Poll: How Many Years of Withdrawals in Bonds

[jebmke]

Your comment got me curious. I looked at the VG website for the Total Bond Market Index yearly highs and lows for 2007-2009:

Total Bond Mkt Index Adm
High High Date Low Low Date
$10.21 12/03/2007 $9.73 06/12/2007
$10.37 01/22/2008 $9.58 10/31/2008
$10.56 11/30/2009 $9.96 03/10/2009

Seems that if you bought and sold at the worst possible times, at the high in 2007 and sold at the low in 2008 you would be down only a little over 6%, not taking into account the dividends you received over that time which would cut that about in half.

Right, and you are only selling small slices of the bonds in any one month. Overall, I made more in bonds than I would have in cash. The bond market constipation was a fairly short (but scary) period. IMO, the bond market situation in '08 was more frightening than the entire equity market down tick.

 

[foxfirev5]

I am much more worried about the bond market in the next 10 years than the '07 - '09 timeframe. A slow painful decline. However, I still plan to stick to my allocation plan and take it from there.

 

[galeno]

We keep a 60/40 port. With 3% AWR we have 13 years of living expenses in fixed income. At 4% we have 10 years.

 

[traineeinvestor]

In my spreadsheet I have a cell that tell me how many years of expenses I have in bonds and cash.

I do the same thing. My floor is 2 years of living expenses in cash/bonds/equivalents (currently more than twice that). I tend to frame this in terms of liquidity management rather than asset allocation (although I suspect the difference is semantic rather than substantial).

 

[Gearhead Jim]

In our late 60's and both retired, we are about 50-50 on our asset allocation, but only a handful of money (maybe 2 months of living expenses) is in bond funds that I haven't bothered to sell. The vast majority of our fixed income is in a five year CD ladder, spread around 3 different banks/CU's both for additional diversification and to stay under the $250k insurance limit.

Call me a dirty market timer, but bonds do not look like they can currently provide the portfolio stability we have used them for in the past.

 

[Sirka]

During the crash of 2008, virtually every asset class was down including bonds. Even the Vanguard Total Bond Fund had a big decline. After the FED acted to provide liquidity it partially recouped the big drop.

What I think this means is that you should look to cash for funds to tide you over recessions. You don't want to have to sell assets (bonds or equities) when their price is depressed. So, you need your cash to supplement taxable dividends and interest, SS, pensions to maintain your spending during recessions.

+1
Cash is king during a crash. Bonds go down as well!
I ran out of cash in 2009 buying stocks.
Ever since 2008, I keep more cash in Money Market even though it pays nothing. At least it does not go down, like the bond funds did last year.

 

[growing_older]

I wonder if you are asking a question like: If your portfolio at your desired asset allocation was so large that you were sure you had enough, what would you do with additional money. Would you continue to allocate unneeded extra money at your original desired asset allocation, or would you effectively start a new second portfolio, with different goals, at a different asset allocation, such as 100% equities?

 

[Jackson D]

Having a floor of safe investments

In his book "Retirement Portfolios", Michael J. Zwecher goes into great depth talking about creating a floor of very safe, inflation protected investments, that will support your lifestyle, and then use equities to hopefully get some gains over time to add in luxuries or increase your spending if you wish. For example, a high net worth individual may be able to realistically fund their expected lifetime of spending using only a portion of their assets. Let's say you have two people, one having $5 million and the other having $7 million, but they both have pensions and only need an additional $50,000 a year from their portfolio to live the life they want. They both put $2 million dollars in very safe, inflation protected investments such as iBonds, CDs, etc. so they now have their basic lifestyle covered for 40 years. This is the floor. It would then seem to be reasonable to put a large chunk of their money in riskier investments to build a legacy or raise their spending in the future if stocks do well. In the example, one has 60% in stocks and the other has 71% in stocks. Now the stock market tanks. This is where something called one way rebalancing kicks in. If the stock market tanks, neither person rebalances from their floor of safe investments into stocks. Their floor of safe investments remains the same so their spending is unaffected. If stocks go up over time they could rebalance to their safe investments and raise the floor. They only rebalance from stocks to bonds and never the reverse.

A wealthy person who has a floor like this could have a high allocation to stocks as they have the ability to accept the risk. They just build a floor that corresponds to their lifetime spending needs and what they do with the rest of the money has little impact on supporting their chosen lifestyle.

Zwecher explains this whole idea much better than I can. I really like his one way rebalancing idea to protect you from selling bonds once your floor is in place.

 

[Independent]

If so what is the correct number of years you should have in bonds?

When I see this comment, I assume it goes with a withdrawal plan that says in "some" circumstances I'd get 100% of my withdrawals from bonds.

If I get into that situation, clearly my "number of years in bonds" will drop. But, that must be okay, or why would I make this type of plan?

So I think this approach requires some explicit plan for when to actually withdraw those bonds, when to stop withdrawing them, and when to refill the bond bucket.

The answer to "how much is enough" comes from writing out that plan then running it through possible market scenarios until I've convinced myself that it meets my goals (whatever they may be) in at least X% of the plausible scenarios.

So I'd say you should start by writing out your plan for using and refilling your bond bucket.

 

[photoguy]

Bernstein has a similar idea about creating a floor with safe investments. All I can say is that I wish I had the net worth typical of their clients that they target these ideas toward.

 

[FinanceGeek]

I think Buffet would agree with the OP, although he might quibble on using bonds to hold your withdrawal fund - maybe short term would be OK...

