Hi I am NameRedacted (Sorry I'm not retired yet)

[NameRedacted]

I don't want to use my real name until retired, I'm afraid. In the meantime you can call me NameRedacted but my close friends call me Name.

I've been lurking here for about 2-3 weeks and I wish I had found this site earlier. I'm most impressed with the depth and breadth of knowledge displayed here.

I'm 55 and planning to hand in my notice on December 16th (just 69 days, 9.85 weeks, 2.26 months or 0.189 years to go). I pretty much have to wait until then as I have a large chunk of stock options vesting on December 15th, otherwise I'd quit tomorrow. i have been planning to retire for a year or two but didn't have sufficient FI until recently.

I have quite a few questions but the most important one is "Can someone make the case for buying bonds?". Everything I read seems to indicate I should have about 25-50% in fixed income, but I just don't see how that makes any sense at the moment.

Here is a little about my situation. Not sure how much of this matters.

I'm not married but have been living with my gf for 16 years now. No kids. Own our own house no mortgage. Live in a relatively low cost area.

I have 1,250,000 in savings as follows

540,000 in taxable accounts (74% individual stocks, 26% cash)
490,000 in IRA's and Roths (95% individual stocks, 5% cash)
220,000 in company stock
+ 50,000 in company stock vesting in December

I plan to sell most of the company stock in November, waiting until then to get the LT capital gains. I thought about selling in January since I'll be in a lower tax bracket but then I'd be over the limit to get ACA help I think. I'll need to calculate which works out best, but I really don't like having such a large amount in a single stock - so the sooner I sell that the better I think.

That would leave me with a large chunk of cash that I 'ought' to put into bonds but I look at the rates being paid currently and the probability that rates are going to rise and just can't see what benefit I get from buying bonds now when they are surely going down in price and have such low returns.

I should mention that I think I have a higher propensity to take risks than the average person my age. I have never owned mutual funds but instead buy individual stocks and specialize in stocks that are in trouble. So for example, I bought Chipotle a few months back and Deutsche Bank a few weeks ago. However, in the last two years I've been eschewing and selling risky stocks and more and more buying blue chips, in preparation for retirement. So that now I own mostly large cap dividend stocks, and only occasionally have a sudden rush of blood to the head and buy Wells Fargo.

That brings me back to the question. Once I have all this cash on hand I know I should be diversifying into fixed income but it just seems like I'm almost guaranteed to lose money. Can someone give any reason why bonds make sense at this point in time? Why not just buy multiple large cap dividend stocks like GM or T or VZ and pick up a 4-5% dividend, or even just purchase CDs, which would provide protection against a stock market crash.

I plugged my numbers into FireCalc and used the Investigate option, "Investigate changing my allocation", and it shows 100% success rate at 75-100% in stocks and less than 100% at anything less than 75%. I was somewhat surprised at that I expected 100% stocks to guarantee at least some failure.

Maybe it's just because I've been buying stocks for so long that I feel very comfortable with them and have lived through quite a number of downturns, whereas I know almost nothing about bonds.

Can someone knock some sense into me?

If this is posted in the wrong section, feel free to move it. I'm kind of new here.

 

[broadway]

Being the very cautious type, I would not be handing in my notice on December 16, 2016.

I would hand in my notice in January 2017 after the money from the stock sell is securely in my account.

And I would sell all of the company stock. I would have sold them when they vested, but it is too late now.

As for asset allocation, I keep about 50% in bonds.

I have Total Stock Market Index, Total Bond Market Index, Total International Stock Index.

 

[fh2000]

220,000 in company stock
+ 50,000 in company stock vesting in December

When you exercise the 50,000 options (I assume this is $50K value of the options, not number of shares), the gain will be counted as ordinary income. So, if you already have almost a full year of income, you may want to wait till January then exercise. The brokerage firm will withhold the tax so your true value will be the remaining amount. You will pay less tax on those options doing it in January.

One company asked us to exercise within 90 days after separation; one asked us to do it in 45 days. So, every company has different policy. Again, you will pay a little less in tax if you exercise in January.

Assuming your $220,000 company stock is held long term, you can sell small chucks in the future when your tax rate is lower than 15%, and the gain will be $0. Selling them all this year, while your tax rate is higher than 15%, means you have to pay the long term capital gain on all of them.

 

[Golden sunsets]

To your bond question, ask yourself how you would feel if your 100% stock portfolio dropped in value by 30% the year you retire. What will your withdrawal rate be once you retire based on the current value of your portfolio? What would that rate be if your portfolio dropped in value by 30%? The fixed income portion of your portfolio does not have to be in bonds. It could be a CD ladder. It could also be in a short term bond fund, which should not drop in value by much in a rising interest rate environment. You could also buy individual bonds in a ladder with the intention of holding them to maturity. That way you will not lose money as long as you don't sell. Or you could buy a bond fund with a limited duration knowing that in the long term the bond fund will recover in value as long as you don't sell.


