Equities vs Bonds in Retirement: What the Model Actually Shows

The retirement planning advice most people receive follows a simple arc: in your 20s and 30s, hold equities. As you approach retirement, gradually shift into bonds. By the time you stop working, your portfolio should be conservative — heavy in bonds, light in equities, designed to preserve rather than grow.

This advice has a logic to it. Equities are volatile. Bonds — particularly government bonds — are more stable. If you are drawing income from a portfolio, you do not want it to fall 40% in year one. Bonds, the thinking goes, provide a cushion.

Then 2022 happened.

In 2022, UK gilts fell by roughly 25%. Global equities fell by roughly 18%. Both fell simultaneously, in the same year, for related macroeconomic reasons. A retiree holding a classic 60/40 portfolio — 60% equities, 40% bonds — saw both halves of their "balanced" portfolio decline at the same time. The bond cushion was not there when it was needed.

This is not an argument against bonds. It is an argument for understanding what bonds actually do — and what they do not do — in a retirement portfolio, and for modelling the trade-off explicitly rather than accepting the conventional wisdom as settled.

What bonds actually do in a retirement portfolio

Bonds serve two functions in a retirement portfolio — and it is important to keep them separate, because they are not equally reliable.

Function 1: Reduce volatility

Bonds have historically been less volatile than equities. Their prices move in response to interest rate changes and credit risk — but the swings are typically smaller than equity market moves. A portfolio with a significant bond allocation will have a narrower range of annual returns than a pure equity portfolio. This is reliable and consistent across most historical periods.

Function 2: Provide a counter-cyclical cushion

The more contested claim is that bonds go up when equities go down — that they provide a natural hedge. This was broadly true during the low-inflation period from roughly 1990 to 2020. When equity markets fell during that period, central banks often cut interest rates in response, which pushed bond prices up. The 60/40 portfolio worked well because the correlation between equities and bonds was negative.

Understanding which function you are relying on matters. Volatility reduction from bonds is reliable. Counter-cyclical protection from bonds is conditional on the interest rate environment — and that environment is not always benign.

The 2022 lesson — and why it matters for retirees

The 2022 market showed what a genuinely difficult environment looks like for a bond-heavy retirement portfolio. Both major asset classes fell simultaneously.

For a retiree drawing income from a 60/40 portfolio in 2022, both halves of the portfolio fell. The bond allocation did not protect the portfolio — it added to the drawdown. A retiree who believed they had reduced their sequence risk by holding bonds discovered that the risk had not been eliminated. It had been transformed into a different kind of risk — interest rate risk — which materialised in the same year as the equity risk.

This does not mean bonds are useless. Short-duration bonds and cash behaved very differently from long-duration gilts in 2022. The lesson is more specific: long-duration bonds in an inflationary environment are not a reliable safe haven. The specific type of bond matters as much as the allocation percentage.

The real trade-off — what the model shows

When you run different asset allocations through a Monte Carlo retirement simulation, the trade-off becomes visible in a way that the conventional wisdom obscures. There are three dimensions to look at: the median outcome, the downside protection, and the insurance premium.

The table below shows how different allocations have historically performed across key metrics. These are illustrative ranges based on long-run UK market data — your actual results will depend on the specific return sequences you experience.

The striking finding from the table is that the conventional 60/40 portfolio — the most commonly recommended allocation — performed worse in 2022 than a portfolio with a higher equity allocation. The bonds that were supposed to cushion the drawdown amplified it instead.

What actually works for sequence risk protection

If bonds are an unreliable cushion, what is the alternative? The model points to three approaches that address sequence risk more directly than bond allocation alone.

Cash buffer

A cash reserve of one to two years of living expenses, held outside the investment portfolio, is the most direct response to sequence risk. Cash cannot fall in value in nominal terms. It is completely uncorrelated with equity markets. When markets fall, you draw from cash rather than selling equities at depressed prices. The cash buffer strategy is covered in detail in a separate article.

Short-duration bonds rather than long-duration

If you are going to hold bonds, the 2022 experience argues strongly for shorter durations. Short-dated gilts and corporate bonds are far less sensitive to interest rate moves than long-dated equivalents. They provide volatility reduction without the severe interest rate risk that made long-dated gilts so damaging in 2022.

Glidepath — gradual de-risking over time

Rather than holding a fixed allocation throughout retirement, a glidepath gradually shifts from higher equity to higher bond allocation over the first 10–15 years of retirement. This addresses the sequence risk window — the period when a crash is most damaging — while preserving more equity exposure in later years when sequence risk is lower because withdrawals have reduced the portfolio's remaining horizon.

The UK context — why it is different from US advice

Most asset allocation advice for retirees is derived from US research using US market data. The UK context differs in three important ways.

The State Pension as a bond substitute

The full new State Pension provides £11,502 per year of guaranteed, inflation-linked income. For a retiree who needs £30,000 per year, the State Pension covers 38% of that requirement — effectively functioning as a guaranteed bond-like income floor. A UK retiree who has full State Pension entitlement already has significant non-equity income. Adding a large bond allocation on top may be redundant.

UK equity market composition

The UK equity market (FTSE 100) is heavily weighted towards defensive sectors — energy, financials, consumer staples, mining — which tend to be less volatile than the technology-heavy US indices. A UK equity portfolio has historically been less extreme in both its ups and its downs than a US equity portfolio. This changes the risk calculus for how much bond allocation is needed to achieve a given level of volatility reduction.

Tax wrapper interactions

The tax treatment of bond income versus equity dividends within ISAs and pensions is identical — both are tax-free within the wrapper. But within a general investment account, bond interest is taxed as income while equity dividends have a separate allowance and lower rates. For retirees with assets outside tax wrappers, this creates an additional argument for equity over bond allocation from a tax efficiency perspective.

What to actually do with this

The research does not support a simple answer. It supports a framework.

If you are more than 10 years from retirement

Hold a high equity allocation. The sequence risk window is far away. Bonds at this stage cost you long-run returns without meaningful protection against the risks you actually face now, which are primarily inflation risk and career/income risk rather than sequence risk.

If you are within 5 years of retirement

Build a cash buffer of one to two years of living expenses rather than increasing bond allocation. Address the sequence risk window directly rather than through bonds, which are not reliably counter-cyclical. Consider a modest shift toward shorter-duration bonds if you want some reduction in portfolio volatility.

If you are already in retirement

Maintain a meaningful equity allocation for long-run growth — a 30-year retirement needs equities to avoid running out of money. Use a cash buffer and a glidepath rather than a heavy bond allocation as your sequence risk protection. Review bond duration — avoid long-dated gilts unless you have a specific view on the interest rate environment.

In all cases

Model it. The right allocation for your situation depends on your specific withdrawal rate, State Pension timing, other income sources, spending flexibility, and risk tolerance. The general frameworks above are starting points — not answers. Running your specific scenario through a Monte Carlo simulation will show you how different allocations affect your probability of success across realistic futures, including the 2022-style scenario where bonds and equities fall together.