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AA by age in bonds or budget buckets
Old 01-16-2011, 10:12 AM   #1
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AA by age in bonds or budget buckets

For the past ten years I've decided my stock to bond ratio using Bogle's "age in bonds" percentage rule. But I approach ER and my assets have grown while I still have a frugal lifestyle I wonder if anyone just uses a more bucket type of approach.

I have 2 years of funds in the bank, MM and short term bonds and then money with a 3 to 6 years time horizon intermediate bonds and Wellesley. However, those 3 to 6 years time scale investments are far more that 4 years worth of expenses.

Does anyone keep just enough to cover 5,6 or 7 years of expenses in bonds of similar durations and and then let the rest ride on the equity market assuming that over 7 year time periods and crashes will "work themselves out"?
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Old 01-16-2011, 10:20 AM   #2
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I am not a buckets person. I do not do age-in-bonds either. My fixed income allocation is about 31% with no cash. I do have short-term bonds. I am semi-retired, so I have earned income.

My portfolio recovered from 1987.
My portfolio recovered from 2000.
My portfolio recovered from 2008.

If one's expenses are 4% of one's portfolio, then 7 years of expenses is 28% of the portfolio. I think a mix of short-term and intermediate-term bonds is fine for all circumstances. It has been in the past.

Somebody who has a 60/40 portfolio with an additional 10% in cash really has a 60/50 portfolio to me which is another way of saying they have a 55/45 portfolio.
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Old 01-16-2011, 12:17 PM   #3
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I am gradually moving from a very aggressive portfolio while accumulating to a less aggressive one for ESR. I will eventually have a large safety cushion in cash and CDs that is readily accessible, with the rest of taxable assets invested for growth (likely a 50/50 allocation or thereabouts). The IRA/401k assets will be quite aggressively invested (80/20 or 90/10) because I will not be looking to tap those for 20 years. I expect that overall I will be 70/30 or 65/35, which is about the target of where I want to be once I am done with full time work anyway.
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Old 01-16-2011, 12:28 PM   #4
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Originally Posted by nun View Post
For the past ten years I've decided my stock to bond ratio using Bogle's "age in bonds" percentage rule. But I approach ER and my assets have grown while I still have a frugal lifestyle I wonder if anyone just uses a more bucket type of approach.

I have 2 years of funds in the bank, MM and short term bonds and then money with a 3 to 6 years time horizon intermediate bonds and Wellesley. However, those 3 to 6 years time scale investments are far more that 4 years worth of expenses.

Does anyone keep just enough to cover 5,6 or 7 years of expenses in bonds of similar durations and and then let the rest ride on the equity market assuming that over 7 year time periods and crashes will "work themselves out"?
I sort of do a combination. I have an AA that includes bonds and cash. When I rebalance, I just make sure that I never go below X (10 to 12) years of need in bonds+cash. I actually ran into this limit when I rebalanced in 2008. It did let me rebalance as much as I could, and still sleep at night. I actually couldn't bring my self to let it go all the way down to 10. I stuck with 12. But it did let me rebalance a LOT when equities were beaten down so hard and I was rewarded nicely over the next year.

I also have about 3 years of living expenses in short-term funds, so I guess you could say I have belt and suspenders! Actually - double suspenders as you can see what I consider my minimum years in bonds+cash in my AA is really 3 to 5 years too much. But it's what I could live with.

This combination keeps me from feeling much anxiety regarding the stock market volatility.

But - I am also gradually increasing bonds as I age. Right now I have 5% less bonds+cash than I am "supposed" to according to the age rule. I decided not to let the gap increase - so I will increase by bond exposure by 1% per year. This means I will be maintaining that 5% gap - but at least it won't widen.

Did I confuse you yet?

Audrey
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Old 01-16-2011, 12:36 PM   #5
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I am gradually moving from a very aggressive portfolio while accumulating to a less aggressive one for ESR. I will eventually have a large safety cushion in cash and CDs that is readily accessible, with the rest of taxable assets invested for growth (likely a 50/50 allocation or thereabouts). The IRA/401k assets will be quite aggressively invested (80/20 or 90/10) because I will not be looking to tap those for 20 years. I expect that overall I will be 70/30 or 65/35, which is about the target of where I want to be once I am done with full time work anyway.
I've always been fairly conservative and have had at least 25% intermediate bond index type funds since I started saving for ER 25 years ago, even through the 90s when bonds were often ignored. I'm now 49 and hoping to ER in about 2 years so I'm 50/50 to reduce volatility. I could be a bit more aggressive as I have an income producing rental property, but I'm comfortable for now.