Sent from my iPad using Early Retirement Forum

 

[donheff]

What Golden sunsets said. Also, if you are comfortable with the extra volatility of high equity ratios make sure you understand where you will get your spending money. If you plan to withdraw X amount per year are you keeping a cash or equivalent buffer to fund the withdrawals after that inevitable 30% drop? It isn't mandatory, but such a cushion could help you avoid liquidating equities right after a massive drop. So maybe 10% liquid. Tap equities in good years and the cash/bonds in bad, then replenish the buffer when the market turns back up.

Oh - and welcome to the board.

 

[2017ish]

OP,

I've gone through similar agony of doing "the right thing" for portfolio allocations in the lead up to retirement. We were 100% equities (actually sometimes more than that....) from 1985 through 2013--except for cash accounts when preparing to buy house or the like. Never gave any thought to selling at the various catastrophic drop points, and it all worked out well.

BUT/HOWEVER/OTOH.... We had ongoing income streams and were buying cheap when our portfolio was underwater. Looking ahead, with negative income streams ad infinitum, the research is unassailable--some type of "bonds," "money market," CDs, etc. needs to be present as ballast in our portfolio. Sure, we could cut spending by more than 50% in a 2008/09 scenario, but realistically, why plan on that?

As much as I hate it, I've concluded that giving up some hypothetical upside is worth it to decrease the possibility of such cuts. Still not there, but working towards 25/30% nonequity before we retire next year. Still aggressive, but that should give us a much more stable journey.

Good luck, and welcome aboard!

 

[DrRoy]

I believe that you would be OK to invest some of the money into a ladder of investment grade corporate bonds. You can keep the maturity as long or short as you want, and you will get more return than with CD's. Hold the bonds to maturity and you get your principle back, and as they mature you can reinvest at higher rates if they are available.

 

[BeachOrCity]

I use cash flow real estate as an alternative to bonds myself. True it is quite different but I just can't stomach the real possibility that rising interest rates will kill bonds which are supposed to be the safe part of my portfolio.

 

[ERD50]

... Why not just buy multiple large cap dividend stocks like GM or T or VZ and pick up a 4-5% dividend, or even just purchase CDs, which would provide protection against a stock market crash.
....

You may be taking too much comfort in ' large cap dividend stocks like GM or T or VZ'. Look at this chart, run the slider back to 2007-2010, and you'll see those stocks had falls pretty much in line with the broad index (and this chart includes divs). Looks like GM drops out of that time frame, I guess due to the restructuring? Not just a 30% drop, but 40-45% drops!

edit - forgot to add link: http://stockcharts.com/freecharts/perf.php?spy,vz,T

Diversification is important, especially in retirement when you don't have time to make up an anomaly. I'd be more concerned about lack of diversification in your equities than I would with a high equity AA. CD or bonds, your choice, probably not a big deal at this stage, esp if they are < 25% overall. Maybe DCA into bonds when you think the outlook is better?

-ERD50

 

[gauss]

Have you run FireCalc with various stock/bond allocation ratios up to 100% stock?

It may be interesting to see how the surviveabilty of your portfolio (given a constant wd rate) would vary given different allocations.

I am quite sure that on average you will end up with more money in the long run if you have a higher allocation to stocks, but many of us here try to manage the worse case scenario due to the downside risk of a reduced standard of living.

In my personal case, once I have "enough" then I no longer attempt get "more", but rather lock in the lifetime gains that I have achieved. IMHO 100% stock allocations are a young man's game.

-gauss

 

[gauss]

You may be taking too much comfort in ' large cap dividend stocks like GM or T or VZ'. Look at this chart, run the slider back to 2007-2010, and you'll see those stocks had falls pretty much in line with the broad index (and this chart includes divs). Looks like GM drops out of that time frame, I guess due to the restructuring? Not just a 30% drop, but 40-45% drops!

-ERD50

The value of that (old) GM stock went to ~$0 due to the bankruptcy.

-gauss

 

[rodi]

I agree with the suggestion to run firecalc changing the AA from the default to 100% equities... That only provides success 100% of the time with a super low WR. The very broad sweet spot of success is everything from a 20/80 (equities/fixed) to 80/20. You need to have some fixed income. It can be CDs, it can be bonds. it can be a combination of the two....

If you are super worried about interest rate hits to bonds... stick with short term bonds or bond funds... Less return, but less interest rate risk.

BTW - welcome to the forum. Love the user name!!!

 

[REWahoo]

The very broad sweet spot of success is everything from a 20/80 (equities/fixed) to 80/20.

