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Re: “Own your age in bonds”


@chang wrote:


 Right now I have in excess of $5m in liquid stocks and bonds. I consider that I’ve won the game. I think my retirement is secure even at current bond rates. 

 

 

 


Chang and I worked for an old codger named Admiral Rickover in the Naval Nuclear Submarine Program.  I see Chang also learned the compounding math well, and his results show it.  Good job.

I retired at an earlier age...I have less than 5 million.  Shows if you want to maximize things...keep working.  The best portfolio size is obtained if you "work until you die!".

It turned out I had enough also...but my being financially independent for 40 years depended on a generous stock allocation; and when I retired bond yields were in 10% yield range for long term ones.  Now that is stability in ones portfolio.

Keep in mind folks, per the "rule of 72", a 30 yr treasury bond at 1.25% yield, with dividends reinvested, will double your money in 58 years!  Prices in my lifetime went up by a factor of ten to date, easily.

Age in bonds, at current yields: absurd.  And for those non-retired folks with portfolios from zero to $150,000 size, should be 100/0...no bonds, period.

R48...27 years financially independent...portfolio still growing...lowest percentage vanilla bond allocation in my lifetime!

 

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Re: “Own your age in bonds”


@chang wrote:

Does anyone think this adage still makes sense?

To be clear, by “bonds” I don’t mean anything fancy, volatile or correlated with equities. Think VBTLX and VWIUX. Vanilla and conventional.


I'm fairly certain that if I owned my age in bonds as you describe I would have difficulty sleeping at night. Long term I see no where for yields to go but up. Near term with yields so low they are dead weight in my portfolio. If I were too scared to be in stocks right now, I would prefer cash to bonds. The downside risk I see on bonds far exceeds the reward. Mutual Funds with static maturities are out of the question for me. Picking individual bonds in the bond market is also not for me, not enough knowledge for that. I have looked at iShares iBonds for both diversification and principal protection. That may prove an acceptable way to ladder at some future date, depending on size of future portfolio, future interest rates and tax law treatment of various income items. But right now at this time owning my age in bonds makes it a certainty that I will not attain my goals investing.

Capital
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Re: “Own your age in bonds”


@chang wrote:

Does anyone think this adage still makes sense?

I don’t believe it.  Interest dividends are secondary to me.  I allocate bonds according to their volatility.  I don’t invest in bonds for ballast.  Everything I invest in is determined by risk parity and how it contributes to total return for my entire portfolio.

I have been investing in treasury funds since 2002.  In late 2018 I took advantage of the correction in fixed income and increased my allocation in EDV to 25%. Since 2018 I have sold approximately 20% of my EDV to keep it at 25%.  I normally carry about 15% in cash and funds like BSV, ISTB and currently in VGSH so most of my fixed income is in treasuries.

Last March I sold most of my equities but have since slowly started buying equities and eventually will bring my equity allocation back to 60%.

Currently my portfolio is down YTD about 3% but I believe the market will correct enough to justify my caution.

helmut

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Re: “Own your age in bonds”

The bottom line is that each of us has our own investment style, risk tolerance, and unique situations.  Take each post just as an (successful?) example/reference on its own, never let any drive your own portfolio development.

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Re: “Own your age in bonds”


@bilperk wrote:

Even when intermediate bonds were yielding 4-6%, the adage had been changed in Boglehead land to age-10 in bonds, as a starting point.  Frankly, anyone in their 40s will very likely make out much better with more than 60% in equities as there is no 20 year period where equities haven't gone up.  But in reality, it is a personal choice.  And if you look at bond returns on a ytd, 1 year and 5 year basis, bonds have returned much more than their yield.  Five years ago, the FED fund rate was near 0.


I hadn’t heard “age minus 10” before. That would give me a target of 48% bonds (52% stock), which would require me to add more money into stocks. I’m willing to add another 5% .... very carefully.

A lot of interesting responses here - thanks to all - ranging from one position to the polar opposite. That’s one reason I think I won’t screw up too badly hovering around 50/50 ... because there are intelligent people who won’t touch stocks and intelligent people who won’t touch bonds.

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Re: “Own your age in bonds”


@retiredat48 wrote:


Chang and I worked for an old codger named Admiral Rickover in the Naval Nuclear Submarine Program.  I see Chang also learned the compounding math well, and his results show it.  Good job.

I retired at an earlier age...I have less than 5 million.  Shows if you want to maximize things...keep working.  The best portfolio size is obtained if you "work until you die!".

It turned out I had enough also...but my being financially independent for 40 years depended on a generous stock allocation; and when I retired bond yields were in 10% yield range for long term ones.  Now that is stability in ones portfolio.

