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The riskiest period in most retirement plans occurs in the years leading up to retirement. . Soon-to-be retirees haven’t yet begun collecting some of the more stable benefits like Social Security, which can help protect their retirement portfolio against market downturns. Also, they no longer have many years ahead to rebuild their portfolio from losses. And if a recession hits, many simply will put off their retirement. This is known as the sequence of returns risk. And one strategy to protect yourself against it is a bond tent. Here’s what you need to know.
A financial advisor can walk you through specific investment options that could meet your retirement needs.
What Is a Bond Tent?
A bond tent is named for the shape it makes in your asset distribution chart. With a bond tent, your goal is to protect your retirement fund from volatility during the years immediately before and after retirement, while also preserving your opportunity for long-term growth. As you approach retirement, you shift your portfolio’s asset balance in favor of bonds so by the time you retire, your portfolio holds a majority of these secure instruments.
Then, during the first several years of your retirement, you take much of your income from the bond section of your portfolio. This provides you with relatively stable withdrawals, and automatically rebalances your portfolio back toward equities and other growth investments.
For example, take a hypothetical 55 year old investor. They hold an aggressive portfolio of 80% equities and 20% bonds. Over the next 10 years, as they approach retirement, they would steadily sell their stocks and buy bonds. By age 65, they hold a portfolio of 40% stocks and 60% bonds. They are now much less exposed to a market downturn at the time of retirement.
In their early years of retirement, then, this investor focuses on spending down their bonds first. They gradually rebalance their portfolio toward stocks, perhaps reaching a balance of 60% equities and 40% bonds by age 75. The result forms a “tent” on this investor’s allocation chart, with their bond holdings peaking at retirement and declining on the other side.
Why Use a Bond Tent?
The value of a bond tent is its mix of security and growth. On both sides of your retirement, your portfolio needs a decent mix of growth-oriented investments. Leading up to retirement, you want to build the wealth that you will retire on. Then, in retirement, you’ll want to continue growing that wealth to maintain your lifestyle, while hedging against both longevity and inflation risks.
After all, you don’t want to find yourself relying on Social Security in your 80s because you spent down the 401(k).
However you also need to protect yourself against volatility during the early years of your retirement, when you haven’t yet begun to take distributions and don’t have Social Security to hedge your income.
If a recession hits at age 64, you might find yourself forced to choose between delaying your retirement and cashing out assets that have lost significant value.
This is where a bond tent comes in. It allows you to weigh your portfolio in favor of low-risk, low-volatility assets during the years immediately surrounding your retirement. This significantly reduces the risk that a bear market will force you to change your plans. If a recession does hit, you will likely be able to rely on your bonds while your equities take time and regain their value. At the same time, though, the equity-heavy sides of your tent allow your portfolio to grow during times when you are less exposed to volatility, giving you a mix of security and growth.
Risks to a Bond Tent
Of course no strategy is foolproof. A bond tent has several potential downsides associated with it. One is the risk exposure of your in-retirement equity holdings. While rebalancing toward equities in retirement can give you potential growth to extend the lifetime of your portfolio, this also exposes your portfolio to market risks. If a recession hits while you hold 60% equities, your retirement accounts will take heavy losses. You might be able to supplement that with your remaining bond holdings and Social Security, but it’s important to make sure that you can do so.
This strategy also depends on your bonds holding their value. If your bonds lose their market value when you need to rebalance toward stocks, you may find yourself having to choose between long-term growth and short-term losses.
These aren’t necessarily reasons to abandon the bond tent as a strategy, but it’s important to remember that like its eponymous chart, this strategy has both up- and down-sides.
Ideal Bond Types for a Bond Tent
Not all bonds are created equal, and choosing the right type is crucial for executing an effective bond tent strategy. Since the primary purpose of the bond tent is to reduce risk and provide reliable income during a critical window, you’ll want to favor stability, inflation protection, and credit quality.
Short- and Intermediate-Term Bonds. These are often ideal for the core of your bond tent. Compared to long-term bonds, they’re less sensitive to interest rate fluctuations, which can help preserve principal during volatile market periods. Short-term bonds (maturities of 1–3 years) provide liquidity, while intermediate bonds (3–10 years) offer a balance between yield and risk.
Treasury Bonds. U.S. Treasury securities are considered among the safest investments. Backed by the federal government, they carry virtually no default risk. Including Treasuries in your bond tent can anchor your portfolio with predictable, stable returns, especially during economic downturns.
TIPS (Treasury Inflation-Protected Securities). Inflation is a key risk during retirement, especially over long time horizons. TIPS adjust their principal based on changes in the Consumer Price Index, helping preserve purchasing power. Adding a portion of TIPS can protect against unexpected inflation spikes during the early years of retirement.
High-Quality Corporate and Municipal Bonds. If income generation is a priority, consider investment-grade corporate bonds or municipal bonds. Corporate bonds from financially strong companies offer higher yields than Treasuries with moderate risk. Municipal bonds may provide tax-advantaged income, particularly beneficial for retirees in higher tax brackets. However, it’s important to stick to high-quality issuers to avoid undue credit risk.
How to Build a Bond Tent: Step-by-Step Guide
Creating a bond tent takes planning, discipline, and a forward-looking view of your retirement needs. Here’s a basic framework for how to implement this strategy:
1. Start Around Age 55. Begin planning your bond tent roughly 10 years before your target retirement age. This gives you enough time to gradually shift your portfolio away from equities and toward bonds without disrupting your investment growth trajectory.
2. Follow a Glidepath Approach. Start with a higher equity allocation, typically 70–80%, at age 55. Each year, reduce your equity exposure by 3% to 5%, and increase bond holdings accordingly. By your retirement date (typically around age 65), your portfolio may hold around 60% bonds and 40% equities.
Sample Glidepath:
- Age 55: 80% equities / 20% bonds
- Age 60: 60% equities / 40% bonds
- Age 65: 40% equities / 60% bonds (tent peak)
- Age 70–75: Begin rebalancing back to 60% equities / 40% bonds
3. Draw from Bonds in Early Retirement. Once retired, begin drawing income primarily from your bond holdings. This allows your equities to recover and grow while reducing sequence of returns risk. Over time, this withdrawal naturally lowers your bond allocation.
4. Begin Rebalancing Around Age 70–75. As your early retirement years pass, rebalance your portfolio back toward growth by slowly increasing equity exposure, ideally when markets are more stable and Social Security or pensions are supplementing your income.
5. Use Tools and Professional Guidance. You don’t have to build a bond tent on your own. Rebalancing software, robo-advisors, and target-date funds can help automate the asset allocation process. Alternatively, a financial advisor can help you personalize your glidepath and choose the right bond types based on your income needs, tax bracket, and risk profile.
Bottom Line
A bond tent is an investment strategy designed to protect your retirement plans against sequence of return risk. It involves creating a bond-heavy hedge in your portfolio during the years leading up to your retirement, so that you don’t have to change your plans in the event of a recession.
Investing Tips for Beginners
- If you want to learn more about bonds and understand why this asset is a popular low volatility investment, this guide breaks down how they work.
- A financial advisor can help you build a comprehensive retirement plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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