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Help with the bond side of things
Old 07-03-2004, 08:09 PM   #1
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Help with the bond side of things

I have been totally redoing my investments and have pretty much settled on the equity portion of things. *I still have to wrestle down where to best put my bond side. *I'm hopefully a year from ER at 52 y.o. and am looking at a 60/40 mix of bonds to equities. *Right now I'm only looking mostly at taxable investments. *I will need to use at least a portion of my bond income for my living expenses. *I'm probably a mix of intermediate muni bond funds and money markets as we speak.

It seems like at least a few that I've noticed are using total or other bond *funds for a major portion of *thier bond portfolio. *As far as I can tell, the books on the reading list are light on bond coverage and recommend not using bond funds but directly investing in bonds to avoid expenses and risk to NAV. *And also that they target 1-5 year durations as the most efficient returns, which pretty much counts out my intermediate investments as well as a total bond market fund. *This also seems especially touchy with higher rates in the crytsal ball. *Even with some reinvestment in higher rates in a bond fund, it seems to me like it would take a long time for funds to recover a loss in NAV. *

I guess this pretty much leaves a laddering of treasuries or CD's in the 1- 5 year range? *I've already maxed out my bank I bond allowance which seems like a decent place for the shorter term. *I still need some decisions on the remainder. *Help appreciated.
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Re: Help with the bond side of things
Old 07-03-2004, 10:55 PM   #2
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Re: Help with the bond side of things

Hey Roger_R,

You seem to have covered the bases pretty well.
My only observation is that it is likely that bond
funds have already anticipated "some" rise in
interest rates. That's why the long term market
rose Friday when the jobs report did not look as
good as expected. If you are concerned about
NAV loss and have maxed I-bonds, then consider
EE bonds ....... they track inflation almost as well
as I-bonds since they are pegged to 90% of the
5 year treasury, grow tax deferred and there is
no limit on purchases.

Cheers,

Charlie
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Re: Help with the bond side of things
Old 07-04-2004, 04:59 AM   #3
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Re: Help with the bond side of things

I had my DFA advisor help me find and get access to some bond funds at reasonable prices, specifically to get access to international bond funds, which Vanguard doesn't provide, and which Bernstein at al suggest have useful counter-cyclical (less correlated) value in your portfolio.

Here were the picks. We are in all these to greater and lesser degree (most in the DFA 2 year Bond and Pimco Foreign Bond (5 year).

We are about 60% in US Bonds, 40% foreign (of an overall 50% bond allocation) currently average maturity around 4 years -- ST Corporate from Vanguard is a good holding tank and can even be a proxy for cash to a degree.

Fidelity New Markets [FNMIX] - bought via vanguard
DFA Global 2-Year Bond [DFGFX] (bigger allocation here)
Pimco Foreign Bond [PFORX] (bigger allocation here)
T Rowe Price Int’l Bond [RPIBX]
American Century Int’l Bond [BEGBX]

We also hold: High Yield, GNMA and Intermediate Bond Index (Vanguard)
I-Bonds are great. If you want more than the max, consider a TIPS fund [VIPSX] and keep it in your IRA (to avoid annual taxes on your principal inflation adjustments).

A few other bits: By getting a DFA Advisor, they can get you into the institutional versions of these non-Vanguard funds via a Charles Schwab Alliance master account which gets you the lowest possible fees -- no loads and institutional fee levels -- which makes otherwise impossible fund diversification possible.

As I remember you were about to go ER; one mistake I made was to bulk up on NY State muni bonds remembering the sting of my working life tax bills. Once you are ER, you should find your income taxes dramatically reduced, and tax-wise investments like muni bonds will make no sense, so if you are going the ladder and individual bond route, beware.

Finally, another thing I learned the hard way, aside from treasuries or agencies (big liquid ones that are quoted for both buy and sell with volume on both sides), I will never again buy a used bond. I got totally hosed by Vanguard's Bond Desk (and I am sure it would have been even worse elsewhere), when I bought and/or sold a used bond. Buy at issue instead and your spread will be nil, fees minimal. Otherwise it is perhaps the most high-spread asset class short of residential real esate, and they can clip you in a way that you'll never even know what happened. You've been warned!