This shows the FIRECalc 30 year success rate of different AA's:

 

[MBAustin]

Welcome NameRedacted! If you haven't seen them yet, there are two excellent resources here that might be useful in preparing for your exit from the w*rkforce:

http://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

and

Early Retirement FAQs - Early Retirement & Financial Independence Community

I would second fh2000's comment about the tax benefits of delaying your retirement date to 1/2/17 if you are required to exercise the options immediately at retirement. I know I had 30 days to exercise mine and it did cause a big tax hit, but I couldn't stand the idea of w*rking another 3 months.

 

[NameRedacted]

Thanks for all the replies everyone! Rather than reply individually I'll do one big reply to everyone.

1. Yes I did think of postponing my retirement to the start of the New Year. One advantage is that I get a paid holiday on 1/2. Another is that the company contributes a small amount to my HSA on 1/1. Additionally, It may make sense to earn enough so that I can contribute to a Roth or IRA.

I'm not sure about selling the company stock in January though, I think it would push me over the threshold for qualifying for subsidies for ACA, which may be better than the gains from the lower tax rate.

Furthermore, I really don't want to hold the stock through another set of quarterly results. There is always a chance it could tank and such a large percentage in one stock makes me nervous.

But I may rethink the actual date anyway. My last week being Xmas week may annoy the person who has to learn what I do when I'm sure he/she would prefer to be doing other things that week. I know I would.

2. For the people who expressed concerns about how I would feel if the market went down 30%, I'm not sure it would matter much. If I have 100% stocks and it drops 30% I lose 30%. If I have 75% in stocks I would lose 22.5% which is better but not that much better. Also, although GM did go to 0, the idea is not to own just a few stocks but spread the 250K or so across about 25-30 stocks - so the complete loss of one is not too bad.

3. I did run Firecalc but got different results than the person who kindly attached the graph. I found that at 75% stocks it had a 100% success rate and it was 100% success rate all the way up to 100% stocks. I've been thinking about this and decided the reason I saw this is because I entered anticipated SS payments for me and my spouse. I think that added a large degree of stability and behaved almost like having a large chunk in fixed income. My initial withdrawal amount was 60K which is 4.6% but when SS kicks in at 62 the withdrawal rate drops to about 2%, which seems survivable for even the worst market downturn.

Having played around with Firecalc I think I would be more likely to go with the Percentage of Remaining Portfolio spending model. I entered 95% as the limit of how much it could fall year to year. The graphs didn't look too bad. I also played around with Investigate and it's showing I could withdraw more initially although I probably won't. It did seem to avoid the problem of Constant Spending where one of the scenarios had my portfolio valued at $80m+ in 40 years.


Having said all this, Even though I think I could stay 100% in stocks, if there is one thing I have learned in life it's that when everyone else says I'm wrong - I'm probably wrong. So being a beginner at bond investing, can anyone recommend a good resource that will take me from entry level to a point where I have a reasonable understanding of what I'm doing. Either a good web-site or a decent book?

 

[Sunset]

You could diversify your stocks by using etf's like VTI or SPY, and perhaps some VXUS.

You might want to keep 3 yrs spending in cd's or very short term bonds or bond funds, but cd's probably pay more interest. The idea is that should the stock market drop 30% tomorrow you don't have to sell your shares cheaply, you can instead live off the 3 years worth of cash (and the dividends your stock pay), while you wait for the market to recover.

 

[broadway]

So being a beginner at bond investing, can anyone recommend a good resource that will take me from entry level to a point where I have a reasonable understanding of what I'm doing. Either a good web-site or a decent book?

Try the free wiki at Bogleheads.org

 

[MBAustin]

Christine Benz at Morningstar posts regularly on asset allocation and withdrawal strategies - I think most of her articles are available free (you have to register but not pay). Also a lot of people here like William Bernstein - his website is Efficient Frontier

 

[NameRedacted]

Thanks everyone!

Sorry for the really late response. It's been horribly busy at work - glad I'm leaving soon. Having to handle some "crisis" on Thanksgiving morning that could easily have waited until the following Monday was no fun.

I poked around a bit on the Bogleheads message board and went ahead and bought the Kindle edition of the book "Why bother with bonds' by Rick Van Ness. I have to say that is one of the most informative books I have ever read and I highly recommend it. I'm now on my third reading and this time I'm taking detailed notes.

The only quibble I have is the book recommends that bonds be held in tax advantaged accounts but I don't see how that makes much sense for me. I'm 55 and so cannot easily get at those accounts. I know I can get at the principal in the Roth but I want that to grow tax-free as long as possible. I want to hold bonds and stock in my taxable account and then sell either bonds or stock or both as necessary for my quarterly draw and annual rebalancing depending upon which has risen the most. I can't easily do that in a tax-advantaged account. Also, most of the spare cash is in the taxable account anyway.

