Poll: How Many Years of Withdrawals in Bonds

[CaliforniaMan]

I used to be 100% stocks, then as my age increased started adding bonds, now 70/30. If you want the potential for wealth accumulation you want a higher stock allocation, if you want less volatility you need a higher bond allocation.

My question is if it would be better to keep a certain number of years expenses in bonds, rather than a fixed AA.

For example if you have 100 years of probable expenses in bonds, I would assume you would put the rest in stocks, no matter how high the stock allocation would be. You will never run out of money no matter how badly stocks do.

But what if you have 5 or 10 or 20 years projected withdrawals in bonds. Should you put the rest in stocks, rather than keep a fixed AA?

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

I have been pondering this for a while and it seems to me if you have 5 to 10 years in bonds that is enough. But I am wondering what others think about this. Is it too low, too high or just plain silly.

 

[ERD50]

...

But what if you have 5 or 10 or 20 years projected withdrawals in bonds. Should you put the rest in stocks, rather than keep a fixed AA?

The 5, 10, or 20 years worth of bonds are part of your AA. I think you confuse things if you compartmentalize them.

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

I have been pondering this for a while and it seems to me if you have 5 to 10 years in bonds that is enough. But I am wondering what others think about this. Is it too low, too high or just plain silly.

At a 4% WR, 10 years worth would be ~ 40% AA in bonds, so a 60/40 AA. When I look at historic success rates versus AA, I would not call anything between 40/60 and 100/0 'silly', and I think anything between 50/50 and 90/10 is pretty reasonable.

-ERD50

 

[CaliforniaMan]

The 5, 10, or 20 years worth of bonds are part of your AA. I think you confuse things if you compartmentalize them.
...
-ERD50

I think I did not explain well what I meant to ask. Yes the 5, 10 or 20 years of bonds are part of your AA, but what I meant to ask is that should you, after you have achieved say 5, 10 or 20 years of bonds, change your AA so that you always have 5, 10 or 20 years of bonds, rather than keeping a fixed AA of stocks and bonds.

 

[Ready]

If we could be assured that the future will be just like the past, we could easily keep close to 100% in equities, or as you say, 100% minus some reasonable number of years of living expenses in bonds or fixed income, so that we have enough to live on for that many years without dipping into stocks.

But since we can't be sure that the future will resemble the past, we have to make decisions based on risk/reward vs volatility. If you were to determine that you could easily keep 90% of your portfolio in equities because the 10% fixed income portion can cover ten years of living expenses, you still have to live with the fact that a major correction could wipe out a lot of your wealth.

We know that even when something as bad as 2008 happens, eventually the market may rebound, as it did this time. However, if we have multiple repeats of 2008 over the next 20 years, you may not be happy with the ending portfolio of a 90/10 AA, whereas a 60/40 AA would have smoothed out the dips quite a bit and never left you with a balance so low that you worried about whether you might have to go back to w*rk.

So it's all a matter of your comfort level with risk, and your prediction on whether the returns of the future will mirror or come close to the returns of the past. And of course, if we all knew for sure they would, we would have very high allocations in equities.

 

[W2R]

What you are asking, as you acknowledge, is fundamentally an asset allocation question. From what I understand, you are asking whether or not you should change your asset allocation now that you have accumulated a certain amount.

It seems to me that the best asset allocation for you at this point depends on your risk tolerance, stage in life, and a number of such factors.

Personally, I do have a fixed asset allocation that I am more than reluctant to change after surviving the 2008-2009 crash with it, buying instead of selling at the bottom. I am so grateful for this crash because it was an extreme real world test of my asset allocation. Thanks to the crash, I know now that my AA is consistent with my risk tolerance and my situation in life. As of today my bond/cash allocation equals 30+ years of bonds+cash, but all of that depends on my spending level (which I am slowly increasing because I have been under-spending), and on the present value of my bond funds, of course.

Here's a good book on asset allocation by somebody who knows more about it than I do:

All About Asset Allocation by Rick Ferri

 

[REWahoo]

... what I meant to ask is that should you, after you have achieved say 5, 10 or 20 years of bonds, change your AA so that you always have 5, 10 or 20 years of bonds, rather than keeping a fixed AA of stocks and bonds.

If you think you need to change your asset allocation based on the number of years of bonds you have in your portfolio, you don't really have an asset allocation strategy - at least not one that I see any logic behind.

I wonder if you are confusing this with John/Jack Bogle's philosophy of having an asset allocation with "your age in bonds"?

