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9-year fixed income plan
Old 06-23-2019, 09:50 PM   #1
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9-year fixed income plan

I am planning for RE in 7-8 months, next February(ish). Starting to make plans to have a stable source of cash during the first 9 years of retirement until pensions start at age 65. I will be needing about 70k per year from savings during these first 9 years and conveniently just about that amount will be coming out of my option exercises and deferred salary payouts that will happen during the first 12 months after the retirement day. So, some time next year I will be sitting on 650k of cash that closely matches the amount I will be needing during my first 9 years of RE.

My thought has been to put the first two years needs on a high yield savings account (currently 2.5%) and the rest on CD ladder from 2 to 8 years of duration. Technically this should work OK as long as the CD yields stay decent until I get my hands in the cash next year.

Since I still have months to decide, I keep second guessing my plan. Some of this money won't be needed for 5-9 years, so is there something else besides CD's I should be considering? Looks like the current government bond yields are lower than the current CD yields and I'm not sure what else I should be considering for the 5-9 year time span. Yet my greedy mind keeps thinking if there is something with a bit better yield but minimal risk that would fit my planning goals.

Just for clarity, I also have a significant size second "bucket" that is currently 80/20 AA as this money I will not need for at least 15 to 20 years, if ever.
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Old 06-23-2019, 10:07 PM   #2
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I would do a cash bucket for ER at 56 to when you are eligible for penalty free withdrawals from tax-deferred accounts at 59 1/2 (~3 1/2 years) accompanied by Roth conversions and then from 59 1/2 to SS take withdrawals from tax-deferred accounts to take full advantage of lower tax rates in ER and reduce RMDs. Assumes that you have tax-deferred funds and do not have a pension or other retirement income streams.

You can still have 9 years of cash if you want (I wouldn't) but it'll just be in different places.

Some of the other money in the taxable account can be put in international equities if you invest in them... in the taxable account you can use the foreign tax credit... in a tax-deferred or tax-free account the foreign tax credit is wasted.

I guess in short, in your planning consider liquidity, asset allocation, tax-efficient placement and tax planning all at the same time.
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Old 06-24-2019, 03:52 AM   #3
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A bond ladder might pay more than CD's.
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Old 06-24-2019, 05:21 AM   #4
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I am in the same boat and I did a muni bond ladder in my taxable account , but I started my buying about a year and a half ago when yields were much higher than today. That enabled me to keep the rest in equities.
It doesn’t make sense for me to do conversions for at least another 4 years because of my high tax bracket.
If I were in your shoes and starting today, I would buy all the boxes in the fixed income matrix, short, intermediate, long, high yield and investment grade. You can use funds, ETF’s or individual bonds just depending on how comfortable you feel with picking your own investments. Buying all boxes will give you diversification, probably a much higher yield than CD’s, reasonable safety and more than likely a boatload of cash flow. Just stagger maturities out to your pension date.
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Old 06-24-2019, 06:54 AM   #5
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I need a 15 year bridge to SS of $700k. I thought about a SPIA, cash, CD's, bond ladders, etc... Then I realized that the 40 part of my 60/40 portfolio will provide enough for that bridge. So I just keep everything in a 60/40 portfolio. By definition, a 60/40 portfolio with a 4% WR has 10 years of fixed income. Easy peasy.
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Old 06-24-2019, 07:38 AM   #6
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...

Just for clarity, I also have a significant size second "bucket" that is currently 80/20 AA as this money I will not need for at least 15 to 20 years, if ever.
What happens between year 9 and year 15 (or 20)?

Another way to look at this is, do not "compartmentalize" that money at all. Look at your total AA. In retirement, you may want to go more conservative than 80/20 (or maybe not, your call). So just add that money to the overall AA, use divs as income, sell a bit if/when needed, re-balancing if you want.

edit/add: I didn't see corn18's post when I submit. Same thing. And actually, a 60/40 has far more than 10 years income, as you are getting divs from the portfolio, you only need to make up the difference, probably ~ 1% to sell each year, approaching 40 years before you touch equities (the math is more complicated than that as the portfolio dwindles, but close enough to get the point across)

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Old 06-24-2019, 07:52 AM   #7
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After year 9 my pensions, SS, and 529s will be high enough to not need withdrawals from the savings to cover my budget. After year 15 or 20 or later things will perhaps become unpredictable, such as health, kids need for help with grad school or first home purchases etc.
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Old 06-24-2019, 08:16 AM   #8
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You might want to checkout setting up an ETF target-maturity bond ladder with the Invesco BulletShare ETFs.

