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Bonds or Money Market
Old 05-30-2007, 01:33 PM   #1
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Bonds or Money Market

My 401K account is with Vanguard. As I near early retirement, Vanguard has a calculator that gives you what they consider to be the optimal asset allocation relative to how close you are to retirement. With less than a year left until early retirement, this calculator tells me I should have about 40% of my portfolio in stocks, and 60% in bonds.
There is no mention of having money in their Money Market Fund, what they consider to be short term reserves. I am wondering if there is some sort of advantage to have having the money in bonds rather than the money market fund.
I have about 10% of my total in this Money Market Fund now. Should I transfer these funds to bonds? They both have about the same return.
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Old 05-30-2007, 02:29 PM   #2
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I think one aspect to consider is how much income the bonds are producing and your other sources of income.
Let's assume you do not have any other income or assets aside from what you have with Vanguard.
Does the bonds produce enough income to cover your budget - including taxes?
If yes - it is a good allocation.
If no - Have 2 years of expenses in a MM - current & next year. After 1 year sell bonds and/or stocks to balance your allocation back to 60/40 or whatever is appropriate for your age.

Really need more info on your financial situation to properly evaluate.
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Old 05-30-2007, 02:41 PM   #3
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Note that while a 40/60 Stock/Bond split may be appropriate for someone retiring at 65, it may not be appropriate for someone retiring at 50.
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Old 05-30-2007, 03:19 PM   #4
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I second Al's comment. Typical retirement planners are looking to minimize volatility and maximize income for someone who only has a ~20 year retirement horizon.
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Old 05-30-2007, 04:21 PM   #5
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Hey Testtubes,

Quote:
this calculator tells me I should have about 40% of my portfolio in stocks, and 60% in bonds
Keep in mind that the calculator (any calculator) should not dictate your own asset allocation. If you determine that a 40/60 split is what will make your retirement work, good deal. If you think that a 40/55/5 AA (the 5 being a MMF), also good.

FWIW, I think that a 40/55/5 AA is a bit conservative for a new retiree. I prefer a 60/35/5 split, but I have DB plans as part of my plan.
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Old 05-30-2007, 06:20 PM   #6
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Quote:
Originally Posted by cute fuzzy bunny View Post
I second Al's comment. Typical retirement planners are looking to minimize volatility and maximize income for someone who only has a ~20 year retirement horizon.
You don't agree with me?!
I'm hurt! And feeling very sensitive today.
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Old 05-30-2007, 06:29 PM   #7
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I didnt disagree!

But here, let me give you a nice scratch under the chin and a nice chicken flavored treat
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Old 05-30-2007, 11:37 PM   #8
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testtubes,

A 40/60 split might be good for someone "Early Retiring" at age 70-75

But back to the MM vs. Bonds question. With interest rates going up the last couple years, I just could not force myself on the last two rebalances to buy more bond funds. I used MM instead. Longer term, I will have to revisit that decision. If interest rates drop, will probably move most of MM to bonds. The MM vs. bonds which-to-buy decision came up for me only because of very good growth on the equity side while I'm slowly drawing from the fixed side, and rebalancing was needed. For assets already in bond funds, I won't move from bonds to MM unless I needed to liquidate some of the bonds for living expenses.
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Old 05-31-2007, 02:53 AM   #9
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the time to buy into bonds is before rates drop. to make bonds worth it over money markets you really need to get in early. otherwise by the time rates drop they are already bid up to the point where you missed the biggest gains and the reason you want them in the first place.

with the inverted yield curve there is no interest rate advantage to going out longer with bonds so its the slight kicker from the capital gains if rates rop, miss that and you shot yourself in the foot
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What do you call this one?
Old 05-31-2007, 04:59 AM   #10
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What do you call this one?

Picture from cnn money pre-market area this morning.
Attached Images
File Type: gif yieldcurve.gif (1.9 KB, 69 views)
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Old 05-31-2007, 08:21 AM   #11
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Either a butterfly or a naughty picture.
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Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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