I sold a lot of company stock in late November and now have about 25% of the entire portfolio in cash. Tomorrow, I'm planning to put about 2/3 of that into 3 bond ETFs split equally amongst

AGG
TIP
VCSH


And then gradually buy more over the next year or two as I slowly sell stock. My target at the moment is 70/30 - so I'm almost there. I'm keeping some in cash to pay for living expenses over the next year. I'm still not sure exactly how much, at the moment I'm guessing one year's worth.

I did think about waiting until after the Fed meeting to see if rates rise but I'm speculating that is already priced in - so I'll just go ahead and pull the trigger tomorrow.

I'm buying the TIP ETF because (and I don't want to get political) I expect inflation to rise over the next couple of years as a trade war comes into effect.

I went with AGG instead of BND because the Expense Ratio seemed a little lower.

My initial plan was to buy VGIT instead of VCSH but went with VCSH instead because of the much lower Duration. An alternative would be VGSH but the Sec yield is lower than I really want to go - even though the risk is lower.

Furthermore, I thought I read in the aforementioned book that short term was the sweet spot for risk/reward on corporate bonds but I can't find that quote in the book so it may just be something I read at Bogleheads.

If any of the experts here have comments about any of the above I would be most interested to hear their opinions.

 

[donheff]

The only quibble I have is the book recommends that bonds be held in tax advantaged accounts but I don't see how that makes much sense for me. I'm 55 and so cannot easily get at those accounts. I know I can get at the principal in the Roth but I want that to grow tax-free as long as possible. I want to hold bonds and stock in my taxable account and then sell either bonds or stock or both as necessary for my quarterly draw and annual rebalancing depending upon which has risen the most. I can't easily do that in a tax-advantaged account. Also, most of the spare cash is in the taxable account anyway.

A number of us carry all bonds in tax advantaged accounts and all equities in taxable. In up years we sell equities to generate cash for expenses. In downturns we sell taxable equities for current expenses and simultaneously exchange bonds for equivalent equities in a tax advantaged account thus converting the stock sale to a bond sale - or sort of. We also let all taxable distributions during the year go into a MMF generating additional cash for current expenses. I have a Federal TSP with G funds which are sort of a super cash/bond fund. In the event that equities are down and most bond funds down at the same time, I could turn to the G Fund to make the exchange.

 

[NameRedacted]

I hadn't thought of that but it sounds like a good idea. It's probably too late for what I am planning to do tomorrow but going forward it looks like a good strategy. As I ramp up the bond allocation I'll start trying that.

Thanks.

 

[pb4uski]

The reason to hold bonds in tax-deferred accounts is because bonds generate ordinary income which is taxed at ordinary rates, just like tax-deferred account withdrawals. Qualified dividends on equities and long-term capital gains are taxed at preferential tax rates, generally 0% for those in the 15% tax bracket and lower and 15% for those in the 25% tax bracket and higher.

Holding equities in tax-deferred accounts essentially converts income that would be taxed at 0% or 15% to income that is taxed at 15% or 25%... and that 10-15% difference adds up. Also, while a portion of international equity holdings are not tax preferenced as described above, you get the foreign tax credit if you hold international equities in a taxable account and you lose that benefit if you hold international equities in a tax-deferred account.

Also see https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Liquidity is not an issue, you just sell taxable account investments as needed to fund spending and then sell bonds and buy stocks as needed in your tax-deferred accounts to rebalance.

 

[pb4uski]

Have you considered the interest rate risk of your proposed bond ETF portfolio? I come up with a duration of ~5.4.

I prefer BlackRock iBond and Guggenheim Bulletshares target maturity bond ETFs that mature in about 4-6 years. At least I know if rates rise then in 4-6 years I'll get the principal (less any credit defaults).

 

[NameRedacted]

Have you considered the interest rate risk of your proposed bond ETF portfolio? I come up with a duration of ~5.4.

I prefer BlackRock iBond and Guggenheim Bulletshares target maturity bond ETFs that mature in about 4-6 years. At least I know if rates rise then in 4-6 years I'll get the principal (less any credit defaults).

To me, a duration of 4-6 years doesn't seem that much different from one of 5.4., but thanks for doing the calculation I hadn't done that but was guessing a bit lower than that.


The reason I went for VCSH was to mitigate the risk of rates rising somewhat. I though that if rates rise I could sell some of the VCSH portion if I need to sell any bonds at all and that along with the extra cash cushion and stock and bond dividends should help.

 

[FinanceGeek]

In downturns we sell taxable equities for current expenses and simultaneously exchange bonds for equivalent equities in a tax advantaged account thus converting the stock sale to a bond sale - or sort of.

Careful to avoid buying "substantially identical" equities to avoid a wash sale...

Otherwise, any losses from the taxable sale cannot be deducted. It's the worst kind of wash sale you have, because the purchased position in the tax advantaged account has no basis. You don't just defer recognition of the loss as with normal wash sales, you lose it forever...