Best Bond Funds For Retirement - Top 5 Low Risk High Yield Investments (2024)

Saving and investing for retirement is a game of risk versus reward. Historically, bond funds have been low risk, but yields are not as good as they are in the equity market, which is high risk. Portfolio managers understand this and allocate their clients’ retirement accounts accordingly.

With interest rates near zero over the past year, bond yields have been low, but that trend appears to be coming to a close. Since the beginning of February 2021, bond yields have been on the rise, sparking a renewed interest in fixed-income investments.

Can we expect higher bond yields to continue? Economists predict that the federal reserve will have to raise interest rates to slow inflation. They are also projecting a possible recession in 2021, which could lead to higher interest rates and a subsequent increase in bond yields.

Keeping all of this in mind, we’ve compiled a list of bond funds that offer higher yields for retirement savers, making them a great addition to your retirement portfolio. There is some risk involved with these funds, but they are the most likely to beat the rate of inflation over time.

Best Bond Funds For Retirement

Bond funds are some of the safest ETFs for retirement, especially when you stick with trustworthy issuers.

Below are our top 5 choices of bond funds to help you invest wisely for retirement.

Fund #1: Invesco National AMT-Free Muni Bond ETF (PZA)

The Fed has claimed that they won’t raise interest rates until 2023, so we’re keeping this list in the present, based on existing bond yields. The Invesco National AMT-Free Muni Bond ETF (PZA) is currently yielding 2.7% with an expense ratio of 0.28%.

PZA invests in revenue bonds with fifteen years remaining to maturity, so the yields are slightly higher than other municipal bond ETFs. We’re including this bond fund on the list because it’s a consistent earner with very little volatility. They’re also low-cost with a high upside.

Fund #2: Vanguard High-Yield Corporate Investor (VWEHX)

By utilizing a mix of corporate bonds that are below investment grade (B or BB-rated), Vanguard has created a bond fund that yields 3.4% with an expense ratio of 0.23%. It’s a risky gamble, but long-term returns have been higher than most funds of its kind.

This bond fund consists of 601 bonds with an average effective maturity of 4.1 years. The risk potential, which you’d assume would be high due to assets below investment grade, is actually a moderate 3 out of a possible 5. Minimum investment is $3000.

Fund #3: Nuveen Select Tax-Free Income Portfolio (NXP)

This bond fund is advertised as being for investors in higher tax brackets who can afford to take a little extra risk. The holdings in the fund have an average maturity of twenty years, so volatility is high for a bond fund. On a positive note, the yield is 3.5%.

Treasury bonds only yield around 1%, which is below the projected rate of inflation, so NXP doesn’t buy them. NXP is a closed-ended fund, so new money doesn’t flow into it. Only existing shares are bought and sold. No new shares will be issued, and buybacks are not allowed.

Fund #4: PIMCO Active Bond ETF (BOND)

With a 12-month yield of 3.1% and an expense ratio of 0.73%, the PIMCO Active Bond ETF isn’t the cheapest investment but it does beat the rate on inflation handily. The average bond in the fund has a maturity of just five years, so volatility is limited.

Shorter-term bonds protect investors if rates go down, whereas longer-term bonds don’t offer that same protection, but have a higher yield. PIMCO seems to have found the right balance, as this fund has held up well and is one of the few not to lose money during the 2020 selloff.

Fund #5: SPDR Blackstone/GSO Senior Loan ETF (SRLN)

The last entry on this list, though definitely not the least, is the SPDR Blackstone/GSO Senior Loan ETF. With a whopping yield of 5.4% and an expense ratio of 0.7%, it easily beats the rate of inflation and blows away most other bond funds in this category.

Like most high yield bond funds, there is an element of risk to SRLN. It’s an actively managed fund with exposure to both domestic and foreign senior loans, most of which are non-investment grade. The fund also resets every three months, so there is some volatility.

Why are these the Best Bond Funds for Retirement?

There are hundreds of bond funds out there and these are just a few of them. These five have been selected because they offer the best chance of long term returns that beat inflation. They are the best bond funds on the market today with the highest yields and lowest expense ratio.

Fixed income funds that contain primarily bonds won’t beat equity markets over time, but they do offer stability to the investor and help mitigate risk. These bond funds actually have a higher risk factor than most, but they still offer the asset allocation needed for a balanced portfolio.

Most of these are exchange traded funds, not equity funds, so volatility is limited. If you review them again, you’ll find a mix of government securities, corporate bonds, and both investment grade and non-investment grade securities. The PIMCO ETF operates like a mutual fund.

Buying into all five of these bond funds provides exposure to the diverse mix of fixed income funds that’s best for retirement investing. The yields are primarily tax free because the investments are made with after tax dollars, an important point to consider.

Personal Finance 101: Bonds Offer a Guaranteed Return

It’s not a 100% guarantee, because bonds can lose money. It’s just not likely to happen. Many retirees actually convert equity investments into bonds at a certain age to give them a sense of security in the latter years of retirement. The stock market loses its allure at that point.

Portfolio managers invest in bonds because they offset the volatility of equities, alternatives, and precious metal investments. Compared to each of those, the risk of loss with bonds is almost non-existent. Returns may be lower, but losses almost never happen.

You can take the suggestions offered in this article or check the consumer price index for the bond market to find the best bond funds for retirement. Go back a few years. Yields have not been great with low interest rates these past few years, but they will improve.