I recently had a zero-coupon Treasury Bill redeem in the amount of $102,000. This money is part of the 35% of my taxable brokerage portfolio that’s in bonds. Somewhere between a 60/40 and 70/30 equity/bond split is what I like to maintain at age 48, as a dual-unemployed parent alongside my wife.
Given I enjoy investing more than spending, the first thing I did was check the latest bond yields, not the latest Range Rovers. And the bond that jumped out at me was the 20-year Treasury Bond at 5%. Not bad for retirees, especially if interest rates are going to get cut multiple times again.
20-Year Treasury Bond Yield Of 5% Could Outperform
One of the problems with the S&P 500 trading at 23X forward earnings is that expected returns are lower due to valuation mean reversion. The average forward P/E for the S&P 500 since 1989 is about 18.5X.
So we must either believe there will be a permanent step-up in valuation thanks to AI-driven productivity, or assume P/E multiples eventually decline back to the long-term average. I assume a little of both.
According to JP Morgan, if you bought the S&P at 23X forward earnings at any time in history, in every case your annualized return over the next 10 years landed between +2% and -2%. Given that backdrop, a risk-free ~5% starts to look mighty enticing.
How Does A 5% Guaranteed Return Sound?
If I was still in my 20s or 30s, I’d say a guaranteed 5% rate of return sounds uninspiring. Back then, as a growth stock investor riding the internet boom, I was chasing 20%+ annual returns.
But now that tech stocks have already boomed since I made my first stock investment in 1996, the ability to lock in capital at 5% for 20 years feels like a win.
The older and wealthier you get, the more appealing a 5% guaranteed return becomes. Here's a post on how to buy Treasury bonds for your reference.
A Fantastic FIRE Scenario
Imagine you stumbled across Financial Samurai in 2009 as a new college graduate. You maxed out your 401(k), saved at least 20% more after-tax, and invested in stocks and real estate. You want to FIRE!
After 16 years of saving and investing $50,000 a year on average with a 14% compound return, your net worth grows from $0 to $3 million. At 39, you’re ready to retire early at 40. Hooray! You only spend $90,000 a year, so you’re set for life.
Now imagine that $3 million sits in your taxable brokerage account. After retiring and reducing your active income to $0, you can sell investments up to $47,025 as a single and $96,700 as a married couple and pay a 0% long-term capital gains tax. Then there's the standard deduction, which enables you to earn even more tax-free income in retirement.
If you live long enough, you could shift the full $3 million tax-free into 20-year Treasuries yielding 5%. That’s $150,000 a year in guaranteed, state-tax-free income. You’d be able to boost annual spending from $90,000 to $110,000 while still maintaining risk-free income.
Since 5% is greater than 4%, you’ll never run out of money following the 4% Rule as a safe withdrawal rate. Yes, inflation will still chip at your purchasing power. However, at least you're not touching principal. And if interest rates plummet again before maturity, you can always sell these 20-year Treasury bonds for a profit. This should be a dream scenario that is good enough for everyone!
But You Probably Won’t Go 100% Risk-Free
Even though this scenario guarantees financial security, greed (or optimism) usually wins. We still want more, more, moooooooar! But maybe that hunger for more isn’t purely selfish. It can also be driven by selfless reasons.
Personally, I’m no longer investing just for myself. I’m investing for my kids, who don’t yet understand the power of compounding. But within 10 years, they will and hopefully they’ll appreciate the foundation being built for them. And if they don’t value the money as much, I hope they’ll at least treasure the time we spent together during Daddy Day Camp.
That said, this is where DIY investing gets tricky. While the $102,000 redemption could (should) easily roll into Treasuries to maintain my ~35% bond allocation, part of me wants to swing for the fences. Maybe put $50,000 into tech stocks at nosebleed valuations, private AI firms growing the fastest, or even Bitcoin.
I mean, surely a company like AI-defense contractor Anduril, fresh off raising $2.5 billion at a $30.5 billion valuation, will compound faster than 5%, right? In just three years, I could see Anduril being valued at over $100 billion. Too bad there are no guarantees when it comes to risk investments.
Reinvesting Half The Treasury Bond Proceeds In Venture Capital
After several days of deliberation, I decided to reinvest $50,000 of the $102,000 into Fundrise Venture. The open-ended fund with only a $10 minimum, holds private AI companies such as Anduril, OpenAI, Anthropic, Databricks, and others. I expect these firms to grow much faster than 5 percent annually and to raise new capital at significantly higher valuations over time.
This investment is in a new personal account I’ve opened with funds earmarked for my young children. My hope is that by continuing to dollar-cost average into venture capital over the next 15-20 years, it will grow to an amount that can help them launch into adulthood.