Keep in mind folks, per the "rule of 72", a 30 yr treasury bond at 1.25% yield, with dividends reinvested, will double your money in 58 years!  Prices in my lifetime went up by a factor of ten to date, easily.

Age in bonds, at current yields: absurd.  And for those non-retired folks with portfolios from zero to $150,000 size, should be 100/0...no bonds, period.

R48...27 years financially independent...portfolio still growing...lowest percentage vanilla bond allocation in my lifetime!

 


I'm not sure I have all the right numbers (please let me know what they are) but let's show it was a gamble.  It worked because your timing was great since you got 5 great years 1995-1999 for stocks.

If you retired in 01/1993 with $650K and withdrew 6.8% annually for 27 years (until 06/2020) VS VWINX(40/60) or VWELX (60-65% stocks) it looks like (this). All 3 portfolios had more money after 27 years.

r48-1.PNG

But it you retired in 01/2000 with the same parameters, it looked like (this).  At one point in 02/2009 VFINX had only $201K left. Only VWINX+VWELX had more money. VFINX had 25% less money after the longest bull market in history.

r48-2.PNG

The above show

1) You were lucky and why a responsible retiree should not do it. If you retired in 01/2000 by 02/2009 69% of your portfolio was gone.  I don't know many retirees that would be OK with that.

2) 60/40 (or 50/50) was a better choice and it's the one recommended by most financial planner.

3) For retirees who made it (have at least 25 times their annual expense in savings), they can have 60% or 20% stocks and both will be OK.  It's a personal choice.

4) If you retire today and need 6.8% withdrawal + count for inflation you must be in a very high % in stocks, you have no choice and you must be OK for the volatility which most are not. You should work several more years until you just need 5% withdrawal.

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Re: “Own your age in bonds”

 

FD, I've tried to post this carefully when I do on this experience.  If I posted 6.8% withdrawal rate, it  should be more like 7.8%. (senior recollection moment).  This was an IRS approved formula  "substantially equally payment scheme" that must be taken annually to age 59 1/2 to avoid IRA EW penalty.

But importantly, the rate was not for the entire retirement.  It was used to get to age 60 when a reasonable pension kicked in (allowing a lesser IRA withdrawal); and then to age 62, when Soc Security begins (allowing further reduction in withdrawal).  Actually, at age 60 I took a lump sum in lieu of pension from GE...glad I did.

I did not run my life to be backtested, so I can only provide my experience on the actual dates that occurred, and my portfolio trend at these milestones.  At each point, portfolio was higher in size.

When I retired I didn't have all these nifty backtesting studies re Safe Withdrawal Rates, etc.  My fall back was I could always go back to work if first five years were terrible.  Didn't happen.  That's life.

R48

 

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Re: “Own your age in bonds”

One of the facts of life is that it’s easy to play around with numbers to get the result you want. For example, suppose—just to make this simple—that I’ve got a $6m portfolio invested 50/50 in stocks and bonds. But I need to earmark $1m to buy my retirement home somewhere (we’re still renting now). So I could deduct $1m in bonds from the $6m (as if I’d bought a house today), and then I’ve got 3/5 = 60% in stocks. Presto: I have effectively a 60/40 portfolio.

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Re: “Own your age in bonds”

No, it doesn't make sense to me.  I've been reading several articles about how the "4% rule" may not be valid anymore because of low interest rates.  In an audio interview here on Morningstar, Wade Pfau said it had never been tested in such a prolonged period of low interest rates.  He recommends a variable withdrawal strategy.

If a portfolio of 25-50% bonds (the asset allocation recommended by the 4% rule) might not work because of low interest rates I'm certain one with 70-75% won't unless the needed income from investments is very low.  If all someone needs is one or two percent then it might work.

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Re: “Own your age in bonds”


@Mustang wrote:

No, it doesn't make sense to me.  I've been reading several articles about how the "4% rule" may not be valid anymore because of low interest rates.  In an audio interview here on Morningstar, Wade Pfau said it had never been tested in such a prolonged period of low interest rates.  He recommends a variable withdrawal strategy.

If a portfolio of 25-50% bonds (the asset allocation recommended by the 4% rule) might not work because of low interest rates I'm certain one with 70-75% won't unless the needed income from investments is very low.  If all someone needs is one or two percent then it might work.


It's just me, but I don't like speculating about safe withdrawal rates. 

As posted earlier this year, I suggest focusing on "fixed costs", costs that we incur no matter what.  These includes food, medical, insurance, transport, etc.  If we don't own a home, it must also include lodging.

My thinking is to be sure to be able to cover these "fixed costs" no matter what the market does.  Sources include SS, pensions, annuities, and maybe rental income.

Use investment income for discretionary expenses only (new car, travel, holiday home, etc.).

