Kitces: A bond tent

[walkinwood]

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Another insightful article by Kitces. He addresses the risk of an equity melt-down in the few years leading up to and after retirement when the portfolio is at its largest. His solutions - increase bond allocation as you near retirement (above your long term AA) and slowly reduce it to target over the first decade of retirement.

I feel that the increase bond allocation in the years leading up to retirement is not as important to Early Retirees, since our retirement date is flexible. So if there is a market drop as we approach our target date, we can just move it back. (It may be harder to do in practice since it will be mentally devastating to many) But, having a higher bond allocation for the first decade after ER may be a wise move since it could increase the portfolio's probability of survival over our longer retirement time frames.

For full disclosure - We're closing in on our first decade of ER (8+ years under our belt), so we'll just stick to our constant 60/40 equity/bond allocation.

 

[pb4uski]

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

....I feel that the increase bond allocation in the years leading up to retirement is not as important to Early Retirees, since our retirement date is flexible. So if there is a market drop as we approach our target date, we can just move it back. (It may be harder to do in practice since it will be mentally devastating to many) But, having a higher bond allocation for the first decade after ER may be a wise move since it could increase the portfolio's probability of survival over our longer retirement time frames. ....

+1 I had planned to retire in 2010 at age 55 but given the great recession I deferred until 2011, just after my 56th birthday... what made it easier is that other pieces of the puzzle fell into place as well.

While things have worked out great, if I know what I know now I probably would have done exactly what you describe.

 

[kevink]

Thanks for posting this article.

Kitces is always worth reading, but it's interesting that someone with his sophistication whose primary audience is FA's not the public isn't looking at portfolios that don't need to be radically tweaked to offer decent returns without the downside risk of equity-heavy approaches.

Just as unsatisfying is that he's advocating up to 70% in bonds at one point in the cycle but then qualifying the whole thing by saying more research is needed, AND he doesn't make it clear why the equity allocation would rise in late retirement (with the latter apparently starting close to the end of normal life expectancy, based on his charts!). Legacy or longevity insurance?

It makes a whole lot more sense to me to invest in, say, the Golden Butterfly, Larry Portfolio or even one of the other allocations shown on Tyler's site (there's a great SWR calculator for each allocation that speaks directly to the issues Kitces writes about):

https://portfoliocharts.com/portfolios/

 

[walkinwood]

Kevink - thanks for that excellent link. There go hours of my life

 

[mathjak107]

the problem is a few portfolio's like the golden butterfly , the permanent portfolio , etc use assets like gold that can not actually be stress tested against the worst case scenario's retirement planning is based on .

you could not own gold here until 1975 except as a collectible and we really have no way of knowing what it would have done if it freely traded .
so you can not really compare to what the term swr really means . at best you can guess hut even that may be way off .

silver plunged in 2008 while gold went up so using silver to guess with is not going to cut it as the two do not always move together .

 

[MooreBonds]

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Another insightful article by Kitces. He addresses the risk of an equity melt-down in the few years leading up to and after retirement when the portfolio is at its largest. His solutions - increase bond allocation as you near retirement (above your long term AA) and slowly reduce it to target over the first decade of retirement.

I understand the concept he is thinking of....but couldn't this have just as much hazard as overloading your stock % allocation then assuming you will draw it down more? If rates move substantially, bond losses could be just about as much as a bear market in equities, depending on which bond allocation you have and how interest rate sensitive it is (intermediate term, vs all gov't bond ETF vs some corporates, etc.).

I like his idea, but if I were thinking of doing that, I would go the extra step and simply put that "extra % allocation" in CDs or perhaps a fixed rate annuity with a limited term, rather than subject it to bond funds and potentially sizable losses. CDs and fixed rate annuities yield just about the same (perhaps a sliver more) than the bond funds, anyway, and you have nearly none of the capital losses risk that the bond funds carry.