Now I've got to figure out what to do with the remaining $52,000. I should reinvest it in Treasury bonds, but I've got $255,000 more in Treasury Bills coming due within two weeks.
Risk-Free Treasury Bonds As Your Financial Bedrock
At the end of the day, a 5% Treasury yield doesn’t have to be an all-or-nothing bet. For retirees and near-retirees, it can serve as the bedrock of your portfolio, covering core living expenses and providing peace of mind.
With that foundation in place, you can still allocate a portion of capital toward higher-risk, higher-reward opportunities without jeopardizing your lifestyle. This is the dumbbell investing strategy in action.
Just remember to review not only your asset allocation within individual portfolios, but also across your overall net worth. Like me, you may have multiple portfolios spread between taxable and tax-advantaged accounts, plus venture capital investments, real estate, or even alternatives like rare books or coin collections.
Security plus upside is what makes Treasuries at today’s yields so compelling. But don’t forget to swing for glory every now and then. Your future self, or your children, will thank you for it.
What do you think, readers? Would you put money into a 20-year Treasury bond yielding 5%? If rates fall, you could always sell early and lock in some gains. So really, what’s the downside to locking in a guaranteed 5% return for a good chunk of your life once you’ve built up a solid net worth?
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Hi Sam,
Good article – I’m actually wondering what you think about the potential upside here given the Trump administration is going to attempt to push down short-term rates (hopefully not at the expense of long-term rates). If you look at an ETF such as EDV (24.5 yr duration treasuries), I think there is an investment opportunity beyond the 5% yield if long-term rates go down over the next 2-3 yrs. Of course, one is taking on duration risk but if LT rates increase short term, one could even double down by buying more EDV at a 6-7% yield and hold until rates eventually go down (as they likely will).
Neal
Hi Neal – The Trump administration should be a tailwind for lower rates. So yes, bond funds could find life again and mean-revert after such a dismal performance since 2020.
Personally, I don’t enjoy taking much risk with my bond portfolio. I’m just a buy and hold to maturity guy and rollover funds to new Treasury bonds. But buying EDV here with a ~4.9% yield and potential principal appreciation looks attractive.
Just don’t count on it magically rebounding after basically going down every month since March 2020. The downside risk does seem limited though.
Buying 20-year Treasuries seems like a good strategy, but it’s really difficult to figure out how to implement it on Vanguard, and VMFXX has gotten 4.58% over one year, so I’ve defaulted to the lazy approach. I’m also still buying iBonds annually, even though they are not as attractive anymore, because I can shield them from current state AND federal taxes. I have never redeemed them, so I don’t know how hard it will be – maybe they won’t be liquid enough to take advantage of a market crash someday?
What’s difficult about the implementation on Vanguard? If you mean buying individual 20-year Treasuries, that’s likely the case, compared to Fidelity. If you mean deciding on the correct investment vehicle, you might research the Vanguard ETF ‘VGLT’ for educational purposes.
I understand the idea of using bonds, or a bond fund, as a complement to equities if you intend to generate income by drawing down your portfolio. But if you intend to use coupons to generate income over a long period, won’t inflation kill your real returns? 3% inflation over 30 years would mean your real returns are less than half at the end of that 30 year period than they are today. Even if you’re 60, you could live to 90. I completely understand that a 5% return over a shorter period with next to no risk is great, but as a long term strategy?
That’s a very fair point, and I agree inflation risk is the biggest drawback of holding long-term nominal bonds. Over a 20–30 year period, 3% inflation compounded really does erode purchasing power. That’s why I personally look at Treasuries more as a stabilizer and income source within a diversified portfolio rather than a stand-alone long-term strategy.
If someone is worried about inflation but still wants bond exposure, TIPS are one option, or they could simply balance out long bonds with equities and real assets that tend to keep up with inflation. The appeal of locking in 5% risk-free today is more about building a cushion and smoothing volatility, not about trying to outpace inflation forever.
But 5% is still 3% over the long run inflation average. So if we have that consistent spread, then we’re still earning a real return each year.
I’m was thinking the same thing. But what if instead of 3% inflation, we have a period of very high inflation. Personally, I’m opting for shorter term bonds like SGOV for the safer part of my portfolio. Am I missing something?
I think it may be the fact that inflation affects all nominal returns from all asset classes.
A 10% return in stocks is a 7% real return if inflation is 3%. So it’s OK to consistently talk about real returns. You just have to do it consistently. Same thing with nominal returns.
Hello Sam, I agree that this is an compelling investment. Do you have an opinion on Vanguard’s LT Treasury zero-coupon ETF, ticker EDV? Looks similar to Pimco’s ZROZ ETF, but lower expense ratio. It has what appears to be a synthetic dividend, despite holding zero-coupon Treasuries.
