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Should I go all fixed income?
Old 01-03-2011, 09:39 AM   #1
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Should I go all fixed income?

Hi guys I am brand new to this site. I am currrently 38 years old. I have just over 1 million in various accounts. Emergency fund, 401k, IRA, SEP, standalone accounts

I am at a point where 30 year treasuries at 5% would cover my current living expenses. I still plan on working at least another 5 years socking in at least 30k a year into various accounts. I can see the treasuries hitting 5-6% in the next few years. If I simply laddered myself into these as the rates rise I am guarenteed my expenses are covered.

I see myself having to work after 2015 due to the nature of needing health insurance. In the open market these rates have gone above 22k a year in premiums and the first 5k per person being out of pocket. It's like the insurance companies don't want the open market risks. So I am guessing if I stay in the UsA I will have to work somewhere to get affordable coverage.

Anyway, just wondering if I should continue taking market risk or move to fixed income treasuries.

Currently I am indexing my way with a 80/20 split. Couch potato portfolio in line with coffee house. Except a little heavier on stocks as I moved to these when the market crashed to pick up bargain stock prices.

So should I continue with market risk if my goals are already met?
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Old 01-03-2011, 12:46 PM   #2
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Hi, and welcome to the forum!

Inflation, of course, is the big risk with fixed income investments. You're looking at a potentially a very long retirement. If it were me I'd want some equity exposure to help keep up with inflation.

If you haven't yet, check out FIRECalc. There's a link in the green bar near the bottom of the page. You can experiment with various portfolio allocations and see how they would have performed historically.

Welcome aboard!

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Old 01-03-2011, 02:17 PM   #3
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Another hi and welcome. You are in great financial shape for your age.

Even if you have more than enough and no need to take on risk the efficient frontier is at around 20-30% equity:70-80% bonds. In other words your maximum return for minimal risk is at around that point so I would always have at least 20% equities in my portfolio. As Coach pointed out inflation is your enemy in such a portfolio - especially since you will need it to last a very long time given your age.

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Old 01-03-2011, 03:03 PM   #4
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In two words, welcome and no.

At 38, I think the the biggest risk to your portfolio is inflation even if there isn't much sign of it today. Second, if you had the intelligence/courage/luck to buy more stocks when the market crashed that shows good instincts. You are familiar the coffeehouse I am sure you can compare the long term averages of a coffee house portfolio to treasury.

Second and more importantly I won't put all of my eggs in one basket even (or perhaps especially) in US debt obligations. Back in 1999 when I was almost exactly your age, my early retirement plan was to take my $2 million portfolio and buy California Muni Bonds that were pay 5+% at the time. At the time California was the 4th or 5th largest economy in the world, Silicon Valley was the envy of the world, tech stocks were going straight up. California clearly was the Golden State. Now financially, I may actually have come out ahead with my plan, but I have no doubt that I would not be able sleep at night with all of my assets depending on California figuring out a way of getting out of their debt crisis.

It may very well be prudent for you to cut back on your equity allocation, but I would do so with a diversified portfolio of bonds. I think the problems of Greece, Ireland, etc should be a wake up call for the potential risk of sovereign debt. If you look out 30 years in the future, who do you think is going to have a better handle on paying back their bond holders, a portfolio of bonds from multinationals like Coke, Exxon, 3M, Johnson and Johnson, Berkshire Hathaway, Shell, Toyota etc. or Uncle Sam?
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Old 01-03-2011, 10:44 PM   #5
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Originally Posted by RetirementColdHardTruth View Post
I see myself having to work after 2015 due to the nature of needing health insurance. In the open market these rates have gone above 22k a year in premiums and the first 5k per person being out of pocket. It's like the insurance companies don't want the open market risks. So I am guessing if I stay in the UsA I will have to work somewhere to get affordable coverage.
Welcome to the forum RCHT!

I'm a few years younger than you, and also had ideas of going mostly fixed income with a goal of retiring in my early 40s before the market tanked I was brought back to reality in 2008. Heed the advice of the communal wisdom of the board - some equity position will be necessary for inflation protection and diversification.

Also, a comment on your health insurance comment: don't forget that (as of now) insurance rates vary crazily by state.
In Missouri, I have a $5,500 deductible individual policy for a 30-something healthy male for $40.50 per month.

The same policy in New York State, for example, would be $550+/month.

Don't forget to shop around to see how different states' insurance regulations impact quotes. www.eHealthInsurance.com is a great free website for instant anonymous quotes that don't involve getting hounded by salesmen (my policy ended up coming from Anthem, and wasn't a public quote - I had to call them to get a quote).
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Old 01-04-2011, 05:56 AM   #6
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Welcome to the board.

