -13.0% | +5.6% | +1.3% | -13.0% (2022) |
| Corporate bonds LQD | +2.4% | -2.0% | +11.0% | -1.8% | -17.9% | +9.4% | +0.9% | -17.9% (2022) |
| High-yield bonds HYG | -17.6% | +5.8% | +4.1% | +3.8% | -11.0% | +11.5% | +8.0% | -17.6% (2008) |
| Municipal bonds MUB | +1.2% | -3.5% | +5.1% | +1.0% | -7.3% | +5.5% | +1.3% | -7.3% (2022) |
Calendar-year total returns, distributions reinvested. 2008: the financial crisis. 2013: the “taper tantrum”, when rates jumped on talk of the Fed slowing its bond buying. 2021–2022: inflation and the fastest rate rises in decades.
Putting it together
Many retirees divide their bond money by when they will need it, rather than picking one fund:
- The next year or two of spending in cash-like or T-bill funds, so a bad market never forces a sale.
- The next several years in short-term bond or short-term TIPS funds: a little more income, still small swings.
- The rest of the bond money in a core bond fund or intermediate Treasuries, which cushion a stock crash, with TIPS for inflation protection.
- Long-term and high-yield funds, if any, as small positions, because they add the risks bonds are supposed to offset.
Each year, spending money is refilled from whichever part of the portfolio has done well, which means selling stocks after good years and bonds after bad ones.
Taxes and accounts
Interest from most bond funds is taxed as ordinary income, which is why many people hold them in IRAs and 401(k)s. Municipal bond interest is generally free of federal income tax, so muni funds belong in taxable accounts, and only pay off for people in higher brackets. Treasury interest is exempt from state income tax, which helps in high-tax states.
How much do you need in bonds?
That depends on your spending, Social Security, pensions and taxes. ReadyAimRetire models them year by year, including what happens if stocks fall the year you retire.
Questions investors ask
Why did bond funds lose money in 2022?
Interest rates rose faster than at any time in decades. When new bonds pay more, existing bonds with lower rates lose value, and bond funds hold existing bonds. The longer the bonds’ maturities, the bigger the loss; cash-like funds were barely affected.
Will my bond fund get its money back like an individual bond?
No. An individual bond held to maturity returns its face value. A bond fund keeps buying new bonds, so it never matures. Over time, though, a fund reinvests at the new, higher rates, which is how bond funds recover from rate rises.
Are TIPS better than regular bonds for retirees?
TIPS protect against unexpected inflation, which regular bonds don’t. In return they usually pay less when inflation stays low, and their prices still move with interest rates. Many retirees hold some of both.
Are bond ETFs a good alternative to CDs?
Short-term Treasury and T-bill funds work like a flexible CD ladder: similar income, no early-withdrawal penalty, and you can sell any day. Unlike a CD, their value can dip slightly, and their income changes as rates change.
How we measured
Funds, groups, maturities and coupons come from our bond ETF list, built from each fund’s latest N-PORT report filed with the SEC. Returns are total returns with distributions reinvested, through Oct 27, 2026. Calendar-year figures for representative funds: BIL, SHY, IEF, TLT, TIP, AGG, LQD, HYG, MUB. For education only, not a recommendation to buy or sell any fund.