High-tech tools promise sleek portfolios and maximum return per unit of risk. For a retiree living off savings, though, the goal isn’t elegance on a chart—it’s steady income and survivable drawdowns.

Modern portfolio theory (MPT) is powerful, but it’s a map. Retirement is the terrain. When a plan proposes zero high-quality bonds for a retiree drawing income, caution is warranted.

MPT in Brief

MPT seeks the best mix of assets for a desired risk level. Combine holdings that don’t move in lockstep and, in theory, total volatility falls while expected return rises. The optimizer sits at the center, crunching expected returns, volatility, and correlations to draw an “efficient frontier.” It’s rigorous—and entirely dependent on the inputs.

Model vs Reality

Optimizers assume the future will rhyme with the recent past. If correlations spike or volatility surges, a portfolio that looked “efficient” on paper can feel fragile in real life. That risk grows when the output is extreme—like a retiree portfolio with no meaningful fixed-income cushion. When conditions change, the gap between model and reality can become costly.

Assumption Risk

Three dials drive an optimizer: expected returns, expected volatility, and expected correlations. Small tweaks to any dial can swing the recommended mix dramatically. If assumed diversification disappears during stress, losses can compound. For someone withdrawing cash, sequence-of-returns risk turns paper losses into permanent damage. Bonds exist, in part, to blunt that sequence risk.

Wade Pfau, a retirement researcher, said, “We’re really vulnerable to market returns around the retirement date—in the years leading up to retirement and then especially in the early years of retirement.”

Keep It Moderate

In practice, the better portfolio is often the one that performs “well enough” across many scenarios, not the one that wins the last backtest. For a typical retiree, that points to a balanced mix: a meaningful slice of equities for growth, plus high-quality bonds to steady cash flows and fund withdrawals during equity drawdowns.

Why Hold Bonds

High-quality bonds offer three retiree-friendly traits: income, lower volatility, and diversification potential in many (not all) selloffs. They help fund several years of withdrawals without forced stock sales. That “time bridge” is invaluable. Even if stocks earn more over decades, the path matters when paychecks now come from the portfolio.

Reasonable Equity

Equities still belong in the plan. Many retirees in their mid-60s can justify roughly half of their portfolio in stocks, diversified across regions, sizes, and styles. Even in later decades, a measured equity stake (often 20%–30%) helps combat inflation and longevity risk. The precise mix should match spending needs, pensions, and risk capacity—not a model’s bravado.

Thoughtful Diversifiers

Beyond core stocks and bonds, modest allocations to real estate or inflation-linked bonds can add resilience. Niche or “alternative” strategies may promise low correlation, but beware complexity, high fees, and backtest bias. If a diversifier’s behavior is hard to explain in plain language, it may be hard to rely on when markets turn.

Stress-Test Cash Flow

Instead of optimizing around abstract volatility, plan around income. Separate essentials (housing, food, healthcare, insurance) from lifestyle wants (travel, hobbies). Structure bonds and cash to cover roughly two to five years of essentials. Let equities fund growth and discretionary goals. If markets drop, you gain time—often the most valuable asset—to wait for recovery.

Sequence Defense

The danger isn’t average returns; it’s bad early returns combined with withdrawals. A simple defense: pair a balanced allocation with a withdrawal policy that flexes. Trim discretionary spending after big declines, harvest gains after strong years, and rebalance with discipline. Bonds make each of those levers easier to pull without stress.

Behavior Matters

Risk tolerance is famous for shape-shifting—brave during rallies, timid after selloffs. Portfolios without ballast invite reactive decisions at the worst moments. A bond sleeve anchors behavior. If a plan requires unusually high tolerance for large swings to succeed, it may not be a durable plan for most retirees.

Ask Better Questions

When presented a bond-free proposal, press for specifics: Which assumptions drive the recommendation? How did the mix hold up in severe market drawdowns? What funds retirements during a three-year equity slump? How are correlations modeled under stress? If the answers lean on optimization alone, seek a second opinion.

Practical Guardrails

Keep fees low, diversify broadly, and rebalance on a schedule. Hold a ladder of high-quality bonds or short-to-intermediate funds for essential spending needs. Map pensions and annuities to core expenses where appropriate. Use equities for long-term growth, not near-term obligations. Measure success in sustainable income and peace of mind—not in backtest Sharpe ratios.

Conclusion

MPT is a valuable compass, but retirement demands a sturdy vehicle, not a racecar tuned to yesterday’s track. For most retirees, a balanced allocation—equities for growth, bonds for stability—beats extreme designs that look brilliant until conditions shift. Before embracing a no-bond blueprint, ask: will this portfolio still support real-life spending when markets don’t follow the model?