Although I have been very conservative in the past (100% allocation in CDs, money market or equivalent), I am beginning to change my mind about this allocation. MooreBonds' point below is worth reading several times.

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Originally Posted by MooreBonds View Post
Heed the advice of the communal wisdom of the board - some equity position will be necessary for inflation protection and diversification.
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Old 01-04-2011, 07:11 AM   #7
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Originally Posted by DblDoc View Post
Even if you have more than enough and no need to take on risk the efficient frontier is at around 20-30% equity:70-80% bonds. In other words your maximum return for minimal risk is at around that point so I would always have at least 20% equities in my portfolio. As Coach pointed out inflation is your enemy in such a portfolio - especially since you will need it to last a very long time given your age.
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Old 01-04-2011, 08:26 AM   #8
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I am at a point where 30 year treasuries at 5% would cover my current living expenses. I still plan on working at least another 5 years socking in at least 30k a year into various accounts. I can see the treasuries hitting 5-6% in the next few years. If I simply laddered myself into these as the rates rise I am guarenteed my expenses are covered.
Currently I am indexing my way with a 80/20 split. Couch potato portfolio in line with coffee house. Except a little heavier on stocks as I moved to these when the market crashed to pick up bargain stock prices.
So should I continue with market risk if my goals are already met?
This question comes up a lot, and the answer seems to be "Yes".

First there's an issue that you may have overlooked: diversification. If you "simply ladder into Treasuries" then you're not diversified. In the extremely unlikely event that the U.S. somehow destroys the Treasury market, sort of the 800-pound gorilla of black swans, then you're not going to recover-- let alone be covered.

It wouldn't even need to be as cataclysmic as the survivalists would have us believe. How long could you survive in a "national emergency" if the govt suspended payments on Treasuries, closed banks for a few weeks, and didn't allow investors to redeem their Treasuries?

Second, you're contemplating a road that's been trod by many other famous ERs, among them Joe Dominguez. When he retired in 1969 (at what we'd today call a high SWR) he was 100% Treasuries and had to resort to extraordinary measures to preserve his assets. Paul Terhorst did the same in 1984 with 100% CDs and a more reasonable SWR but appears to have realized that it's unsustainable in the long term. IIRC the Kaderlis also started out that way 20 years ago but have since moved back into equity index funds.

Third, you're hoping that your ladder will keep up with inflation. (So why not buy TIPS instead of Treasuries? Again-- lack of diversification.) Dominguez was probably hit with a nasty combination of high expenses and the '73-74 recession yet appears to have made no attempts to counter the high inflation that arrived at the end of the decade. Groucho Marx' answer to this problem was "Sure, you can retire on Treasuries-- if you have enough of them." The problem is figuring out the precise amount of "enough" that you'd require. What's a safe SWR for avoiding market risk? 2%? 1.5%? How much longer do you want to keep working saving?

Finally, by "market risk" you could mean either loss of principal or volatility. The reality of both of those is that the odds significantly decline over longer time periods, and avoiding those comes at a high price.
Retirement Investing: The high cost of low volatility.

Back in 2004 I sat next to an elderly retiree at a Schwab dinner. He'd been buying 30-year Treasuries in the 70s and had lived mostly on those payments for the next three decades. His returns from them were phenomenal, of course, but now he was having to contemplate reaching the end of his ladder. He was pretty sure he wasn't going to get double-digit returns from Treasuries any time soon but he had no idea where to invest or how to handle diversification. The Schwab reps at our table were drooling into their napkins... the same reaction as bleeding at a vampire's banquet.

These two articles don't directly discuss Treasuries or TIPS but have useful insights on the "no risk" portfolio:
Asset Allocation for the Ages or "The Trinity Study" meets "Stocks for the Long Run."
Can You Retire on CDs and Money Market Funds?
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Old 01-04-2011, 10:30 AM   #9
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the efficient frontier is at around 20-30% equity:70-80% bonds
Can you elaborate on this? If there is a sweet spot in the curve I thought it was at 80/20. Certainly not below 50/50?
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Old 01-04-2011, 10:58 AM   #10
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Can you elaborate on this? If there is a sweet spot in the curve I thought it was at 80/20. Certainly not below 50/50?
I think it depends on what you are trying to target as "sweet".

For maximizing long-term gain 80/20 Equities/FI is the sweet spot - if you can live with the volatility.

But for portfolio survival in face of long-term inflation, 20/80 is really the minimum equity exposure you can get away with. Below that portfolio failure skyrockets. And since this ratio has the minimal volatility yet can survive - some folks might consider that the "sweet spot".

