Bonds make up the foundation of most successful retirement portfolios. These assets are debt-related instruments issued by governments and corporations that are looking to raise money. Think of them as loans, where the “issuer” is the borrower and investors are collectively the lender.
Like any loan, bonds carry interest payments in addition to repayment of the principal amount — meaning this asset can provide a steady stream of cash back to investors. This makes them incredibly appealing, particularly for retirees looking for income to replace their paychecks once they stop working. They also tend to be much less volatile than stocks, making bonds ideal for capital preservation in retirement.
Unfortunately, building a diversified portfolio of individual bonds can be a complicated and opaque process. But thankfully, bond funds have democratized access to fixed-income markets by allowing even small-time investors to put as little as a few dollars behind big-ticket loans to corporations, banks and the government.
Not all bond funds are the same, however, and while they are easy to buy, they are also easy for retirement investors to misunderstand. Here’s a brief rundown of some of the top bond funds out there and what they have to offer:
| BOND FUND | EXPENSE RATIO | FORWARD DIVIDEND YIELD |
| Dodge & Cox Global Bond Fund (ticker: DODLX) | 0.45% | 4.6% |
| Vanguard LifeStrategy Conservative Growth Fund (VSCGX) | 0.12% | 3.1% |
| Manning & Napier High Yield Bond Class W (MHYWX) | 0.11% | 8.1% |
| Eaton Vance High Yield Municipal Income Class W (EWHYX) | 0.07% | 4.9% |
| Fidelity Inflation-Protected Bond Index Fund (FIPDX) | 0.05% | 3.6% |
Dodge & Cox Global Bond Fund (DODLX)
Diversification is key in any retirement portfolio, so adding some global fixed-income exposure can be a good idea. This is especially true when the stability of the U.S. economy may be in question.
DODLX is an actively managed fund that invests across global credit, currency and interest rate markets with a long-term perspective. It’s “highly selective” in its investment selection, with a focus on total return and capital preservation. This selective process has served it well, enabling DODLX to consistently outperform most of its peers without taking on excessive risk.
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
When looking toward retirement, investors aim to not only generate income but also watch their investments grow. This is where VSCGX tosses its hat in the ring. The fund aims to provide both capital appreciation and income and serve as a complete portfolio. So, if you want one fund only, this is the one to choose.
It combines four other Vanguard funds to create a portfolio that’s approximately 60% bonds and 40% stocks. Since two of these four funds are also international funds, the portfolio also provides global diversification.
The fact that it’s less than two-thirds bonds means you won’t get quite as big of a yield from this fund as in some full bond portfolios. But it makes up for this by providing more share growth than bonds alone can provide.
[READ: 9 Best ETFs to Buy for a Recession.]
Manning & Napier High Yield Bond Class W (MHYWX)
If you don’t mind taking a bit more risk with your retirement portfolio, a high-yield bond fund like MHYWX could take your income to a whole new level. The fund’s 8% trailing 12-month yield is nearly double most of the other funds on this list. Its performance even beats the majority of other high-yield bonds, and all for only 0.11% in expenses.
As a high-yield fund, MHYWX invests in noninvestment grade debt, also called junk bonds. However, it’s less risky than the average high-yield bond fund and has limited interest rate risk thanks to its shorter duration. So you’re getting superior returns for less risk and one of the lowest prices. It’s hard to ask for more.
Eaton Vance High Yield Municipal Income Class W (EWHYX)
High income is great until you have to pay taxes on it. Luckily, there are funds like EWHYX that aim to shelter your income from at least some of those taxes. It does this by investing in municipal bonds that are exempt from federal income tax.
This tax sheltering can be a true asset if you keep the fund in a nonretirement account. Note that retirement vehicles like 401(k)s and individual retirement accounts already provide a degree of tax sheltering, so keeping a tax-exempt bond fund in these accounts is redundant.
Since EWHYX also seeks high yield, the fund will invest further down the credit quality spectrum. This opens the door to more risk, but in return you’re getting among the highest returns of any high-yield municipal bond fund.
Fidelity Inflation-Protected Bond Index Fund (FIPDX)
One of the key risks retirees face is their savings not keeping up with inflation. As the price of the goods and services you buy increase, your purchasing power decreases. If your investments aren’t earning at least as much as the inflation rate each year, you’re effectively losing money. This is where inflation-protected bond funds like FIPDX come into play by investing in Treasury inflation-protected securities, known as TIPS.
TIPS adjust their principal in line with the consumer price index, which measures inflation. As inflation rises, the principal on TIPS rises, resulting in a higher interest payment for investors to help compensate for those higher prices. However, the principal will also go down if deflation occurs.
As Treasury securities with the added cushion of inflation protection, TIPS are conservative options. But this greater security can come at the cost of yield, so don’t expect FIPDX to keep up with high-yield bond funds in terms of income.
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5 Best Bond Funds for Retirement originally appeared on usnews.com
Update 03/19/25: This story was previously published at an earlier date and has been updated with new information.
