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Bonds in a Portfolio

Bond Allocation by Age

Pomegra Learn

Bond Allocation by Age

The rule "your age in bonds" is outdated. A 30-year-old holding 30% bonds forgoes too much growth; a 70-year-old holding 70% bonds may be too conservative. Modern lives demand a more nuanced approach.

Key takeaways​

  • Age-in-bonds is a useful starting heuristic but outdated for longer lifespans and lower bond yields
  • A 25-year-old with 40+ years to retirement can tolerate 10–20% bonds; a 50-year-old with 15 years can tolerate 30–40%
  • Transition years (5–10 before and after retirement) require careful bond allocation to manage sequence-of-returns risk
  • Life expectancy, income stability, and other assets (real estate, pension) should adjust your bond allocation
  • A rising bond allocation during early retirement (70–75, age 65–70) can lock in gains and reduce required equity risk

The age-in-bonds rule and its flaws​

The rule is simple: hold a percentage in bonds equal to your age. At 25, hold 25% bonds (75% stocks). At 50, hold 50% bonds. At 70, hold 70% bonds.

The logic is sound: as you age, you have less time to recover from a market crash, so you should take less volatility risk. But the rule has three problems in the modern era.

Problem one: longer lifespans. In 1960, a 65-year-old could expect to live to 80. In 2025, a 65-year-old can expect to live to 85–87 (and 20% of them will see 95). A 70-year-old today has a 20-year-plus investment horizon—far longer than the rule assumes. If you're 70 with a 20-year horizon, you can't afford to hold 70% in bonds earning 3–4% annually; you'll run out of money.

Problem two: bond yields are lower. When the age-in-bonds rule was codified, bonds yielded 5–7%. A 40-year-old holding 40% bonds was getting 2–3% from that allocation, which was acceptable because stocks would deliver the growth. Today, bonds yield 4–5% (10-year Treasury around 4%, AGG around 4.5%). That's better than 2024's lows, but it's not much. If a 40-year-old holds 40% in bonds earning 4%, and equities earn 9%, the portfolio earns roughly 7.4% annually. If she instead holds 30% bonds and 70% stocks, she earns 7.7%—nearly the same return with less bond drag.

Problem three: sequence-of-returns risk is asymmetric. A 25-year-old who suffers a 40% portfolio loss will recover; she has 40 years of compounding ahead. A 65-year-old who suffers a 40% loss in year one of retirement faces a different math. If she withdraws 4% of her portfolio each year, and the portfolio starts at $1M, she withdraws $40,000 in year one. If the portfolio falls 40% that year, it's down to $600,000. The next withdrawal is still $40,000 (adjusted for inflation), which is now 6.7% of the remaining portfolio. If markets don't recover quickly, the portfolio can be depleted. This risk is severe in the first 5–10 years of retirement, not across all decades.

A modern framework​

Instead of age-in-bonds, use a more nuanced approach:

Accumulation phase (age 25–55)

If you're 25 with 40 years until retirement, hold 10–20% bonds. Stocks will deliver the necessary growth; a stock-heavy portfolio reduces bond drag.

A concrete allocation: 85/15 or 80/20 (stocks/bonds). This captures most of equity growth while providing a small ballast. Even if the stock market falls 30%, your portfolio falls 25.5%, which is painful but manageable.

As you approach 40, you can shift to 80/20 or 75/25 as your confidence in your long-term income grows. By 50, 70/30 is reasonable.

Transition phase (age 55–65)

This is the critical decade. You're no longer young enough to dismiss a bear market as temporary, but you're still working and adding to the portfolio. Sequence-of-returns risk begins to matter.

Suggested allocations: 60/40 or 70/30, depending on how much longer you'll work and how much you can afford to reduce the portfolio if necessary. A 55-year-old who plans to retire at 67 has 12 years of income ahead; a 55-year-old who plans to retire at 62 has 7. The latter should hold more bonds.

Early retirement (age 65–75)

This is the dangerous zone. You're now withdrawing from the portfolio instead of adding to it. A bear market early in retirement (sequence-of-returns risk) can cripple a portfolio.

Here's where the modern insight differs from age-in-bonds. A 65-year-old cannot afford to hold 65% bonds and get 3–4% yields; the math doesn't work. But she also can't afford to hold 80% stocks and risk a 30% decline in year one of retirement.

A sensible allocation is 55–60% stocks and 40–45% bonds. This is lower than the 70/30 that many 65-year-olds hold while working (because they're adding cash), but it's higher than the age-in-bonds rule suggests (65% bonds) because bond yields are too low to sustain withdrawals.

The key insight: position bonds to cover 2–3 years of withdrawals. If your portfolio is $1M and you're withdrawing $40,000 annually (4%), hold $80,000–$120,000 in bonds (8–12% of the portfolio—not for permanent allocation, but as a cash buffer). The rest can be in stocks. Every time the stock market recovers, rebalance and shift gains into the bond bucket. By your early 70s, this process accumulates a 50%+ bond allocation naturally, without you making an aggressive shift.

Late retirement (age 75+)

If you've managed sequence-of-returns risk well, your portfolio has likely recovered from any early-retirement losses. Now, compound growth is less important; capital preservation and yield matter more.

A 75-year-old can comfortably hold 50–60% bonds. The equity portion can be high-quality dividend stocks (like VTI or SCHX with a slight dividend tilt) rather than growth stocks. The bond portion can be heavily weighted to intermediate and long-term bonds (BND, VBTLX) to capture the long-duration rally if inflation continues to cool.

Adjusting for life expectancy and income​

Not all 65-year-olds are alike. The framework above is a starting point; adjust for:

Life expectancy: If your family history suggests you'll live to 95, hold more stocks at 65 than someone whose family history suggests 80. Actuarially, you need higher growth.

Income stability: If you have a pension or Social Security, you already have a stable bond-like income. You can afford to hold more stocks. If you have no pension and will rely entirely on portfolio withdrawals, hold more bonds.

Other assets: If you own a paid-off house worth $500,000 and a $1M portfolio, your house is a large fixed asset (like a bond). You can afford to hold 80% stocks in the portfolio. If your house is mortgaged and you have a $1M portfolio, hold more bonds.

Health: If you've been diagnosed with a serious illness, you may need the portfolio to last 10 years, not 30. Hold more bonds. If you're in good health, hold more stocks.

Rising bond allocation in early retirement​

A subtler but powerful strategy is to allow your bond allocation to rise as you age and your portfolio recovers from early-retirement losses. Here's how:

At 65, hold 55% stocks and 45% bonds.

Each time the stock market is up >10% from your entry price, rebalance by selling some stocks (locking in gains) and buying bonds. By 72, your portfolio may naturally shift to 50/50. By 80, it might be 40/60.

This approach has two advantages. First, it locks in gains during bull markets, reducing the amount you have riding on continued stock-market performance. Second, it reduces the risk of having to sell stocks at the bottom of a bear market. If you maintain 45% bonds at 65 and rebalance to maintain that level, you have cash available to buy stocks when they're down.

Age-based allocation decision tree​

Next​

Age is one dimension. Your financial goal is another. A 50-year-old saving for retirement at 65 has a different investment horizon than a 50-year-old withdrawing to pay for college. We'll explore how to size bonds based on your specific goals.