FWIW,

N.

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Re: “Own your age in bonds”

@norbertc “Use investment income for discretionary expenses only (new car, travel, holiday home, etc.).”

My investment portfolio is now my only source of money, until I reach SS age.

I am not focused on “income”, qua dividends, at all. I’ve always considered “income” to be completely irrelevant. I reinvest all dividends and distributions, and simply withdraw money by selling whichever securities I think make the most sense to sell at a given time. If I choose to sell the securities which throw off the most income, then I am effectively using the income as income. But that’s an after-the-fact coincidence, not the strategy.

In other words, I focus only on TR. However, I have a diverse portfolio, so obviously that includes some dividend paying stocks and bonds.  But I certainly do not aim to meet a certain, fixed “portfolio yield” target.

Anyway, back to your point. My investments, since I finished working, must now pay ALL our expenses. Not just the discretionary ones.

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Re: “Own your age in bonds”

I'll start Social Security at 62 in Sep. $20,400 per year. So to me it's the same as $1,000,000 in a bond fund @ 2.04% annually. That'll put me at about 50/50.

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Re: “Own your age in bonds”


@MNfish wrote:

I'll start Social Security at 62 in Sep. $20,400 per year. So to me it's the same as $1,000,000 in a bond fund @ 2.04% annually. That'll put me at about 50/50.


Interesting—and valid—way to look at it.

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Re: “Own your age in bonds”


@norbertc wrote:

@Mustang wrote:

No, it doesn't make sense to me.  I've been reading several articles about how the "4% rule" may not be valid anymore because of low interest rates.  In an audio interview here on Morningstar, Wade Pfau said it had never been tested in such a prolonged period of low interest rates.  He recommends a variable withdrawal strategy.

If a portfolio of 25-50% bonds (the asset allocation recommended by the 4% rule) might not work because of low interest rates I'm certain one with 70-75% won't unless the needed income from investments is very low.  If all someone needs is one or two percent then it might work.


It's just me, but I don't like speculating about safe withdrawal rates. 

As posted earlier this year, I suggest focusing on "fixed costs", costs that we incur no matter what.  These includes food, medical, insurance, transport, etc.  If we don't own a home, it must also include lodging.

My thinking is to be sure to be able to cover these "fixed costs" no matter what the market does.  Sources include SS, pensions, annuities, and maybe rental income.

Use investment income for discretionary expenses only (new car, travel, holiday home, etc.).

FWIW,

N.


My total income from Investments, retirement plans, SS and other income generates 150% of the income needed to cover expenses and taxes. Almost all of my investment income comes from qualified dividends taxed at either 0 or 15% which lowers my effective tax rate to 5%. Excess income is reinvested in equities which Increases qualified dividends. If needed I can take tax free withdrawals from a Roth IRA. When I retired I declined to take an annuity which would have paid 2X the amount of my RMDs and would have been taxed at over 30% because I didn’t need the income. The amounts in the retirement plan will Continue to grow tax free and will be passed on to my heirs.

Tax efficient investment income lowers taxes because it is taxed at a lower rate than SS and retirement benefits.  

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Re: “Own your age in bonds”


@chang wrote:

@MNfish wrote:

I'll start Social Security at 62 in Sep. $20,400 per year. So to me it's the same as $1,000,000 in a bond fund @ 2.04% annually. That'll put me at about 50/50.


Interesting—and valid—way to look at it.


That is one of the two general ways to approach SS and pension cash flow.  It is valid as long as one understands you will be generally having a higher level of equities that you would have with the other approach.  Using SS as a bond, BTW, was a Bogle recommendation but I believe that was based on the fact that most retirees have very little savings so they may need a larger stake in equities.

 

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Re: “Own your age in bonds”


@retiredat48 wrote:

 

FD, I've tried to post this carefully when I do on this experience.  If I posted 6.8% withdrawal rate, it  should be more like 7.8%. (senior recollection moment).  This was an IRS approved formula  "substantially equally payment scheme" that must be taken annually to age 59 1/2 to avoid IRA EW penalty.

But importantly, the rate was not for the entire retirement.  It was used to get to age 60 when a reasonable pension kicked in (allowing a lesser IRA withdrawal); and then to age 62, when Soc Security begins (allowing further reduction in withdrawal).  Actually, at age 60 I took a lump sum in lieu of pension from GE...glad I did.

I did not run my life to be backtested, so I can only provide my experience on the actual dates that occurred, and my portfolio trend at these milestones.  At each point, portfolio was higher in size.

When I retired I didn't have all these nifty backtesting studies re Safe Withdrawal Rates, etc.  My fall back was I could always go back to work if first five years were terrible.  Didn't happen.  That's life.

