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Bonds vs Shares in Retirement: How to Split Your Money

Retired couple reviewing super investment choices together

In retirement you rarely have to pick bonds or shares. You decide how much of your money sits in each, based on how soon you need it and how much a bad year would hurt. Bonds lend money to governments or companies for a set return and are usually lower risk and more stable, while shares can grow over time but move up and down more in the short term. The hard part is the balance: too much in shares and a market fall can force you to sell at the wrong time, too much in bonds and your savings may not keep pace with a retirement that can last decades.

This guide explains how the two compare for income, risk and access to capital. It also covers how Australian super and pension rules affect the choice, and how to test a mix before you commit to it.

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TL;DR

  • Bonds are the steadier, lower-risk part of a portfolio. Shares are the growth part, with bigger short-term swings.
  • Retirees are not choosing one or the other. The real decision is the split, and it should follow your spending needs and your comfort with risk.
  • ASFA has warned that shifting too heavily into cash and bonds can limit long-term growth and push retirees to live more frugally than they need to.
  • In an Australian super pension, the asset mix is a menu choice, and tax and drawdown rules sit around it.
  • Test your mix against bad scenarios before you retire, not after.

Table of Contents

What bonds and shares actually do for a retiree

A bond is a loan. You lend to a government or company, and it agrees to pay a set return. That predictability is the appeal. Moneysmart describes bonds as usually lower risk and more stable than shares, which is why super funds class them as defensive assets.

A share is part ownership of a business. Your return comes from dividends and from the price rising over time. Prices can fall hard in a single year, but over long periods shares are the main source of growth in most diversified portfolios.

Those two roles map onto two retirement jobs:

  • Defensive job: pay the bills over the next few years without selling growth assets after a fall.
  • Growth job: keep your purchasing power alive for the 20 or 30 years after that.

A useful way to think about it is not “which is better” but “which money is for which year”.

Bonds vs shares: income, risk and access to capital

Bonds Shares
What you own A loan to a government or company A slice of a business
Income pattern Set return, more predictable Dividends that can rise or be cut
Short-term ups and downs Usually smaller Usually larger
Long-term growth Generally lower Generally higher
Role in a retirement portfolio Stability and spending buffer Growth to outlast inflation and longevity
Main risk Lower growth, and returns that may not keep up with living costs Selling after a fall

Two cautions on this table. First, “usually” matters. Bonds are not risk free, and a bond held to maturity behaves differently from one sold early. Second, products labelled as protected need a close read. Moneysmart notes that capital-protected investments can combine bonds and derivatives to offer market-linked returns while promising to return your original investment at maturity, but the protection generally applies only if you hold for the full term. If you might need the money earlier, that promise may not apply to you.

Income: what you can count on

Bonds give you a more predictable stream, which makes budgeting easier. Shares give you a less predictable one, but one with more room to grow. For many retirees, a mix of both smooths the ride. Neither tells you how much you can safely spend. That depends on your balance, your age, and how long you expect to draw on it.

Risk: two different kinds

The risk most people worry about is a sharp fall in the value of shares just as they retire. The quieter risk is running out of growth. ASFA’s 2024 paper says traditional retirement approaches often shift too heavily into defensive assets like cash and bonds, which can limit long-term capital growth and force retirees to live more frugally than necessary. Both risks are real, and the right mix is a trade between them.

Two retirement portfolio risks compared

Access to capital

Listed shares and bond funds can generally be sold when you need cash, though not always at a price you like. That is different from a lifetime annuity, which can limit access to your money. We come back to that below.

Choosing an asset mix in retirement

There is no universal ratio. Rules of thumb such as 60/40 are starting points, not answers, and a reddit thread on the topic makes a fair point: if you hold only 60% shares, you may need more shares rather than more bonds, depending on your goals. What matters is that your mix fits your situation. Four questions help:

  1. How much do you need to withdraw each year, and for how long? A higher spending rate relative to your balance leaves less room for a bad run early on.
  2. Do you have other income? Part-time work, rent or an Age Pension can cover some spending and let you hold more growth assets.
  3. How would you react to a 20% fall? Moneysmart says your choice can reflect time to retirement and comfort with investment risk. A mix you abandon in a panic is the wrong mix.
  4. What else do you own? The Retirement Income Review’s material points out that planning should account for superannuation and other assets, including homeownership, alongside social security entitlements.

A simple buckets approach

Many retirees split money by time horizon. This is an illustration, not a recommendation:

  • Next 1 to 3 years of spending: cash and short-term defensive assets.
  • Years 4 to 10: bonds and other defensive or income assets.
  • Beyond 10 years: shares and other growth assets.

The idea is that a market fall does not force you to sell shares to pay this year’s bills. The buckets are topped up from the growth portion when markets are healthy. Your own numbers will decide how large each one is. For a wider look at the options, see our guide to retirement investment options for Australians.

How asset allocation works in an Australian super pension

If your retirement savings are in super, the mix is usually chosen from a menu. Moneysmart explains that most super funds let members choose investment options, and diversified, growth, balanced and conservative options vary in asset mix and risk. A conservative option holds more defensive assets such as bonds and cash. A growth option holds more shares.

