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Frequent Contributor

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.



@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.


To get to 4% in the future it may be necessary to Omit fixed income as an investment because the low yields will simply drive down the withdrawal rate and rely only on dividends. Second option is to have a larger portfolio of investments than previously planned for which would generate additional interest on fixed income to make up for lower yields, e.g. 40% of assets instead of 25%. Third is to plan on spending less in retirement to eliminate the possibility of selling low yielding bonds.

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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.


This is a valid viewpoint...to a degree.

In past M* threads, the majority of posters indicated they DO NOT do this with their allocation.

I agree, and recommend not doing it.  Better is to subtract the SS (and pension) annual income, from annual spending needs, and invest accordingly.  Much, much simpler.

Some factors against calling SS a bond:  You don't control it at all...can never sell; If interest rates go up, will you DECREASE the value of this bond, like will be happening to your other LT bonds?   What is the duration/maturity of this bond?? I hope you don't call it short term!  Lastly, the bond redemption value is worthless at maturity!

Good day

R48

 

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Frequent Contributor

Re: “Own your age in bonds”

 

There's another matter not yet discussed here:

When considering a "bond allocation"...how to consider cash and short term bonds??

Such as, money market funds are really bonds.  A short term bond fund of 1-2 years duration are bonds, yet are just holding places for many.

So when I am very negative on "bonds" going forward, I still have very large sums of money in mm funds and short term bond funds...being patient...waiting.  And am very comfortable in these short duration holdings, that will not decline in price meaningfully if interest rates rise.  

But I don't consider this part of any "bond allocation."

I view longer term CDs as bonds.

Disclosure:  I do own a rental single family home in Florida that throws off considerable more income than standard-issue bond funds, and has favorable tax treatment...and likely a rising asset price.  So to me there is more than 60/40.  There is "cash"...and rental real estate...and other alternatives such as gold/silver.  

Hmmm...seems these other things are doing much better than bonds today.

R48

 

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Participant ○

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.  If I count Social Security as a bond, then I do, in fact, hold my age in bonds.  Maybe I need to think about increasing my equity holdings!

John Bogle thought Social Security should count as a bond.  He told Christine Benz that retirees ought to adjust the "age in bonds" formulas by accounting for the size of there Social Security "bond": https://www.morningstar.com/articles/339534/bogle-old-principles-of-asset-allocation-hold

On the other hand, Paul Merriman argues that Social Security should not be counted as a bond: https://www.marketwatch.com/story/social-security-is-not-an-asset-2013-09-04

--Aquinas

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Frequent Contributor

Re: “Own your age in bonds”


@Aquinas 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.  If I count Social Security as a bond, then I do, in fact, hold my age in bonds.  Maybe I need to think about increasing my equity holdings!

John Bogle thought Social Security should count as a bond.  He told Christine Benz that retirees ought to adjust the "age in bonds" formulas by accounting for the size of there Social Security "bond": https://www.morningstar.com/articles/339534/bogle-old-principles-of-asset-allocation-hold

On the other hand, Paul Merriman argues that Social Security should not be counted as a bond: https://www.marketwatch.com/story/social-security-is-not-an-asset-2013-09-04

--Aquinas


Bogle introduced the concept of SS as a bond with an intrinsic value to finesse the dilemma of how to modify the age in bonds ratio for retirees as interest rates began to decline over the last 20 years which reduced Income from bond yields for retirees. By creating a present value of SS equivalent to lifetime benefit payments that would be part of a retiree’s fixed income investment assets, a retiree would be comfortable with having a larger portion of assets invested in equities. For example under age in bonds an investor age 65 with 1M in investments would allocate 350K (35%) to equities. Assuming present value of future SS benefits is 300K, the total investment assets would increase to 1.3M of which $455K or 35% of $1.3M would be invested in equities which would increase the amount of equities by 105K.

There are many different ways to calculate age in bonds by including the present Value of SS benefits as a bond. This has been one of them.

 

 

 

 

 

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Frequent Contributor

Re: “Own your age in bonds”

@Intruder : That is a good and valuable way to look at SS benefits, thanks.  Let's hope that such benefits will be steady for the long-term with few changes.

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Frequent Contributor

Re: “Own your age in bonds”

I never believed in strict rules. 

In the last 20 years invested almost everything in managed funds. I haven't used a typical asset allocation based on stocks to bonds but used funds that will support the risk/reward I was looking for.

In retirement: 

1) I don't believe in the 4% rule but in portfolio of at least 25 times your annual expenses not including SS.  If I want to use a % it would be a max of 3%, in our case is less than 2%.

2) I don't believe in using more than 20-30% in equities for investors who follow item 1 unless you want to make more money for heirs.

3) Bonds are not only high-rated bonds. There are bond OEFs that will generate more performance and/or more income and/or both.

=========

If you use only/mainly indexes then you have to follow common rules.

 

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Explorer ○○

Re: “Own your age in bonds”

@Intruder: interesting way to translate Bogle’s advice. The net effect of considering Social Security as a bond for that hypothetical retiree with a $1 million portfolio is to increase the equity portion from 35% to 45%, interestingly bringing the allocation up to “age minus ten” (55%) in bonds. 

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Participant ○

Re: “Own your age in bonds”

@chang "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."

Why would you purchase your home with cash when the cost of leverage is so low these days?  In reality you could put down 20% to avoid PMI and leverage the other $800,000.  The cash flow (cap gains, dividends and interest) from that properly invested $800,000 would easily more than cover the mortgage.

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Re: “Own your age in bonds”

@Howaya “Why would you purchase your home with cash when the cost of leverage is so low these days?“

That’s a good point. Though just at this moment we’re not sure where that home will be—Thailand, Switzerland or Spain—not in the US, I’m pretty sure, and I have no idea what might be involved in borrowing a mortgage. So I’m thinking for simplicity’s sake to figure paying cash.

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Re: “Own your age in bonds”


@chang wrote:

@Howaya “Why would you purchase your home with cash when the cost of leverage is so low these days?“

That’s a good point. Though just at this moment we’re not sure where that home will be—Thailand, Switzerland or Spain—not in the US, I’m pretty sure, and I have no idea what might be involved in borrowing a mortgage. So I’m thinking for simplicity’s sake to figure paying cash.


I agree with Howaya...as an investor, in this low rate environment, you want to be on the right side of the fence.  To me, that is: better to be a borrower, than a lender.

With a 15 year, 2.7% mortgage, you may find this is gold, in the long run.  If rates fall, you refinance; if rates go up, you rejoice.  Your home price will rise with inflation, or cost of currency in the country where it exists.  A storage of value.  You can always pay off mortgage quickly with your cash, if desired.

Disclosure:  I have two large HELOCs ( 3% fixed and 2.5% variable)...(and three houses)

R48

 

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