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Retiring with 10 year Treasury rate at 2.2%
Old 11-04-2015, 09:53 AM   #1
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Retiring with 10 year Treasury rate at 2.2%

Many retirement portfolios emphasize bond funds to avoid stock market volatility and produce income. But the 10 year Treasury bond yield is at 2.2% so in the best case scenario of no rate increase the 4% withdrawal rule looks a bit optimistic. If rates increase bond funds will decline in value further impacting the portfolio.

What, if anything, are people doing to account for these low current rates. Is staying the course with an AA the right approach? Are the classical bond heavy portfolios going to work for today's retirees. Should people be using SWRs of 3% or even lower?
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Old 11-04-2015, 10:10 AM   #2
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How is the above different from the thread you started just a few days ago?

Are bond funds bad for a retirement portfolio?
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Old 11-04-2015, 10:12 AM   #3
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There was a thread just this week "Investing for total return..." (IIRC) that had a chart showing how 100% bonds did not perform as well--and had greater risk-- than a 28%/72% portfolio.

I think the only option is to maintain a certain level of equities. Equity dividends or Bond Interest are the same to me...it's income.

Yes, there's more volatility but for me, I'm more concerned with inflation and look to equities to at least stay on pace with that.
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Old 11-04-2015, 11:05 AM   #4
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Quote:
Originally Posted by marko View Post
There was a thread just this week "Investing for total return..." (IIRC) that had a chart showing how 100% bonds did not perform as well--and had greater risk-- than a 28%/72% portfolio.

I think the only option is to maintain a certain level of equities. Equity dividends or Bond Interest are the same to me...it's income.

Yes, there's more volatility but for me, I'm more concerned with inflation and look to equities to at least stay on pace with that.
I imagine that chart used historical bond yields that are higher than today's rates. So is the conventional wisdom of efficient frontier charts like that over optimistic if people continue with high bond allocations?
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Old 11-04-2015, 11:32 AM   #5
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I dropped out of bonds completely a couple of years ago and put a large sum into CDs that range from 2.25-3%. I just can't see any advantage to bonds in the near term. I keep about 60% equities with emphasis on growth and income. We also keep several years of living expenses in cash at 1.05% to be able to ride out any major market stumbles. With a small non-cola pension and a rental property bringing in $18k after expenses, we hope we're ready for anything short of an apocalypse. I am tired of the rental though, so we may sell next year. I'm also waiting for DW to give up her job...but that's another story.


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Old 11-04-2015, 11:42 AM   #6
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Quote:
Originally Posted by nun View Post
I imagine that chart used historical bond yields that are higher than today's rates. So is the conventional wisdom of efficient frontier charts like that over optimistic if people continue with high bond allocations?
The chart shows returns from 1970 to 2010, so just a year or so of "today's rates"

Here it is:
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Old 11-04-2015, 12:06 PM   #7
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Quote:
Originally Posted by Dash man View Post
I dropped out of bonds completely a couple of years ago and put a large sum into CDs that range from 2.25-3%. I just can't see any advantage to bonds in the near term. I keep about 60% equities with emphasis on growth and income. We also keep several years of living expenses in cash at 1.05% to be able to ride out any major market stumbles.


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+1
Pretty much where we are at also. CD's average out to 3.8% but drop every year as they mature and roll over. It was tough to pull the trigger on 10 yr Penfed CD's in 2011 at 5%, but halfway through the 10 yr term that decision is looking good. Also a 4% Navy Federal CD that permits me to add-on, but that one only has a yr left on it.

We actually would have been better off with a reasonable bond allocation, but only because the much anticipated rate hike never happened...but eventually it WILL happen. I am struggling with how to acquire something with inverse correlation to equities and right now I am considering muni's to initiate a bond allocation.
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Old 11-04-2015, 12:17 PM   #8
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What I am doing is simply lowering my withdrawal rate.

Income has been a big part of total returns historically. So for me, historically low yields for both bonds and stocks mean that, whether I am investing for income or total return, I can expect poor returns in the foreseeable future. It is too early to say whether the current situation will actually break the 4% rule, but I think that we will come close enough to justify some adjustment. People realize that, I think. When I joined the board, nobody seemed to question the validity of the 4% rule, but for several years now we have seen people targeting lower and lower WRs.
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Old 11-04-2015, 12:31 PM   #9
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Quote:
Originally Posted by marko View Post
The chart shows returns from 1970 to 2010, so just a year or so of "today's rates"

Here it is:
The question is what rate of return was used for the bonds......a simple average of the 10 year T-bill would be 5%.....that seems optimistic for the next decade so any pragmatic portfolio or withdrawal plan should take that into account.

Bonds have been doing strange things for a couple of decades and and their rising value and falling yields have made them good things to own in the accumulation phase. But they don't look like good bets to produce inflation beating low risk income for maybe the next decade.
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Old 11-06-2015, 04:17 AM   #10
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using average returns when it comes to interest rates isn't like using them for stocks .

it took us 40 years to get to this point . going back may be just as long .
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Retiring with 10 year Treasury rate at 2.2%
Old 11-06-2015, 06:25 AM   #11
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Retiring with 10 year Treasury rate at 2.2%

You've stated that you are risk adverse- me too. May I suggest that your portfolio of treasuries is risky in the long term. Inflation is an insidious adversary it like water can erode anything over time.

Stop looking at market volatility look at dividend volatility... Go to yahoo finance and put in vz (Verizon) or so (southern company) then click on historical prices then click the little button "dividends only". You'll discover an amazing thing - little or no volatility. Guess what they pay more then 2%! And their prices rise over time. I believe for people who don't need to draw down the principal a pool of diversified utility stocks may be a wiser alternative. As long as the dividends get paid why would I care about portfolio valuations?

Try my little experiment for VPU vanguard utility ETF... Only change the from date to 1995. See any volatility?


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