Long-term bonds offer lackluster returns and gut-wrenching price swings. And today they get our seal of approval.

In fact, for some folks, there's arguably no safer investment, as pension funds have discovered. The reason: If you're approaching retirement, the big danger is that the cost of generating retirement income will spike higher -- and owning long bonds is a great way to hedge that risk.

Keeping promises. To understand why, imagine you own a small business with a handful of employees, and you have promised them all pensions of $1,000 a month.

Your plan: When they retire, you will buy them each an immediate-fixed annuity. That will mean handing over a wad of money to an insurance company, which will then send your retired employees $1,000 every month for life.

Want to make sure you have enough money to buy these annuities? True, stocks will likely deliver the highest returns, while short-term bonds will give you a decent yield without much volatility. But your annuity costs won't fluctuate with the value of stocks or the price of short-term bonds.

Instead, the cost charged by the insurance company will vary with the yield on long-term bonds, typically defined as those with more than 10 years to maturity. "If you have a slice of your portfolio in long bonds, that will give you some protection," says Paul Pasteris, a senior vice president at insurer New York Life.

Suppose interest rates drop sharply just before one of your employees retires. The bad news is, the plunge in bond yields means a $1,000-a-month annuity will now be far more expensive. The good news is, your long-term bonds will soar in price as interest rates fall, so you will still have enough money to make the purchase.

Yet, deterred by the wild price swings, investors often avoid long-term bonds. "It's based on a complete misconception of what risk is," argues Robert Arnott, chairman of money manager Research Affiliates in Pasadena, Calif.

Battling inflation. Of course, you probably don't have employees -- and the only retirement you're worried about is your own. Nonetheless, mimicking a pension plan and buying longer-term bonds could be a smart move. But you need to tweak the strategy.

For starters, don't go overboard on long bonds, because they aren't likely to generate high long-run returns. Instead, as you struggle to amass enough for retirement, stocks should probably be your largest investment.

You also shouldn't invest too heavily in long bonds because, unlike a pension plan, your goal isn't 100 percent annuitization. Instead, upon retirement, you might invest 25 percent to 50 percent of your savings in an income annuity, and even less if you will collect a traditional pension.

"People need to think about what their liabilities are," says John Ameriks, a senior investment analyst at Vanguard Group, the Malvern, Pa., mutual-fund company. "Our needs are much less predictable than a steady stream of income."

Let's say you need extra money for medical expenses. If all you have is annuity income, you could be in a financial bind. But if you still own some stocks and bonds, you can sell those to pay the bills.

There's another crucial difference between you and a pension plan. While most pension plans pay the same sum every month to their retirees, what you really want is income that rises with inflation. With that in mind, skip conventional long-term bonds -- and instead buy long-term inflation-indexed Treasurys.

With inflation-indexed bonds, both the principal value and the interest paid climb along with inflation. Upon retirement, you could use your inflation bonds to purchase an inflation-indexed annuity, such as those offered by Vanguard and New York insurer MetLife. (The MetLife annuity is currently sold only through employers.)

Taking a position. How much should you invest in inflation bonds? If you're risk-averse and don't need high returns, you might keep as much in inflation bonds as you plan to invest in the annuity.

For most folks, however, a 10 percent portfolio allocation will likely suffice. Inflation bonds have had a rough year, but that means today's yields are fairly enticing, with 10-year inflation-indexed Treasurys paying some 2.3 percentage points a year above inflation.

You could purchase inflation bonds through a fund. Alternatively, buy individual bonds, which will allow you to tap into longer maturities -- and thereby better protect against rising annuity costs. Inflation-indexed Treasurys are available with maturities of up to 25 years.

Planning to purchase an annuity at age 65? As a hedge, you might buy inflation bonds that, once you're 65, will have 15 or 20 years to maturity, says MetLife actuary Aaron Fried.

Even if you have no intention of buying an annuity, it's still worth purchasing inflation bonds. But consider creating a "ladder" of short and long-term issues.

"A portfolio of bonds that you're consuming as you age, where you're spending both principal and interest, is almost identical to owning an annuity," says William Bernstein, an investment adviser in North Bend, Ore. "You just don't have the insurance against outliving your money."