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Old 01-04-2011, 11:08 AM   #11
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Ah. Ok. Thanks for the clarification.
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Old 01-04-2011, 05:23 PM   #12
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Originally Posted by RetirementColdHardTruth View Post
Hi guys I am brand new to this site. I am currrently 38 years old. I have just over 1 million in various accounts. Emergency fund, 401k, IRA, SEP, standalone accounts

I am at a point where 30 year treasuries at 5% would cover my current living expenses. I still plan on working at least another 5 years socking in at least 30k a year into various accounts. I can see the treasuries hitting 5-6% in the next few years. If I simply laddered myself into these as the rates rise I am guarenteed my expenses are covered.

I see myself having to work after 2015 due to the nature of needing health insurance. In the open market these rates have gone above 22k a year in premiums and the first 5k per person being out of pocket. It's like the insurance companies don't want the open market risks. So I am guessing if I stay in the UsA I will have to work somewhere to get affordable coverage.

Anyway, just wondering if I should continue taking market risk or move to fixed income treasuries.

Currently I am indexing my way with a 80/20 split. Couch potato portfolio in line with coffee house. Except a little heavier on stocks as I moved to these when the market crashed to pick up bargain stock prices.

So should I continue with market risk if my goals are already met?

Since it's football playoff season, I'll make my answer as an analogy to a football game. I hope you don't mind.

First, about $1mil is a great head start. But keep in mind, since you are only 38 years old (young from ER standards), your $1mil would have to last a long long time. You might live more than another 38 years. Sure, you may not, but you have to plan like you will.

Back to football...

If $1 at 38 is like a 21 - 0 lead at halftime, though you are out to a good lead, the game isn't over yet. At this point you can't just pull the starters or play a "prevent" defense the rest of the game.

Now, if you were leading 45-0 (or in retirement terms, if you had $5 mil) and had a very modest lifestyle) then I don't see a reason you can't just put it all in fixed income. As your ultimate goal is to not have the money run out on you (just like the ultimate goal in a game is to win, even if not the perfect game).

Hope the football analogy helps.
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Old 01-04-2011, 05:38 PM   #13
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This question comes up a lot, and the answer seems to be "Yes"...[SNIP]...These two articles don't directly discuss Treasuries or TIPS but have useful insights on the "no risk" portfolio:
What a great post!!!
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Old 01-04-2011, 08:50 PM   #14
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Can you elaborate on this? If there is a sweet spot in the curve I thought it was at 80/20. Certainly not below 50/50?

Here is an article in Seeking Alpha that describes it in gory detail: Choosing Your Portfolio Risk Tolerance - Seeking Alpha

The graph shows an inflection point at ~80% bonds, increasing your bonds above that increases your risk and decreases your yield - the worst possible outcome!

DD
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Old 01-16-2011, 10:42 PM   #15
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I see myself having to work after 2015 due to the nature of needing health insurance.
You say that 5% will cover your expenses, but thensay that you'll need to keep working for the health insurance.....sounds like you need to do a more inclusive budget. When you ER you need to budget health costs until you reach Medicare age...I'm a 49 year old male and I'm looking at $350/mth for a policy with a $5k deductible.
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Old 01-17-2011, 08:11 AM   #16
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Here is an article in Seeking Alpha that describes it in gory detail: Choosing Your Portfolio Risk Tolerance - Seeking Alpha

The graph shows an inflection point at ~80% bonds, increasing your bonds above that increases your risk and decreases your yield - the worst possible outcome!
The 20/80 "inflection point" (or "sweet spot") to which you refer is the minimum volatility portfolio created from risky assets. It is efficient only in the absence of a riskless asset.

If you take the return on a riskless asset (e.g. a zero-coupon US Treasury security with a maturity equal to the portfolio horizon) and draw a tangent line to the efficient frontier of risky assets, the intersection point is the optimal portfolio of risky assets, since any point on the tangent line will have a higher return than that on the efficient frontier of risky assets for the same level of volatility. By inspection, you can see that this intersection-point portfolio will contain considerably more than 20% equities.
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Old 01-17-2011, 10:12 AM   #17
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You say that 5% will cover your expenses, but thensay that you'll need to keep working for the health insurance.....sounds like you need to do a more inclusive budget. When you ER you need to budget health costs until you reach Medicare age...I'm a 49 year old male and I'm looking at $350/mth for a policy with a $5k deductible.
It is not the $$$ that I haven't budgeted for. It is my DW pre existing condition that stops me getting insurance on the open market. That's why I will continue to work until I decide to leave and migrate back to Australia where I can get coverage for $354 a month.

I was a contractor and this issue forced me back to W2 employment.
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