My Vanguard Financial Plan

[2B]

As part of my preparations to actually and finally retire, I thought I'd take advantage of my free financial plan available through Vanguard. I was looking for a professional second opinion of what I think was pretty much covered. I also have used it to hopefully calm DW who has recently started to express concerns now that I'm appearing committed to finally retiring. She hasn't been as involved as I would have liked in all of the planning.

We had our first telephone/video conference with our assigned CFP. Based on the questionaire, my AA was recommended to be 60% equities. Currently, I have 40% equities and pointed out that I had "won" the retirement planning game ala Bernstein. I didn't need the extra theoretical return and could eliminate the risk. He agreed but will do the next plan at 50%. I'm open to increasing to this level.

I was surprised that one recommendation kept my same equity mutual funds and another case had me go to one US and one foreign fund. In our first meeting I didn't get to explore the rationale.

Not surprising, the fixed income recommendation was to move from CDs as they mature into Vanguard Total Bond Market Index Admiral Shares (VBTLX). His pitch was the increased return which is due entirely to moving to longer maturities. The bond fund yields 2.05% and has an average maturity of 7.9 years. My 2 yr CDs are currently being replaced at around 0.8%. One thing I'm going to do is look at longer maturities for CDs to compare interest rates.

He led me to believe that this fund effectively holds to maturity unless a bond becomes non-investment grade. If so, it addresses my belief that when interest rates do go up the loss in a bond funds price is permanent. Bond funds that target specific maturities sell bonds that are a couple of years below their target maturity date. Does anyone know if VBTLX really holds most bonds to maturity?

Overall, it was a worthwhile discussion if for no other reason that DW seemed to like it too. It's nice to have my opinions and assumptions examined.

On a final note, the pre-plan information asked for an estimate of my after tax spending in retirement. I threw out a figure that I estimated would be very safe (basically my 95% FireCalc number adjusted for income taxes) that was well above expected spending and over twice our basic cost of living. Vanguard put this at a 99% success rate using their 60/40 split.

Does anyone have any suggestions for things to bring up at our next video conference?

 

[mathjak107]

congradulations , i too am retiring in the next 11 months and just cut down to part time.

we are putting our final touches on things as well.

i wouldn't get to wrapped up in whether they hold to maturity or not. if they do all it means is you won't see your share price drop much but it evens out by not getting the higher interest of higher bonds.

moot point.


i hold quite a bit of total bond. we cut to about 33% equities ala pfau/kitces rising glide path and the rest are bonds,cash and special situation funds.

basically i follow fidelity insight so we buy and manage rather than buy and die with what we bought.

the mix of stuff changes as the big picture changes.

 

[pb4uski]

IIRC Vanguard typically provides two recommendations. One is ideal and the other sort of blends ideal with trying to be less disruptive in relation to your existing holdings. The recommendation for domestic and international equities is consistent with their target date funds.

I think many bond funds typically hold bonds to or near to maturity so I don't see that as a differentiating factor. Perhaps PenFed will offer some 3% CDs again this year. If not, I like the target maturity bond funds as a substitute for a CD.

Did they mention or have you considered any allocations to domestic high yield, international or emerging market bonds? I hold all of these in addition to domestic investment grade bond funds as a diversification play and I like the higher yields.

 

[karluk]

I am not involved with making trading decisions for Vanguard total bond market fund, but I can see why it would rarely, if ever, sell a bond before maturity. The whole point of a total bond market fund is to accurately reflect the aggregate holdings of the investment grade US bond market. So what if a bond is nearing maturity? It still is a component of the US bond market and as such belongs in a total bond market fund.

 

[karluk]

IIRC Vanguard typically provides two recommendations. One is ideal and the other sort of blends ideal with trying to be less disruptive in relation to your existing holdings. The recommendation for domestic and international equities is consistent with their target date funds

I think pb4uski is right about the FP's suggestions reflecting Vanguard's own target date retirement funds. It looks as if the 60% stock recommendation is close to Target Retirement 2020's current allocation and the 50% stock recommendation is close to Target Retirement 2015. I would compare the recommendations you got with these funds and see where they differ, if at all.

 

[mrfeh]

i wouldn't get to wrapped up in whether they hold to maturity or not. if they do all it means is you won't see your share price drop much but it evens out by not getting the higher interest of higher bonds.

moot point.

+1

I don't understand the widespread consternation regarding bond funds. Unless the time horizon the the money invested is mismatched with the average duration of the fund, you want interest rates to rise.

 

[2B]

congradulations , i too am retiring in the next 11 months and just cut down to part time.

i wouldn't get to wrapped up in whether they hold to maturity or not. if they do all it means is you won't see your share price drop much but it evens out by not getting the higher interest of higher bonds.

Congratulations back at you.

Bond funds that have a target maturity - long term, mid-term, short term funds - will typically buy bonds 2 or 3 years beyond their target maturity. They will then sell bonds 2 or 3 years less than their target. It then all averages out. This creates the situation where the fund locks in capital gains and losses as interest rates vary. You get more interest as rates rise but your principle is gone until rates return to their old level.

If you hold to maturity the drop in share price happens but holding to maturity results in the original face value of the bond being recovered. A long term holder of a fund that never sells bonds will eventually be the same as someone that buys their own individual bonds or CDs and hold to maturity. When interest rates do finally go back up, a lot of people are going to be in shock when they see what it does to their "safe" investment.

 

[2B]

IIRC Vanguard typically provides two recommendations. One is ideal and the other sort of blends ideal with trying to be less disruptive in relation to your existing holdings. The recommendation for domestic and international equities is consistent with their target date funds.