John Bogle recommends "roughly your age in bonds"; for instance, if you are 45, 45% of your portfolio should be in high-quality bonds. Mr. Bogle describes the idea as just "a crude starting point" which "[c]learly . . .must be adjusted to reflect an investor's objectives, risk tolerance, and overall financial position".

Bogleheads® investment philosophy - Bogleheads

 

[CaliforniaMan]

What you are asking, as you acknowledge, is fundamentally an asset allocation question. From what I understand, you are asking whether or not you should change your asset allocation now that you have accumulated a certain amount.

It seems to me that the best asset allocation for you at this point depends on your risk tolerance, stage in life, and a number of such factors.

Personally, I do have a fixed asset allocation that I am more than reluctant to change after surviving the 2008-2009 crash with it, buying instead of selling at the bottom. I am so grateful for this crash because it was an extreme real world test of my asset allocation. Thanks to the crash, I know now that my AA is consistent with my risk tolerance and my situation in life. As of today my bond/cash allocation equals 30+ years of bonds+cash, but all of that depends on my spending level (which I am slowly increasing because I have been under-spending), and on the present value of my bond funds, of course.

Here's a good book on asset allocation by somebody who knows more about it than I do:

All About Asset Allocation by Rick Ferri

If you think you need to change your asset allocation based on the number of years of bonds you have in your portfolio, you don't really have an asset allocation strategy - at least not one that I see any logic behind.

I wonder if you are confusing this with John/Jack Bogle's philosophy of having an asset allocation with "your age in bonds"?

Bogleheads® investment philosophy - Bogleheads

Thanks for the replies. When I mentioned number of years, I was actually thinking about the number of years the bond part of the portfolio would support your withdrawal rate, rather than about age.

Maybe a better way to look at it would be choosing an Asset Allocation (see I used the words ) based on number of years we could live on the bond portion of the portfolio alone.

Another way to think of it, or to pose the question is how long we could live on bonds alone, to help in choosing an appropriate Asset Allocation.

I feel pretty confident I won't sell in a panic, I never sold any stocks in the 1987, post 2000, or 2008 declines, just rode them out and kept adding to my retirement account the max allowed in my then 100% stock AA. Actually I started pre 2008 adding bonds, as my plan was to get to a higher bond percentage as I neared retirement. I wish I had kept to my 100% stock portfolio then, but hindsight... I started investing early, when I was in college, and DID sell in the 1974 panic, part of my learning experience I guess.

I have to say that I am very impressed by W2R, that you were keeping to your AA in 2008. While I feel confident I would not sell in a future panic, I am not sure if I could buy. I might worry that it is a replay of 1929 and hence keep the bonds. Only allocating out of stocks during bull markets.

As I have a few months more before I start retirement, the AA and whether to buy stocks in a panic weighs heavily on my mind.

Again, I want to thank everyone for their opinions and thoughts, they are very helpful, especially those that have been in this retirement game for a while.

 

[rescueme]

We have 0% bonds to cover expenses. That is covered by our MM accounts in which both me/wife hold 3-4 years worth of expenses - including taxes due upon withdrawl.

Our bond holdings are to cover the drop in the equity side if/when it happens (and it has, since I've been retired since early 2007).

While some folks on this forum use short term bonds to cover their expenses (and that's fine - for them), we do not. That's what our "cash bucket" is used for, restocked by sell-off of gains in equities and bonds, as they occur. We have sold neither equities nor bonds to meet our day to day expense needs.

Just another way of looking at it.

 

[haha]

Thanks for the replies. When I mentioned number of years, I was actually thinking about the number of years the bond part of the portfolio would support your withdrawal rate, rather than about age.

Maybe a better way to look at it would be choosing an Asset Allocation (see I used the words ) based on number of years we could live on the bond portion of the portfolio alone.

Another way to think of it, or to pose the question is how long we could live on bonds alone, to help in choosing an appropriate Asset Allocation.

I feel pretty confident I won't sell in a panic, I never sold any stocks in the 1987, post 2000, or 2008 declines, just rode them out and kept adding to my retirement account the max allowed in my then 100% stock AA. Actually I started pre 2008 adding bonds, as my plan was to get to a higher bond percentage as I neared retirement. I wish I had kept to my 100% stock portfolio then, but hindsight... I started investing early, when I was in college, and DID sell in the 1974 panic, part of my learning experience I guess.

