Are Bond Funds Still Safe? Why Retirees Are Rethinking Income

Quick Answer: Bond funds can — and do — lose money when interest rates rise, which surprised many retirees who counted on them for safety. Today, alternatives like MYGAs and fixed index annuities offer something bond funds can’t: a guarantee that you won’t lose principal, with competitive interest rates or growth potential built in.

The Problem With the Old Retirement Formula

For decades, the go-to retirement advice was simple: put part of your money in stocks to grow, and put the rest in bonds to keep it safe. This “60/40” approach — 60% stocks, 40% bonds — became the standard playbook for millions of retirees.

Then 2022 happened. Interest rates rose sharply, and the “safe” half of the portfolio fell just as hard as stocks. A typical 60/40 portfolio lost around 16% that year. The bond fund portion alone dropped roughly 13%. Many retirees were blindsided — because they thought bonds were their safety net.

The lesson isn’t that bonds are worthless. It’s that they carry a risk most people didn’t fully understand: when interest rates go up, bond fund values go down. And that risk is real whether you’re 40 or 70 — but it matters a lot more when you’re living off your savings.

Why 2022 Was a Wake-Up Call

The chart below shows what happened to different strategies in 2022, one of the worst years for bond investors in modern history — and why some retirees are rethinking where they keep the “safe” portion of their money.

While bond funds and the 60/40 portfolio posted historic losses, retirees in MYGAs earned a guaranteed, positive return — and those in fixed index annuities simply didn’t lose anything. The floor protection kicked in and did exactly what it was designed to do.

Bond Funds vs. What You Might Think You Own

Here’s something many people don’t realize: a bond fund and an individual bond are very different things.

When you buy an individual bond, you know exactly what interest rate you’ll earn, and when your money comes back to you. As long as the borrower stays solvent, you get your principal returned at the end.

A bond fund works differently. It holds hundreds of bonds with different maturities, buying and selling constantly. It has no end date for your money. That means its value goes up and down every single day — just like a stock fund — depending on where interest rates are moving. When rates rise quickly (as they did in 2022), bond fund values fall. There’s no maturity date to wait out the storm.

This is the gap between what many retirees assumed they owned and what they actually owned. And it’s why so many people were caught off guard.

What Makes MYGAs and Fixed Index Annuities Different

Both of these products were designed specifically to address the risks that bond funds carry — and they work in different ways.

MYGAs: The CD Alternative

A Multi-Year Guaranteed Annuity (MYGA) works a lot like a bank CD, but issued by an insurance company. You put in a lump sum, the insurance company locks in a fixed interest rate for a set number of years (typically 2 to 10), and at the end of the term, you get your principal back plus all the interest earned. Your principal is protected. The rate doesn’t change. There are no daily fluctuations to worry about.

In the high-rate environment of the past few years, MYGA rates have been competitive — often exceeding what you’d get from a bond fund without any of the principal risk. You can compare current rates at our MYGA rates hub.

The trade-off: if you need to access your money before the term is up, there are typically surrender charges. MYGAs are best suited for money you’ve set aside for a specific purpose and won’t need immediately.

Fixed Index Annuities: Growth Potential With a Safety Net

A fixed index annuity (FIA) links your interest earnings to a market index like the S&P 500, but with a floor — usually 0% — so you can never lose your principal due to market losses. In a year like 2022, when both stocks and bond funds fell, an FIA simply credited 0% for that period. Your money didn’t grow, but it didn’t shrink either.

In good years, an FIA allows you to participate in some of the market’s upside — up to a cap or participation rate set by the carrier. You don’t get all the gains, but you get some of them without the risk of loss. Over a long retirement, this combination of downside protection and upside participation can produce solid outcomes for the right person.

Important Things to Know Before You Switch

Neither MYGAs nor FIAs are perfect for everyone, and it’s worth being clear about the trade-offs.

