A 71-year-old with $1.1 million is ready to sell every stock and lock in Treasury yields above 5%, and the income math actually works until you factor in the tax traps, Medicare surcharges, and a retirement that could stretch two decades.
With the 10-year Treasury yield above 5%, he wants to sell every stock, buy Treasuries, and live on the interest. Plenty of retirees are thinking the same way. The Fed held rates steady as inflation hit a three-year high, and the chief executive of BNY (NYSE:BK) told Reuters that current 10-year yield levels have historical precedent. Locking in 5% feels like a safe place to stop worrying.
How Treasury Securities Function as Government Debt Instruments
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as a supplement to taxation. Since 2012, the U.S. government debt has been managed by the Bureau of the Fiscal Service, succeeding the Bureau of the Public Debt.
There are four types of marketable Treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). The government sells these securities in auctions conducted by the Federal Reserve Bank of New York, after which they can be traded in secondary markets. Non-marketable securities include savings bonds, issued to individuals; the State and Local Government Series (SLGS), purchaseable only with the proceeds of state and municipal bond sales; and the Government Account Series, purchased by units of the federal government.
Treasury securities are backed by the full faith and credit of the United States, meaning that the government promises to raise money by any legally available means to repay them. Although the United States is a sovereign power and may default without recourse, its strong record of repayment has given Treasury securities a reputation as one of the world’s lowest-risk investments. This low risk gives Treasuries a unique place in the financial system, where they are used as cash equivalents by institutions, corporations, and wealthy investors.
The Historical Reputation of Treasuries as Low-Risk Investments
To finance the costs of World War I, the U.S. government increased income taxes (see the War Revenue Act of 1917) and issued government debt, called war bonds. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917.
The Treasury raised funding throughout the war by selling $21.5 billion in Liberty bonds. These bonds were sold at subscription, where officials created coupon price and then sold it at par value. At this price, subscriptions could be filled in as little as one day, but usually remained open for several weeks, depending on demand for the bond.
After the war, the Liberty bonds were reaching maturity, but the Treasury was unable to pay each down fully with only limited budget surpluses. To solve this problem, the Treasury refinanced the debt with variable short and medium-term maturities. Again, the Treasury issued debt through fixed-price subscription, where both the coupon and the price of the debt were dictated by the Treasury.
The problems with debt issuance became apparent in the late 1920s. The system suffered from chronic over-subscription, where interest rates were so attractive that there were more purchasers of debt than required by the government. This indicated that the government was paying too much for debt. As government debt was undervalued, debt purchasers could buy from the government and immediately sell to another market participant at a higher price.
The Hidden Costs: Taxes, Medicare Surcharges, and Inflation
Treasury interest is taxed. It counts as ordinary income. States can’t tax it, but the IRS taxes it fully, and adding $56,000 in interest on top of his benefits pushes 85% of his Social Security into taxable income. For 2026, single taxpayers pay 22% on income over $50,400.
Selling the taxable account first. That sale produces $150,000 of gain, roughly $22,500 at the 15% rate, plus the 3.8% net investment income tax because his income tops $200,000. Two years later, Medicare bills him for it. Single taxpayers above $109,000 pay Part B premiums of $284.10 to $649.20 a month, up from the standard $202.90.
Inflation shrinks a fixed coupon. At 3% inflation, $56,000 is worth about $42,000 in today’s dollars by year ten. His spending keeps rising while the checks stay flat. The 10-year Treasury yield recently stood at 5.1%, while 10-year TIPS yield 2.7%.
The Challenge of Fixed Income Versus Rising Living Expenses
A 71-year-old in good health could easily live into his 90s, spanning two full Treasury maturity dates of fixed income against rising prices. Social Security adjusts for inflation, with a 3.6% COLA set for 2027. His Treasury coupons never adjust.
Reinvestment risk occurs when bonds mature and the investor must reinvest at potentially lower prevailing interest rates. In ten years, the bonds mature at whatever rates exist then. The 10-year went from 5.3% to 5.1% in about two weeks this month, showing how quickly income on new money can shrink.
Required minimum distributions start at age 73, and on a $700,000 IRA the first one is about $26,000, taxable whether he needs it or not. RMDs arrive anyway. Required minimum distributions start at age 73, and on a $700,000 IRA the first one is about $26,000, taxable whether he needs it or not.
Reinvestment Risk and Future Market Volatility
Reinvestment risk occurs when bonds mature and the investor must reinvest at potentially lower prevailing interest rates. In ten years, the bonds mature at whatever rates exist then. The 10-year went from 5.3% to 5.1% in about two weeks this month, showing how quickly income on new money can shrink.
Market volatility can further complicate reinvestment outcomes, as sudden shifts in interest rates may reduce the yield available on new Treasury purchases. This is especially relevant for retirees relying on fixed income, as lower reinvestment rates could diminish annual income over time.
The 10-year Treasury yield recently stood at 5.1%, while 10-year TIPS yield 2.7%, highlighting the gap between nominal and inflation-protected returns. This spread reflects market expectations for future inflation and influences the real income retirees can expect from their Treasury holdings.
Sources
- Dad Is 71 and Wants to Sell Every Stock, Put His $1.1 Million in 10-Year Treasuries Now That the Yield Is Above 5% and Live on the Interest. Is It a Crazy Idea?
- United States Treasury security
- Why U.S. Borrowing Costs Keep Climbing Despite Treasury’s Efforts | Council on Foreign Relations
Photo: Beyond My Ken (CC BY-SA 4.0)