Yes, EDV is quite similar to ZROZ in that they both hold long-term zero-coupon Treasuries, giving you that deep convexity if rates move down. The main difference, as you pointed out, is the lower expense ratio on EDV, which is always nice. The “dividend” is just a distribution of the accrued interest from the STRIPS, so it’s more of an accounting/tax treatment than a true dividend. Functionally, you’re still getting the same zero-coupon exposure. Between the two, I’d lean toward EDV if you’re cost-conscious, but either one will be highly volatile and very sensitive to rate moves.
Personally, I prefer to just buy and hold Treasury bonds.
Appreciate it, sir.
I love this article, thank you. I put on a similar trade in August of 2023′–a fairly large trade relative to my net worth. My rational was the same as what you described. My thinking and rational were rational and sane. What I didn’t anticipate was the level of volatility that followed. Jaw dropping volatility. Fortunately rates came back down fairly quickly. After rates came down a bit, I reduced the size of the trade. I some how seem to forget just how volatile the long end of the curve can really get. My thinking may have been sound, but my stomach couldn’t handle the volatility -relative to the size of the trade.
Did you invest in a bond fund? I found overtime that if I’m gonna allocate a percentage of my investment capital to bonds, I just want the least amount of volatility as possible and will aim to buy individual bonds and hold them to maturity. If they start moving around a lot like stocks, then in the gates, one of the key reasons why I allocate to them in the first place.
I had bought 20 MSFT bonds and 20 year treasuries. Unfortunately, I bought them them at exactly the wrong time, I think yields climbed up 1% within 60 days of me positioning them. Horrible timing on my behalf.
oh wow thanks for posting the rate table. I’ve been meaning to check rates. I had a treasury expire fairly recently myself so I need to put that to work. Thanks for the reminder!
Hi Sam, I’m curious as to why the 4% withdrawal rate works when you invest in treasuries yielding 5%? My understanding has always been that the 4% rule tends to work when invested in risk assets that yield around 6-7%, allowing capital to remain constant after inflation is taken into account? If inflation runs any higher than 1% in the above scenario are you not by definition eating into capital? Love to hear your thoughts and love your work.
Sure, by definition, if you’re withdrawing at a 4% rate when you can get a 5% return a year guaranteed that’s still higher than 4% after tax, you will never run out of money.
The 4% Rule is from a study of 400 retirees who had a 55/45 stock/bond allocation and 5% cash. So yes, it’s from that mix. But if you have 100% in treasury bonds yielding, 5%, then withdrawing at 4% is money for life.
I’m gonna speak to Bill Bengen again this Friday and will publish our conversation in the next month or so.
But in the meantime, check out my post and conversation with Bill here.
Thanks Sam
Hi Sam,
Do you consider that just 1% it is money for life when looking at the fact that Trump fired Erika McEntarfer, the Bureau of Labor Statistics (BLS) commissioner?
What is your opinion regarding this: Forget 60/40—Vanguard Says Go 70% Bonds In Today’s Market source https://finance.yahoo.com/news/forget-60-40-vanguard-says-000113455.html
Maybe for FIRE 25X must be minimum and to go to 33X or 36x will be much safer?
In one of your articles you mentioned an 110% for expenses, if I understood that correctly.
Real yield of 5% more like 2% and additional future risk. What about 30 year TIPS as an alternative?
Could be good. What are your thoughts on TIPS and their real yield? Thx
I’ve been buying 5, 10, and 20 year treasuries and Munis over the last few months. Psychologically it has been hard to lock up this money with the markets seemingly going up every week. However, I’ve been through enough downturns to realize how grateful I’ll be to earn 5 percent when my equities are tumbling.
Indeed. Everything always feels great during a bull market. But eventually, the bad times Return again. It’s nice to have some stability once you’ve filled a large enough nut, especially in retirement.
I love this idea and 5% sounds great for me, nearing retirement at 61. I went on Vanguard and could not fingure out how to buy them. They only list up to 10 year maturities. Will have to do some digging.
Also, for retirement I assume you focus on getting the full interest – 5% coupon rate. Always weird to me paying say 105,000 for a 100,000 treasury.
Hi Sam – just curious why you would go with treasuries rather than munis given your tax status?
Have to look at the net effective yield for everybody’s tax status.
Also, if your income is low enough, you can sell investments and pay 0% capital gains tax.
What are your thoughts about the 20-year Treasury bond yielding 5%?
I just bought a long-term muni yielding 4.71%, so with an effective federal tax rate of 30.8% quite a bit better.
That’s a good one. What is the duration, and rating? Please send the CUSIP or whatever the investment is. Thx!
expense ratio?