I have to say that I am very impressed by W2R, that you were keeping to your AA in 2008. While I feel confident I would not sell in a future panic, I am not sure if I could buy. I might worry that it is a replay of 1929 and hence keep the bonds. Only allocating out of stocks during bull markets.

As I have a few months more before I start retirement, the AA and whether to buy stocks in a panic weighs heavily on my mind.

Again, I want to thank everyone for their opinions and thoughts, they are very helpful, especially those that have been in this retirement game for a while.

My approach is somewhat different, or lot different. For a long time, my MRDs and my ss would cover my basic expenses, though they would fall a bit sort of what I usually spend.

Additionally, I have Roth assets (and income which compounds in the Roth, and a lot of dividend paying assets in my taxable account. Only some sort of true financial or political or wartime devastation could make me have to sell assets.

Ha

 

[Options]

We have 0% bonds to cover expenses. That is covered by our MM accounts in which both me/wife hold 3-4 years worth of expenses - including taxes due upon withdrawl.

Our bond holdings are to cover the drop in the equity side if/when it happens (and it has, since I've been retired since early 2007).

While some folks on this forum use short term bonds to cover their expenses (and that's fine - for them), we do not. That's what our "cash bucket" is used for, restocked by sell-off of gains in equities and bonds, as they occur. We have sold neither equities nor bonds to meet our day to day expense needs.

Just another way of looking at it.

+1 My plan as well, beginning next year when I FIRE.

 

[Live And Learn]

I am definitely planning on keeping my equity / bond / cash portfolio constant at least for the first 25 years of retirement to age 75. Goal is 50/40/10. Cash and "near cash" (bonds and CDs with a duration of 5 years or less) are currently enough to cover 7 years of expense, but that's because I've not yet finished rebalancing. Once done cash / near cash will cover 5 years of expenses.

 

[Midpack]

Like others, X years in bonds & cash is not a basis for setting my AA. I keep 1-2 years in cash (not bonds), but my equity:bond allocations are based on other factors.

 

[pb4uski]

The 5, 10, or 20 years worth of bonds are part of your AA. I think you confuse things if you compartmentalize them.



At a 4% WR, 10 years worth would be ~ 40% AA in bonds, so a 60/40 AA. When I look at historic success rates versus AA, I would not call anything between 40/60 and 100/0 'silly', and I think anything between 50/50 and 90/10 is pretty reasonable.

-ERD50

+1

 

[ziggy29]

Percentage or number of years? A percentage is a more traditional AA approach; a "number of years" is more like the Ray Lucia "buckets" strategy.

 

[audreyh1]

Oops, I answered wrong. In my spreadsheet I have a cell that tell me how many years of expenses I have in bonds and cash. This is different than the number of years of withdrawals in bonds and cash which is fixed by my AA. I use number of years of expenses as a check on rebalancing in down stock markets.

 

[photoguy]

I've been thinking about this exact strategy for some time now. Right now my AA is about 73% equities and 27% FI. This works out to about 10 years of bonds which I think should be enough to weather most bear markets.

It's always bothered me somewhat that most literature thinks about portfolio risk in terms of percentages instead of absolute dollars and doesn't even seem to question this assumption. I spend actual dollars not percentages so why not use dollar loss/portfolio value to set risk tolerance?

Keeping the FI portion fixed in absolute dollars has the effect of increasing equity percentage under most firecalc runs. This is probably similar to the "rising glide path" strategies.

 

[photoguy]

Another way to think about this is that an AA set by percentages doesn't account for reduction in the marginal value of money. E.g., If my portfolio goes from 10M to 7M, I will cry but it won't change my WR or lifestyle. On the other hand if my portfolio goes from 1M to 700k, I'm going to be cutting back.

 

[CaliforniaMan]

Oops, I answered wrong. In my spreadsheet I have a cell that tell me how many years of expenses I have in bonds and cash. This is different than the number of years of withdrawals in bonds and cash which is fixed by my AA. I use number of years of expenses as a check on rebalancing in down stock markets.

As I mentioned I am a few months away from starting my withdrawals, but as you I also have a spreadsheet with my assets, re-balance, and withdrawal calculations.

While currently not included in the re-balance or withdrawal calculations, I have a cell which indicates, the number of years of withdrawals in bonds, which I think would be somewhat similar to expenses. I think of it also as a check on re-balancing in down markets.

I am curious about how you use the number of years of expenses in bonds to adjust your AA in down years or do you just use it as a check? I have noticed in other threads that some people here don't re-balance into stocks in fear of a possible replay of 1929, but don't know how common that is.