Some funds also adjust automatically. Certain MySuper options shift the asset mix as members age, moving from growth assets to steadier ones to reduce risk near retirement. That is convenient, but it is a default designed for an average member, not for you. If you have a partner on the Age Pension, an investment property, or a long retirement ahead, the default may not suit you.

If you want to see how a given return assumption affects your balance, a superannuation calculator for Australians is a quick way to get a first estimate. For the choices inside super itself, our super choices guide goes further.

Rules that sit around your investment choice

The mix is only one part. A few rules shape how you use it:

The last point matters for the bonds vs shares question. Inside a pension account, you generally do not pay tax on the earnings, so tax is less of a reason to favour one asset class over another there. Outside super, the picture changes, which is where capital gains tax and your marginal rate come in.

Annuity or account-based pension: where bonds and shares fit

This choice is really about how much risk you hand to someone else.

With an account-based pension, you choose how much to transfer, the size and frequency of payments, and the investments. You keep control, and you carry the market risk. An annuity, in contrast, provides guaranteed income for a set number of years or for life, but can limit access to your money.

In effect, a conventional annuity plays the role bonds play in a portfolio: steady, predictable and less flexible. Many retirees therefore treat annuity income as their defensive layer, then hold shares for growth in the account-based pension.

ASFA calls this approach product layering: combining account-based pensions with lifetime annuities to balance flexibility, control over capital and the security of income for life. The same paper notes that investment-linked lifetime annuities are emerging in Australia, letting members choose their own investment risk level, which affects income volatility, while keeping a longevity guarantee.

If you go this way, the share of your money that is locked into an annuity should shape how much bond exposure you still need in the rest of the portfolio. Holding both a large annuity and a large bond allocation may mean you are paying twice for stability.

Annuity or account-based pension: where bonds and shares fit — overview diagram

If you are retiring before preservation age

Early retirees face a gap. You cannot generally reach your super until you meet a condition of release, so the years between leaving work and preservation age must be funded from savings held outside super.

A few things follow from that:

Our guide to super preservation age explains when your own access begins. The bridge is a modelling problem as much as an investing one: how many years, how much per year, and what happens if markets fall in year two.

Why modelling beats rules of thumb

The Retirement Income Review submission cited above observes that for most people, retirement income decisions are complex and unfamiliar, and careful presentation of options is needed. A static ratio hides the things that matter most: when you retire, what you spend, how the Age Pension interacts with your assets, and what a poor first few years would do.

The practical test for any mix is to run it under several scenarios and compare them side by side:

  1. Your base case, with your expected returns.
  2. A weaker-returns case.
  3. A market fall in the first years of retirement.
  4. Higher spending than planned.
  5. A longer life than average.

If the plan only works in the base case, the mix is too fragile, whichever way it leans.

Our perspective: the split matters less than the plan behind it

We built AeroWealth because most Australians we see approach this question with a spreadsheet, or with a single ratio and no way to check it. Our view is that bonds vs shares is the wrong first question. The first questions are what you need to spend, when you can reach each pool of money, and how your super, property and other investments work together.

Once those are on the table, the asset mix tends to follow. A retiree with a paid-off home and a long horizon can often justify more growth assets than a cautious default suggests. An early retiree bridging to preservation age needs steadier money for those years, with growth assets working in the background. Neither can be judged without seeing the numbers side by side, and stress-testing them against a bad first few years.

We also think the cost of too much caution is underrated. A portfolio that feels safe can leave you spending less than you could, for years, and that is a real loss too.

— Aerowealth Team

Test your mix in AeroWealth

AeroWealth lets you put super, investment property, ETFs, mortgages and contributions into a single plan, then compare scenarios side by side with stress tests. It also models bridge years for retirement before preservation age, and includes capital gains and tax effects under Australian rules. The Free plan lets you start, and Pro is $7 per month for expanded scenario planning, bridge mode and a higher AI assistant quota. You can see both on the AeroWealth pricing page.

If you are also working out how much income to draw, our retirement income strategies guide is a good companion.

FAQ

Are bonds a good investment for retirement income?

Bonds can provide a more predictable return and are usually lower risk and more stable than shares. They suit the part of your money you plan to spend soon. They are less suited to money that must last for decades, because lower growth can leave your savings behind rising living costs.

Should retirees hold more bonds than shares?

Not necessarily. ASFA has noted that moving too far into defensive assets can limit long-term growth and make retirees live more frugally than necessary. The right split depends on your spending, other income, time horizon and how you would cope with a fall in markets.

How does asset allocation work in the pension phase?

In most Australian super funds you pick from options such as conservative, balanced, growth or diversified. These differ in how much they hold in shares and bonds. Some funds also shift the mix automatically as you age, so check what yours does and whether it fits your situation.

Annuity or account-based pension: which is better?

An annuity offers guaranteed income but can limit access to your money. An account-based pension gives you control over payments and investments, with market risk attached. Many retirees combine the two, which ASFA calls product layering.

What if I retire before preservation age?

You need to fund the years before you can access super from money held outside it. Keep the spending for those years in steadier assets, and model the gap with different market outcomes. Consider speaking with a licensed financial adviser or the ATO about tax on any sales.

Sources

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