That's what I got. I currently have large US, small US, REIT, Dev Int'l and Emerging Mkts. They maintained my current % but recommended increasing the equity exposure. The other portfolio mix does look like the target date fund. In my next discussion, I want to see what he thinks of the asset allocations I have and why would I want to go to two equity funds. It would be easy to do and not have much tax impact.

I think many bond funds typically hold bonds to or near to maturity so I don't see that as a differentiating factor. Perhaps PenFed will offer some 3% CDs again this year. If not, I like the target maturity bond funds as a substitute for a CD.

I have gone around with many people on this. I keep wanting someone to show me the math if the fund sells before maturity. Many bond funds don't hold to maturity.

Did they mention or have you considered any allocations to domestic high yield, international or emerging market bonds? I hold all of these in addition to domestic investment grade bond funds as a diversification play and I like the higher yields.

There was a suggestion to move my current 401k into a hedged international bond fund but there isn't one in my 401k. The planner said their software doesn't always know what funds are in each plan. I didn't get into the specifics of international or high yield funds. That's a good topic to bring up for my next discussion.

 

[pb4uski]

.... Bond funds that have a target maturity - long term, mid-term, short term funds - will typically buy bonds 2 or 3 years beyond their target maturity. They will then sell bonds 2 or 3 years less than their target. It then all averages out. This creates the situation where the fund locks in capital gains and losses as interest rates vary. You get more interest as rates rise but your principle is gone until rates return to their old level.....

This may be true of short/mid/long term bond funds - I don't think so but their disclosures are not sufficient to tell one way or the other. It is definitely not true of target maturity bond funds like the Blackrock iBonds and Guggenheim Bulletshares funds. According to the link below the iBonds target maturity bond funds hold bonds that mature in the 12 months preceding the terminal distribution date. Ditto for Bulletshares as I recall.

http://www.ishares.com/us/literature/semi-annual-report/sar-isharesbond-term-etfs-04-30.pdf

 

[pb4uski]

....I have gone around with many people on this. I keep wanting someone to show me the math if the fund sells before maturity. Many bond funds don't hold to maturity. ...

It works both ways - where are you getting this idea that funds don't hold to maturity? I previously worked for a financial institution that sponsored and managed mutual funds and while I wasn't that close to the investment accounting for the funds, I never heard any talk about it. To my knowledge they tended to hold to maturity. They might sometimes try to gain a small bit by subtle shifts between sectors that they believed were over or underpriced but it was at the margins and often done with new money. They might occasionally sell bonds in sectors that they perceived to be overpriced and buy bonds in sectors they believed were slightly underpriced.

 

[pb4uski]

....There was a suggestion to move my current 401k into a hedged international bond fund but there isn't one in my 401k. The planner said their software doesn't always know what funds are in each plan. I didn't get into the specifics of international or high yield funds. That's a good topic to bring up for my next discussion.

I have a similar recollection that they suggested something in my 401k that was not available. You could always just do it in other tax-deferred accounts outside your 401k (that's what I did).

 

[ernow]

If a fund is experiencing heavy redemptions, ie. because people see the NAV falling due to a rate hike, I could see the manager being forced to sell bonds before maturity. I imagine it could be hard to get that back just from the higher reinvestment rate.

 

[2B]

It works both ways - where are you getting this idea that funds don't hold to maturity? I previously worked for a financial institution that sponsored and managed mutual funds and while I wasn't that close to the investment accounting for the funds, I never heard any talk about it. To my knowledge they tended to hold to maturity. They might sometimes try to gain a small bit by subtle shifts between sectors that they believed were over or underpriced but it was at the margins and often done with new money. They might occasionally sell bonds in sectors that they perceived to be overpriced and buy bonds in sectors they believed were slightly underpriced.

How can a fund that advertizes itself as a long term bond fund with an average maturity of 20+ years keep true to that investment objective if it doesn't sell bonds of shorter duration? I saw selling mentioned in one of the details I read but it was a long time ago.

My specific question is whether the total bond fund is constructed specifically to hold to maturity except for credit downgrades and sales to meet redemptions as needed.

 

[2B]

If a fund is experiencing heavy redemptions, ie. because people see the NAV falling due to a rate hike, I could see the manager being forced to sell bonds before maturity. I imagine it could be hard to get that back just from the higher reinvestment rate.

Here the effect wouldn't be any different for a long term holder of the fund if the mutual fund sold bonds in approximately the same way that the bond portfolio existed. If they dumped the long term bonds heavily, then it couldn't be recovered at maturity.

 

[LOL!]

Thanks for the report of your financial review.

Folks may be interested in TheFinanceBuff's 4-part series from last March on his Vanguard review:

Vanguard Financial Plan Review: (1) The Questionnaire

Vanguard Financial Plan Review: (2) The Plan

Vanguard Financial Plan Review: (3) The Consultation

Vanguard Financial Plan Review: (4) Worth It?

 

[karluk]

Folks may be interested in TheFinanceBuff's 4-part series from last March on his Vanguard review:

From FinanceBuff's Worth It? link:

The recommendations fell in line with the composition of a Target Retirement fund.

I am unsurprised by this, and indeed pb4uski has already indicated that's what to expect. But as a DIY investor, I'm just not seeing a lot of value in undergoing the process, knowing ahead of time I'll be steered towards a target retirement like allocation. I can see for myself the allocations in, say, Target Retirement 2015 and make my own decisions about where and by how much to modify them.