R48

 


Basically, you were lucky using withdrawal of 7.8%. In the 5 years of 1995-1999 the SP500 had an average return of over 26% which is huge.  I don't want to depend on luck and/or go back to work.

When I retired I didn't depend on any study.  I just used LT market returns + inflation + our annual expense and knew how much money we need and added more.  We have the choice to take SS at age 62 or 70, we can be in 20% stocks or 60%.

If the choice is to retire with a portfolio of 15 times annual expense at age 55 or 25 times at age 60, most should wait to age 60.  If the option is between age 65 at 15 times(not including SS) to age 70 with 25 times I would retire at age 65 because you already have SS + Medicare + fewer years to live.

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Re: “Own your age in bonds”


@chang wrote:

@norbertc “Use investment income for discretionary expenses only (new car, travel, holiday home, etc.).”

My investment portfolio is now my only source of money, until I reach SS age.

I am not focused on “income”, qua dividends, at all. I’ve always considered “income” to be completely irrelevant. I reinvest all dividends and distributions, and simply withdraw money by selling whichever securities I think make the most sense to sell at a given time. If I choose to sell the securities which throw off the most income, then I am effectively using the income as income. But that’s an after-the-fact coincidence, not the strategy.

In other words, I focus only on TR. However, I have a diverse portfolio, so obviously that includes some dividend paying stocks and bonds.  But I certainly do not aim to meet a certain, fixed “portfolio yield” target.

Anyway, back to your point. My investments, since I finished working, must now pay ALL our expenses. Not just the discretionary ones.


This is how I see it.  The only different I use mostly bond OEFs but all distributions are invested.  I sell some shares when I need to. SS will be taken at age 65.

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Re: “Own your age in bonds”

Agree with Mustang here. Bond yields are so low now that I question whether the 4% rule will work going forward. I’m planning on using a 3 to 3.5% withdrawal rate as our “upper end”, just to be safe. At least for the first ten years or so. I’m also staying with a high equity allocation heading into retirement in 2 years.

However, our bond allocation (anticipate it to be ~15-20% portfolio at retirement) will be large enough to support us for ~ten years if we have a really bad market. In other words we can sell off portions of our bonds in case of a really bad equity market. Helps us mitigate the risks of a bad sequence of returns.

Win
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Re: “Own your age in bonds”


@Gary1952 wrote:

The yield/TR for these funds can go a long way towards a 3-4% withdrawl.


@SteadyEddy wrote:

@chang wrote:

Does anyone think this adage still makes sense?

To be clear, by “bonds” I don’t mean anything fancy, volatile or correlated with equities. Think VBTLX and VWIUX. Vanilla and conventional.


I do. A lot of 'why bonds' threads popping up all over the forums not just M*. I am yet to find a better ballast to go along with stocks than the plain vanilla, low-cost index bond funds such as VBTLX/BND. I am not holding BND to make me money but to make me sleep better at night and lose less than any alternative.

In my opinion, everything else has more price volatility than these vanillas.


 


 But will bonds provide enough Retirement income at today’s low yields which are well below the rate of inflation? Yield on 10 yr treasury is 0.6% and will go lower. Treasury bonds used to fund TSP also has a yield of 6%. According to Joyce Chang of JPM 32% of global government bonds have yields below 0.5%. Problem is there is too much global money chasing fixed income which keeps driving yields closer to 0.

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Re: “Own your age in bonds”


@bilperk wrote:

@chang wrote:

@MNfish wrote:

I'll start Social Security at 62 in Sep. $20,400 per year. So to me it's the same as $1,000,000 in a bond fund @ 2.04% annually. That'll put me at about 50/50.


Interesting—and valid—way to look at it.


That is one of the two general ways to approach SS and pension cash flow.  It is valid as long as one understands you will be generally having a higher level of equities that you would have with the other approach.  Using SS as a bond, BTW, was a Bogle recommendation but I believe that was based on the fact that most retirees have very little savings so they may need a larger stake in equities.

 


Interesting concept.  I had heard it before but don't use it.  My goals are different than most.  We have plenty of income.  We reinvest my MRDs and invest my wife's social security every month because my social security and pension pays all of our bills.  If I were to include that as income from bonds then we would be too heavily weighed in bonds.  But, bond income doesn't go away when I die.  My pension and social security does.  These investments, our annuities, and the insurance is to make sure she is OK when I'm gone.

There is another income source that fills the bond side of the equation.  In that discussion on the "4% rule" Pfau called it an other asset.  Something that can be used for income while stocks recover.  That is a reverse mortgage.  I know people who are living off only social security and a reverse mortgage.  My neighbor, who died last year, was one.  The bank now owns the house.  I really wish they would send someone out to mow the lawn once in a while.

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