I recently did just this with their investment grade bond ETFs. The expense ratio is 0.1%.

I believe that Blackrock may also offer a similar product (target date maturity fund/etfs).

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Old 06-24-2019, 08:24 AM   #9
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I have thought about and continue considering just using the bond allocation from my total portfolio for income, just like couple of people here recommended. I am far from a bond expert, but couple of observations that have held me back a bit: Vanguard bond ETF yields are not any higher than the best CD yields right now. This of course could change by next year. My current bond allocation a total bond fund that is sitting in my 401k for tax reasons. Never bought individual bonds yet but I know it's pretty easy through my brokerage accounts as long as I know what to buy. Then there is some worry in my mind about another great recession over the 9 year period that might cause some high yield bonds default. Probably not all entirely rational; just sharing my thoughts here.
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Old 06-24-2019, 08:33 AM   #10
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Originally Posted by SilentWalker View Post
I am planning for RE in 7-8 months, next February(ish). Starting to make plans to have a stable source of cash during the first 9 years of retirement until pensions start at age 65. I will be needing about 70k per year from savings during these first 9 years and conveniently just about that amount will be coming out of my option exercises and deferred salary payouts that will happen during the first 12 months after the retirement day. So, some time next year I will be sitting on 650k of cash that closely matches the amount I will be needing during my first 9 years of RE.

My thought has been to put the first two years needs on a high yield savings account (currently 2.5%) and the rest on CD ladder from 2 to 8 years of duration. Technically this should work OK as long as the CD yields stay decent until I get my hands in the cash next year.

Since I still have months to decide, I keep second guessing my plan. Some of this money won't be needed for 5-9 years, so is there something else besides CD's I should be considering? Looks like the current government bond yields are lower than the current CD yields and I'm not sure what else I should be considering for the 5-9 year time span. Yet my greedy mind keeps thinking if there is something with a bit better yield but minimal risk that would fit my planning goals.

Just for clarity, I also have a significant size second "bucket" that is currently 80/20 AA as this money I will not need for at least 15 to 20 years, if ever.
I would look at TIPS especially for years 4-9 as that will protect your principal in case the present economic paradigm turns inflationary
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Old 06-24-2019, 09:34 AM   #11
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Originally Posted by SilentWalker View Post
... My thought has been to put the first two years needs on a high yield savings account (currently 2.5%) and the rest on CD ladder from 2 to 8 years of duration. Technically this should work OK as long as the CD yields stay decent until I get my hands in the cash next year.

Since I still have months to decide, I keep second guessing my plan. Some of this money won't be needed for 5-9 years, so is there something else besides CD's I should be considering? Looks like the current government bond yields are lower than the current CD yields and I'm not sure what else I should be considering for the 5-9 year time span. Yet my greedy mind keeps thinking if there is something with a bit better yield but minimal risk that would fit my planning goals ...
No point in getting and staying agitated prior to getting the money. Wait until the pay date is closer or until you actually have the money, then talk to the bond desk at Schwab, Fido, etc. about current yields, risk, various options, etc.

Remember, too, that a few basis points differences in rates probably translate into dollars that are the same as a couple of tanks of gas. So no point in obsessing over this.

Personally I would look hard at TIPS for the second four or five years; IMO high inflation is the biggest risk most of us face even though few seem to worry about it.

Edit: Remember, too, that TIPS and other govvies are not subject to state income tax, if that is a consideration for you. Be sure to look at net dollars in your pocket, not posted rates, at least for CDs.
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Old 06-24-2019, 10:01 AM   #12
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...Then there is some worry in my mind about another great recession over the 9 year period that might cause some high yield bonds default. Probably not all entirely rational; just sharing my thoughts here.
I would not go into high-yield bonds. They act like a hybrid of stocks/bonds. Better to allocate fixed to fixed and equities to equities. I think it was Bernstein that pointed this out. A total bond fund I guess holds some high yield, not enough to worry about, IMO.

Offhand, I don't think you'll really go wrong with any of the approaches you are considering, some maybe make more generic sense, might be simpler, but I don;t see anything "wrong" in any of it.