Buffet made a statement last year about bonds being poor investments. His quote was "You shouldn’t be 40% in bonds…. Anybody I would [advise] ... I would have them having enough cash on hand so they would feel comfortable, and then the rest in equities"

Warren Buffett: Bonds Are ‘Terrible Investments’ Right Now - Income Investing - Barrons.com

To watch the interview where he said this, see the link below. Its the second video down on this page (time 1:18).

Warren Buffett: Stocks Will Go 'Far Higher' Over Time

 

[Rambler]

I've played it a little differently. I currently keep enough cash for about 2 years of full expenses OR 4-5 years of full, fun-included expenses. Then, I have enough in a very wide variety of muni bonds to pay virtually all of my basic living expenses from the interest thrown off. I got a lot of the bonds early in the downturn, so the yield on purchase price was pretty good, and yield on current market value is also not bad at all at around 5.4-5.5%. I do have some corporate bonds but not too much. Beyond that, it's mostly a wide variety of stocks and funds with a slight value bent that toss off slightly better than market average divvies, plus some REITs that push off some higher divvies. Together, that provides the play money and the inflation protection.

As yields move higher, I will likely begin putting the extra fun money, plus proceeds from harvesting some losses to offset some gains that have run their course into more bonds, which will help me keep my balance.

Right now though, I'm about 70/30, the 70 including the equities and the minor amount of REITs. Cash is outside of that, but would be about 5% of the invested assets. We also have a good chunk of home equity that will be redirected to investments when, at some point maybe 10-15 years from now, we decide to downsize.

Just another way of looking at things.

R

 

[scrabbler1]

The monthly interest thrown off by my taxable account's bond funds more than covers my monthly expenses. Any excess gets reinvested, so I can add shares to the bond funds which will in turn spin off more interest. Over time, however, if my expenses grow to overtake the excess then I will have to dip into principal. But my projections don't have that happening for at least 10 more years. And even if I have to dip into principal, I will around that time have access to other money not yet available (i.e. IRA, frozen company pension, SS). Therefore, I expect the original bond funds to last me at least 30 years.

 

[obgyn65]

I don't have much money in bonds at all. So to answer the OP's question, next to zero.

 

[CaliforniaMan]

Bernstein has a similar idea about creating a floor with safe investments. All I can say is that I wish I had the net worth typical of their clients that they target these ideas toward.

I took a look at some reviews of the Bernstein book you mentioned. One stated:

"He does look at several examples of people with different spending needs. A rule of thumb he provides is that by age 70, people should have enough safe assets to fund at least 20 years of spending needs after accounting for Social Security and other pensions. Of course that is very tough to do, especially in today’s low interest rate environment."

Unless your spending is very low, and SS high, it does seem he is directing that to higher net worth individuals. 20 years seems a bit extreme for me, but for high net worth people it certainly would be prudent. I will put his book on my list. Thanks.

 

[Independent]

I took a look at some reviews of the Bernstein book you mentioned. One stated:

"He does look at several examples of people with different spending needs. A rule of thumb he provides is that by age 70, people should have enough safe assets to fund at least 20 years of spending needs after accounting for Social Security and other pensions. Of course that is very tough to do, especially in today’s low interest rate environment."

Unless your spending is very low, and SS high, it does seem he is directing that to higher net worth individuals. 20 years seems a bit extreme for me, but for high net worth people it certainly would be prudent. I will put his book on my list. Thanks.

I'm sure that "high" and "low" are very subjective.
In our case, if my wife starts SS at age 66, and I wait till 70, our combined benefit will be over $50,000. That covers 100% of our spending "needs". Other assets will cover spending "wants" and gifts.

 

[CaliforniaMan]

When I see this comment, I assume it goes with a withdrawal plan that says in "some" circumstances I'd get 100% of my withdrawals from bonds.

If I get into that situation, clearly my "number of years in bonds" will drop. But, that must be okay, or why would I make this type of plan?

So I think this approach requires some explicit plan for when to actually withdraw those bonds, when to stop withdrawing them, and when to refill the bond bucket.

The answer to "how much is enough" comes from writing out that plan then running it through possible market scenarios until I've convinced myself that it meets my goals (whatever they may be) in at least X% of the plausible scenarios.

So I'd say you should start by writing out your plan for using and refilling your bond bucket.

Yes, this is pretty much exactly what I was wondering and I think you described it much better than I did. While there are many plausible scenarios, I must admit that I have not come up with a solid plan for when to draw 100% in bonds/cash and how to replenish the bond/cash bucket.

 

[dunkelblau]

I guess I'm an outlier here, I have about 30 years expenses in cash and the rest in stocks. I don't like bonds-- I've traded them through mutual funds many times over the years and got clobbered almost every time so it finally sunk in that I shouldn't go there. Cash is a slow bleed but at least it's been predictable, I see the opportunity cost as an insurance premium. It came in handy being able to buy stocks without selling around YE2008, although I think it would have been better for me if that rout weren't so short-lived. Better luck next time, eh?

 

[Dash man]

Our AA is 45/40/15 for equities, cash and real estate. I keep 10 years living expenses in cash (CDs, savings and a few iBonds) and the rest of our liquid investments in stocks. We both have pensions and also have rental income. I just don't see any benefit to owning bonds these days. I replenish my cash from stock trades if needed, but if the market is down I can wait out the dip for a recovery. Stock dividends and our pensions cover our basic needs and the rental income covers property taxes and maintenance for all of our real estate including our home. Life is good!