Good luck and bon courage...

ESRBob
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Re: Help with the bond side of things
Old 07-04-2004, 06:29 AM   #4
 
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Re: Help with the bond side of things

I was surprised like ESRbob on the income taxes, which in ER are pretty much -0-. Never saw it coming until
it was here. Serendipity?

John Galt
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Re: Help with the bond side of things
Old 07-04-2004, 08:09 AM   #5
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Re: Help with the bond side of things

More then serendipity, John;
For once the cookie is crumbling our way -- since we already earned our $ once as salary and paid taxes on it, somebody out there feels we are entitled to keep a portion of whatever that money earns for us going forwards in capital gains, dividends etc. And due to the progressive nature of our tax system, even our interest income, if we don't earn much, gets sheltered behind the lower tax brackets so we don't get stiffed the way a salary earner would.

So in ER the game is to try to live like a high roller while being taxed like the working poor. We have the free time and wiles to create a really nice quality of life out of each day. Even if we don't spend a huge amount to do it, I bet we're having a lot more fun for our lower outlays than your average plutocrat!

Happy 4th everybody! Hoist one to "Independence" today! The Pursuit of Happiness -- enshrined in our nation's history! 8)

ESRBob
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Re: Help with the bond side of things
Old 07-04-2004, 08:25 AM   #6
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Re: Help with the bond side of things

ESR Bob, Interesting thoughts and also I had not considered much some of the tax considerations. I'm still learning, but at least from what I can tell from your DFA advised bond funds that some of them are in the more risky category than I have yet to consider. Food for thought, but at least some very basic impressions are not to stack things too heavily in emerging market or high yield bond funds. Seems like this degree risk is better placed in equities? One or two of them you mentioned did get my interest.
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Re: Help with the bond side of things
Old 07-04-2004, 09:49 AM   #7
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Re: Help with the bond side of things

Regarding taxes in retirement.
It has been pretty nice to be able to ladder 5 year CD's to fund a portion of our expenses, with not much thought for tax consequences. (Wouldn't have dreamed about that while I was working).
Strategy will have to change somewhat when mandatory withdrawel from I.R. A. kicks in about 4 and a half years from now.
About a year and a half ago, they extended the maximum draw-down period from 16 years to 26 years.
(An advantage if you are hoping to leave some on the table for your kids).
Have even thought about drawing a little out of I.R.A. now to avoid a larger bite later, but enjoy not paying much tax now. (It feels so good, that even if the strategy isn't the best, it's worth it for mental outlook).
As John Galt is fond of saying, tomorrow is not promised to anyone, and enjoy not paying taxes now. (Even if it will only last another 4 and a half years).
GDER brought up good point about a retirement based on pension, rather than assetts. The kids do stand a better chance of having an inheritence on assett based retirement. (But no guarantee that we all will be good keepers of the vault). It could come back to bite them.
Meanwhile, it feels pretty good to be able to give the I.R.S. only a fleeting thought.
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Re: Help with the bond side of things
Old 07-04-2004, 05:02 PM   #8
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Re: Help with the bond side of things

Good luck on you ER Roger!!!

At age 52 you have about 40 years left before you're living 6' under.

Are you sure that a 40/60 (Stock/bond) mix will serve you well for such a long time?

You may wish to look at 60/40 or 50/50 (stock/bond) as your long term mix. You may find out too late that 40/60 is too conservative.
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Re: Help with the bond side of things
Old 07-04-2004, 11:02 PM   #9
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Re: Help with the bond side of things

Quote:
Are you sure that a 40/60 (Stock/bond) mix will serve you well for such a long time?
Yup Mickeyd, makes me a little nervous, too. At a 3% lifetime withdrawal I'm at about 35-40% of my current income (with house paid off). Then, I have a modest inflation adjusted pension that will kick in at 55 and then SS on top of it all. I guess I have the choice of working longer and having more pension money and more savings. It will be difficult when the exact times arrives, but I'm at least setting a target date.
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Re: Help with the bond side of things
Old 07-05-2004, 06:23 AM   #10
 
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Re: Help with the bond side of things

Quote:
Yup Mickeyd, makes me a little nervous, too. *At a 3% lifetime withdrawal I'm at about 35-40% of my current income (with house paid off). *Then, I have a modest inflation adjusted pension that will kick in at 55 and then SS on top of it all. *I guess I have the choice of working longer and having more pension money and more savings. *It will be difficult when the exact times arrives, but I'm at least setting a target date.

