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For retirees watching their expenses rise, a government-backed investment yielding more than 5% has understandable appeal.

The benchmark 10-year Treasury yield was around 5.3% in early October. That creates an opportunity to secure substantial income for years, although the yield available changes throughout the trading day.

But moving a large share of retirement savings into 10-year Treasuries requires more than comparing their yield with a savings account. The decision involves how much money a retiree needs, when it will be needed, and how long retirement could last.

Technically, the 10-year security is a Treasury note. It pays a fixed coupon every six months and returns its face value at maturity. Treasury securities carry the federal government’s full faith and credit. 

Consider a hypothetical $500,000 purchase at face value with a 5.25% coupon. It would generate $26,250 annually before taxes, paid in two installments of $13,125. That is the equivalent of $2,187.50 a month, although the payments arrive semiannually.

The distinction between coupon and yield matters. An existing note quoted at a 5.3% yield might have a lower coupon and sell below face value. Part of its return would come from receiving face value at maturity, rather than from larger interest checks. Buyers should check the price, coupon, maturity date, and yield to maturity.

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Pros and cons

The attraction is predictability. Fixed payments can supplement Social Security or a pension and help cover expenses without requiring stock sales during a market downturn. If rates fall, the note continues paying its original coupon, and its resale value would generally rise.

The reverse is also true. If rates climb, existing notes generally lose market value. The government’s promise to repay face value at maturity does not protect an investor’s sale price before then.

For illustration, a newly purchased 10-year note with a 5.25% coupon, bought at face value, would lose roughly 7% of its market value if its yield immediately rose to 6.25%. On $500,000, that is about $35,000. The calculation assumes semiannual payments and no elapsed time.

A retiree who holds to maturity would still receive the scheduled payments and face value.

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Upside risks

Someone who needs money for medical care, a move, or family assistance could have to sell at an unfavorable price. Even without selling, higher rates would leave the investor earning less than newly available securities.

Inflation presents another risk. Traditional Treasury payments do not increase with living costs. At an illustrative 3% annual inflation rate, $100,000 returned in 10 years would buy about what $74,400 buys today. A retiree who spends all the interest would preserve nominal principal while its purchasing power shrinks.

Taxes also change the calculation. In a taxable account, Treasury interest is subject to federal income tax but exempt from state and local income taxes. At a 22% federal marginal rate, a 5.25% coupon leaves approximately 4.10% after federal tax, before other income-related effects. 

Additional taxable interest can make more Social Security benefits taxable and push some retirees into higher Medicare Part B and Part D premiums. Medicare’s income calculation generally uses tax information from two years earlier.

Account type matters, too. Buying Treasuries within a traditional IRA generally defers tax on investment earnings until distributions occur. Withdrawing IRA money to buy them in a taxable account may create a substantial tax bill. Required minimum distributions also need to fit the cash-flow plan.

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What to consider

Before committing, retirees should assess essential expenses after Social Security and pension income, emergency reserves, expected major purchases, taxes, and their remaining investment mix. The same $500,000 bond purchase represents a very different commitment for someone with $600,000 in savings than for someone with $2 million.

A 65-year-old may also need savings to support decades of spending. Allocating nearly everything to fixed payments can limit long-term growth and leave a household exposed to inflation. Diversification should reflect both the investment horizon and tolerance for losses. 

Alternatives offer different compromises:

• Shorter Treasuries and a bond ladder: Bills and shorter notes return principal sooner. A ladder spreads purchases across maturity dates, making money available periodically and allowing reinvestment at different rates. Shorter securities generally fluctuate less when rates change, but future reinvestment yields could be lower.
• Treasury Inflation-Protected Securities (TIPS): TIPS adjust principal with inflation, and interest payments reflect that adjusted principal. They can help protect purchasing power, although their market prices fluctuate and principal increases can create annual federal taxes in taxable accounts. 
• Insured CDs: Certificates of deposit can provide fixed returns. Compare yields, withdrawal terms, and any call provisions. FDIC coverage generally totals $250,000 per depositor, per insured bank, per ownership category, including other deposits in that category. 
• Bond funds: Funds offer convenience, but conventional Treasury funds do not promise to return an investor’s purchase amount on a particular maturity date. Their share prices can fall even when they hold government securities.

For retirees whose essential expenses are largely covered and who have ample accessible reserves, 10-year Treasuries can anchor part of a retirement portfolio. The amount committed should follow a spending and tax plan, with room for emergencies and rising costs throughout retirement.

Before making a major move with your retirement portfolio, it’s wise to speak with an objective and trusted financial advisor.