• Both products have surrender periods — typically 5 to 10 years — during which taking your money out early may trigger a fee. They’re not a good fit for money you might need on short notice.
• MYGAs offer a fixed, guaranteed rate but don’t grow with inflation over time. A 30-year retirement needs growth somewhere in the plan.
• FIAs offer growth potential, but your gains are capped. You won’t capture every dollar of a bull market.
• These are insurance products, not bank accounts. They’re backed by the claims-paying ability of the issuing insurance company.
• Moving money out of a bond fund into an annuity may involve tax considerations, especially in a taxable account. A licensed advisor can help you think through the specifics. Find a SafeMoney advisor near you.

Is This the Right Move for You?

The honest answer is: it depends on your situation. But here are the questions worth thinking through.

How much of your monthly income depends on assets that can decline in value? If your essential expenses — housing, food, healthcare — are covered by a guaranteed source like Social Security or a pension, you have more flexibility to keep some money in bond funds. If your portfolio is your primary income source, volatility hits harder and the case for more predictability gets stronger.

How close are you to — or how deep into — retirement? The closer you are to living off these assets, the more sequence of returns risk matters. A 15% loss at 67 is very different from a 15% loss at 47. You can explore how different scenarios affect your plan with our retirement income calculators.

What would let you sleep at night? This is not a trivial question. Retirees who feel financially secure tend to spend more confidently, maintain better health, and enjoy retirement more fully. If a guaranteed income floor would meaningfully reduce your financial stress, that has real value — even if it means accepting a cap on gains.

• Bond funds lose value when interest rates rise — unlike individual bonds held to maturity. In 2022, the U.S. bond fund index fell about 13%, and a typical 60/40 portfolio fell roughly 16%.
• MYGAs offer a fixed, guaranteed interest rate and full principal protection — similar to a CD but issued by an insurance company. Rates have been competitive in recent years.
• Fixed index annuities link growth to a market index with a 0% floor, meaning you can participate in market gains without risking your principal.
• Both products have surrender periods — they work best for money you won’t need for several years.
• The right answer depends on your income needs, timeline, and comfort with volatility. Use our retirement calculators to model your options.
• A licensed advisor who specializes in safe money strategies can help you evaluate whether replacing your bond allocation makes sense for your specific plan.

Frequently Asked Questions

Can my bond fund really lose money?

Yes — and this surprises many people. When interest rates go up, the bonds inside the fund become less valuable compared to new bonds being issued at higher rates. Because bond funds don’t have a maturity date the way an individual bond does, there’s no fixed point where your principal is returned. The value fluctuates daily, and in years of sharp rate increases, those declines can be significant.

What’s the difference between a MYGA and a CD?

They work very similarly. Both lock in a fixed rate for a set term and return your principal at the end. The main differences: MYGAs are issued by insurance companies rather than banks, they’re not FDIC-insured (though they carry state guaranty protections), and they often offer higher rates than CDs for the same term. MYGAs may also have more flexibility around interest withdrawal options during the term.

If I switch to a MYGA or FIA, will I miss out on market gains?

Possibly — and that’s a real trade-off. A MYGA earns a fixed rate regardless of what markets do, so in a strong bull market you’ll earn less than an all-stock portfolio would. A fixed index annuity lets you participate in some of the upside, but with a cap. For retirees who prioritize predictability and principal protection over maximum growth, this is often an acceptable trade — but it’s worth thinking through carefully with your own numbers.

How do I know if my current bond fund carries this kind of risk?

Look at the fund’s “duration” — this is listed in the fund’s fact sheet or on sites like Morningstar. Duration measures how sensitive the fund is to interest rate changes. A duration of 7 means the fund would lose roughly 7% in value for every 1% rise in rates. Many intermediate-term and long-term bond funds carry durations of 5 to 10 years, which translates to meaningful volatility when rates move.

Ready to Take a Closer Look?

If 2022 raised questions you still haven’t fully answered — or if you’re building a retirement plan and want to understand your options — a SafeMoney certified advisor can walk you through how MYGAs, fixed index annuities, and other safe money strategies might fit your plan.

Find a SafeMoney advisor near you and get a free, no-obligation review of your current income strategy.