I've been thinking about this exact strategy for some time now. Right now my AA is about 73% equities and 27% FI. This works out to about 10 years of bonds which I think should be enough to weather most bear markets.

It's always bothered me somewhat that most literature thinks about portfolio risk in terms of percentages instead of absolute dollars and doesn't even seem to question this assumption. I spend actual dollars not percentages so why not use dollar loss/portfolio value to set risk tolerance?

Keeping the FI portion fixed in absolute dollars has the effect of increasing equity percentage under most firecalc runs. This is probably similar to the "rising glide path" strategies.

Assuming a rising market, keeping a certain number of years in bonds I guess would result in a rising allocation to equities, maybe allowing a lower initial allocation, didn't think of it as a "rising glide path" approach, but I guess that is what would result.

Another way to think about this is that an AA set by percentages doesn't account for reduction in the marginal value of money. E.g., If my portfolio goes from 10M to 7M, I will cry but it won't change my WR or lifestyle. On the other hand if my portfolio goes from 1M to 700k, I'm going to be cutting back.

My worries exactly, but you said it much better than I did. Thanks.

 

[audreyh1]

While currently not included in the re-balance or withdrawal calculations, I have a cell which indicates, the number of years of withdrawals in bonds, which I think would be somewhat similar to expenses. I think of it also as a check on re-balancing in down markets.

I am curious about how you use the number of years of expenses in bonds to adjust your AA in down years or do you just use it as a check? I have noticed in other threads that some people here don't re-balance into stocks in fear of a possible replay of 1929, but don't know how common that is.

No, expenses are different from withdrawals. They are quite a bit lower, as my absolute $ withdrawals increase with the rising portfolio since I use a fixed % of the portfolio each year, but so far my expenses have not. Also, the expenses I use for this computation are after taxes, because if I were only spending down cash and bonds, and equities had taken a huge hit, taxes would be close to 0.

I used this cell in 2008 which limited the amount I rebalanced by selling cash and bonds to buy stocks so that I would still have X years expenses remaining in cash and bonds after rebalancing. It reduced my equity allocation just a couple of percent at the time. If the market had not recovered, I would have then just have been spending down cash and bonds until equity had recovered enough to start rebalancing the other way.

 

[jollystomper]

My current retirement planning has me keeping enough withdrawals in cash between my target retirement and taking SS (currently 8 years). It fits within my desired AA and will not force me to sell equities during a down market. When SS kicks it will cover much of my required withdrawals so I can lessen the cash a bit (or, based on how I am doing, spend more ).

 

[SteveL]

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.

These funds are a part of your AA, and not connected to the bond/equity split.

 

[FLD3C]

A 90/0/10 portfolio. Expenses are covered by dividends + cash for 5-10 years then Dividends + Social Security

 

[jebmke]

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.

These funds are a part of your AA, and not connected to the bond/equity split.

According to the VG website the 2008 return for Total Bond Market was ~5% (positive). 2009 was over 6%.

I retired in December, 2007 and kept all my fixed invested in short-intermediate duration bonds (no cash) until October, 2008 when long TIPS became a screaming buy.

 

[CaliforniaMan]

According to the VG website the 2008 return for Total Bond Market was ~5% (positive). 2009 was over 6%.

I retired in December, 2007 and kept all my fixed invested in short-intermediate duration bonds (no cash) until October, 2008 when long TIPS became a screaming buy.

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.

 

[CaliforniaMan]

No, expenses are different from withdrawals. They are quite a bit lower, as my absolute $ withdrawals increase with the rising portfolio since I use a fixed % of the portfolio each year, but so far my expenses have not. Also, the expenses I use for this computation are after taxes, because if I were only spending down cash and bonds, and equities had taken a huge hit, taxes would be close to 0.

I used this cell in 2008 which limited the amount I rebalanced by selling cash and bonds to buy stocks so that I would still have X years expenses remaining in cash and bonds after rebalancing. It reduced my equity allocation just a couple of percent at the time. If the market had not recovered, I would have then just have been spending down cash and bonds until equity had recovered enough to start rebalancing the other way.

Thanks for your comment audreyh1. This is kind of the strategy I was thinking about employing should/when we have another serious market decline. Limiting the re-balance into stocks to keep a minimum time in bonds & cash for the market to recover. All of us newbies have plans, but I find it really helpful hearing from people like you who have actually been there and done it.