The reason I asked my question is that if I stay 50/50 I will have many years of expenses in fixed income as I LBYM and only need 2% withdrawals plus the rental income to live comfortably. Maybe I'll count my rental as fixed income and overweight equities to compensate......If I was to include my SS and UK state pensions too (as Bogle suggests) I'd probably own no bonds at all
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Old 01-16-2011, 12:50 PM   #6
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If I only needed 2% draw on my retirement portfolio (and I am 51), I would probably be inclined to keep a higher equity ratio too. (Right now I am at 54% equities anyway). So for me a higher equity ratio in your scenario would likely be 60%+.

My thinking about age-in-bonds was more based on where I wanted my portfolio to be when I was 70 or 80. I didn't see myself owning more than say 35% equities at age 70, so that's why I decided to start making a gradual transition. I didn't want to get to that age and then make a sudden change.

But who knows - maybe at that age (70) I would still be comfortable with 40% in equities. Probably no more than that, though. I can only make my best guess.

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Old 01-16-2011, 01:43 PM   #7
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As I approached retirement in 2007 I think I reached about 30% cash and another 20% gold/bear market fund. I thought negative consumer savings, in particular, would cause problems in the coming years, in addition to the higher profile mortgage problems. The plan was to go ahead and spend the cash before selling any equities. Not a big hit to the lifetime return of the portfolio (cash for a few years, but 100% equities as a long term goal), but insurance against a bear market just as I retired. A good time to be conservative. Plus DW decided not to retire with me, a big margin of safety but we still had to make significant portfolio withdrawals (about 2%) with a kid in college.

All of that cash went back into equities from 2008 to 2009. I sold the gold and bear fund and went long with that money fairly early, with the market a little less than 20% down. The cash went back in in about 7 equal steps spaced at 5% to 10% market drops. In March 2009 at the bottom of the dip we probably hit 99% equities, with enough cash for the next few months, and maybe 10% of the portfolio using borrowed money. In 2009 I was selling some equities as we needed more cash. But that was after gains in the market, so the investments were working.

In 2010 the portfolio value was back to a level that supported my original retirement plans plus a decent margin. I started taking more cash out at that point. We're at maybe 10% cash now (actually short-term bonds mostly), with the rest in equities. I paid back the HELOC since the interest rate was above what I can get from a CD. The equity portfolio value at the start of 2010 matched my retirement projections, plus I already have taken out the cash required for about the next two years. We actually have a 2.5% annualized investment return from 10/9/2007 to 1/14/2011 according to Quicken. I'm kind of uncomfortable with this amount of cash, but we still have the youngest kid in college and high expenses for a few more years. No Social Security or pensions coming for a while, and 59 1/2 is still about 3 years in the future. DW is still working, but only as long as she's enjoying it, kind of year to year now.

So I'm nominally 100% equities. When the equity portfolio is above retirement projections I take the excess in cash for near-term expenses. In a bear market I'll reinvest the cash if I have it. Otherwise I sell equities as needed to meet expenses. So far so good. I'd hate to have a bunch of cash or even bonds sitting around throughout 30 year retirement. If my retirement projections end up to be too conservative and the cash gets too high (3 years worth?) I'll let the equity portfolio rise and reset my expectations.

While I felt bad as my equities crashed with the market, even with very wide diversification, I felt more anxiety about the equity prices being so low and not being able to buy even more. I borrowed from my home equity line of credit in order to buy at what ended up as the very bottom of the market. My next step would have been to allocate less to conservative assets and move it to assets likely to rise first in a recovery.

Certainly not for everyone. It takes a little work and flexibility, and maybe an unusual mindset, but it's what I feel most comfortable with.
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Old 01-16-2011, 03:01 PM   #8
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I will stick with an overall AA that is in line with what the conventional wisdom is for our age.

But the talk about holding too much in bonds is encouraging... means people are feeling better about the stock market.
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Old 01-16-2011, 06:08 PM   #9
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Originally Posted by nun View Post
For the past ten years I've decided my stock to bond ratio using Bogle's "age in bonds" percentage rule. But I approach ER and my assets have grown while I still have a frugal lifestyle I wonder if anyone just uses a more bucket type of approach.
I guess I'm using a bucket approach - I didn't know it had a name. Now I have something to research to help me refine my plan. - Thanks!
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Old 01-16-2011, 07:38 PM   #10
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I don't use a bucket approach.

A 60/40 equity/bonds+cash allows me about 8-10 years in bond/cash at a 4% SWR.

I plan to rebalance every year irrespective of what happens. Or at least I'll try as long as my stomach holds out.
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