Well, can you lower your wihdrawal rate to 1 or 2% when the Pension and SS Kick in?
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Re: Help with the bond side of things
Old 07-05-2004, 07:05 AM   #11
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Re: Help with the bond side of things

Quote:
Well, can you lower your wihdrawal rate to 1 or 2% when the Pension and SS Kick in?
That's sort of how I'm thinking about it. *

Although alternately I could consider the "raise" to be used for a health care pad. *I've lived pretty frugally and am satisfied with my lifestyle, but I suppose with a little practice, I could also take the pension and SS and learn to live it up * *

My thinking is not necessarily to maximize returns, but also to reduce risk to match the income I will be comfortable with. At some point, whether it would be to work longer or to weigh heavily in a hopefully promising equity market, I will have a possibilty of having more income that I would need.

Are my thoughts in line?
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Re: Help with the bond side of things
Old 07-05-2004, 02:24 PM   #12
 
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Re: Help with the bond side of things

Other than my real estate, my portfolio is almost 100%
bonds. I don't really have a withdrawal rate. Since I
retired my net worth has increased (or at least held).
That has been good enough for me. Once SS kicks in
(2 years), I figure that plus my bonds will provide
enough for my wife and I. And, I may still have a substantial real estate position to fall back on.
At that point (2 years hence) the only big unknowns
are if my wife will still want to work, and whether I will
be in line for any inheritence.

John Galt
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Re: Help with the bond side of things
Old 07-06-2004, 02:34 PM   #13
 
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Re: Help with the bond side of things

I don't understand how you all pay 0 taxes. 1M in bonds at 5% thows off 50K/year in taxible income.

JG- are your bonds in a tax sheltered account?

I like balancing my stock holdings with bonds but don't like it when tax time comes around. I don't need the income, just the diversification and risk reduction. Any tips?
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Re: Help with the bond side of things
Old 07-06-2004, 02:56 PM   #14
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Re: Help with the bond side of things

Then dont do that

Lets see...I last year I had two homes property taxes and most of my medical insurance as a deductible, $3k in rollover losses against 'ordinary income', all my capital gains offset by prior losses, charitable and other miscellaneous deductions and so forth brought my taxable income below the zero waterline.

The year before that I had a slightly different mix of stuff.

Eventually I'll draw too much in interest and dividends, and eventually I'll run out of capital loss carryovers

Next year after I'm married, its married filing jointly, but from a quick analysis our joined tax burden will be a couple of grand less than what we collectively paid last year...in other words I'm dragging her tax load down.
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Re: Help with the bond side of things
Old 07-06-2004, 04:06 PM   #15
 
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Re: Help with the bond side of things

We file "married but separate". Necessary in order to prevent "comingling" which tends to weaken your
prenup. Not sure how long this will continue.
Forever?

John Galt
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Re: Help with the bond side of things
Old 07-06-2004, 04:31 PM   #16
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Re: Help with the bond side of things

I'm not doing the prenup thing.

My uncle had a unique approach to a marriage crisis when my aunt suggested divorce.

He said "I'll cancell all the insurance and set fire to the house and cars, and go to jail. You'll get nothing. Now, shall we talk this over?".

15 years later they're still married.

When my dad told my wife to be that story, she looked at me and said "it kind of sounds familiar..."
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Re: Help with the bond side of things
Old 07-06-2004, 04:58 PM   #17
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Re: Help with the bond side of things

In an earlier post on this thread I stated that there
is no limit on EE bond purchases. I was wrong.
There is a limit similar to that on I-Bonds.

Mea Culpa,

Charlie
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