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Old 06-24-2019, 10:15 AM   #13
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I think there is a place for high yield for a small portion of your fixed income. You get paid for the risk with higher yields. I use a fund for high yield because there are individuals incented to find the best risk adjusted returns at these funds. The fund I use is up almost 9% YTD with about a 6% yield and a 2.6 year duration. I have about 4% of my fixed income pool in it.
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Old 06-24-2019, 10:40 AM   #14
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I think there is a place for high yield for a small portion of your fixed income. You get paid for the risk with higher yields. I use a fund for high yield because there are individuals incented to find the best risk adjusted returns at these funds. The fund I use is up almost 9% YTD with about a 6% yield and a 2.6 year duration. I have about 4% of my fixed income pool in it.
Which fund (ticker)? I'd be surprised if I couldn't match it in total return with a blend of a Total Market fund and a Total Bond fund, back tested in that Portfolio Analyzer site.

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Old 06-24-2019, 10:51 AM   #15
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Which fund (ticker)? I'd be surprised if I couldn't match it in total return with a blend of a Total Market fund and a Total Bond fund, back tested in that Portfolio Analyzer site.

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Old 06-24-2019, 10:54 AM   #16
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You might want to checkout setting up an ETF target-maturity bond ladder with the Invesco BulletShare ETFs.

I recently did just this with their investment grade bond ETFs. The expense ratio is 0.1%.

I believe that Blackrock may also offer a similar product (target date maturity fund/etfs).

-gauss
I was thinking the same thing... but the yields are not much better than brokered CDs of a similar maturity. I think the OP may be able to create a ladder of bank CDs and perhaps find some specials at a local bank and do better.

For example, the Bulletshare maturing in 2024 has a portfolio yield to worst of 2.71%... less 0.1% expense is a net yield of 2.61%... vs 2.10-2.65% for brokered CDs maturing in mid-2024.

Also, I'm not keen on the Bulletshare structure in the final year as the returns in the final year stink because they have bonds maruting throughout the year but the proceeds get reinvested at short-term rates until the terminal distribution in December.
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Old 06-24-2019, 10:56 AM   #17
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There are a lot of ways to skin a cat. Don't let a perfect plan get in the way of a good one.
Well, I asked because I'm curious if this fund is able to provide some alpha over a blend. When I've looked at the Hi-Yield funds in the past, they did not. That doesn't mean it can't happen, but I would be surprised.

I guess you don't want to share the ticker?

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Old 06-24-2019, 11:01 AM   #18
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Originally Posted by SilentWalker View Post
I have thought about and continue considering just using the bond allocation from my total portfolio for income, just like couple of people here recommended. I am far from a bond expert, but couple of observations that have held me back a bit: Vanguard bond ETF yields are not any higher than the best CD yields right now. This of course could change by next year. My current bond allocation a total bond fund that is sitting in my 401k for tax reasons. Never bought individual bonds yet but I know it's pretty easy through my brokerage accounts as long as I know what to buy. Then there is some worry in my mind about another great recession over the 9 year period that might cause some high yield bonds default. Probably not all entirely rational; just sharing my thoughts here.
I have similar reservations on bond investing... what I have chosen to do was to buy Wellesley in my IRA.. I have bought enough so that 60% of Wellesley covers my bond allocation (when combined with other bond-like investments in my portfolio)... so I am using the expertise of Wellesley's fixed income managers... and the equity piece of Wellesley just follows along as part of my equity allocation.

But at this point CD yields look better than bond yields to me.
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Old 06-24-2019, 11:14 AM   #19
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Well, I asked because I'm curious if this fund is able to provide some alpha over a blend. When I've looked at the Hi-Yield funds in the past, they did not. That doesn't mean it can't happen, but I would be surprised.

I guess you don't want to share the ticker?

-ERD50
As an example, I plugged HYD (mentioned by COcheesehead in another thread) into Portfolio analyzer. I iteratively plugged in an AA for VTI and BND until the total return matched as close as I could get it. Turns out a conservative 28/72 (portfolio 1) slightly outperformed HYD (portfolio 2), with significantly less volatility.

http://bit.ly/2N7RMrv << short link to Portfolio Analyzer

I don't see the attraction. Was there another ticker we should analyze?

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Old 06-24-2019, 11:29 AM   #20
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I would look at TIPS especially for years 4-9 as that will protect your principal in case the present economic paradigm turns inflationary
+1. It sounds like protection of your income stream is paramount. With TIPS, your principle is fully guaranteed by the US Government and you have maximum insulation from inflation risk. If a few extra basis point of yield are that important to you, then you should probably just work one more year.
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