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Using Savings Bonds as Gap Filler
Old 06-13-2004, 09:34 PM   #1
 
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Using Savings Bonds as Gap Filler

Has anyone else tried this strategy? When I retire, I plan to live on my savings until my Government pension kicks in (about 5 years after I retire). My strategy is to use U.S. savings bonds exclusively to fund this 5 year gap and let my other assets (principally a 401k and stocks) grow. I figure I should be able to cash in enough savings bonds to fund the first five years of my retirement without triggering any taxable income, i.e., the interest due on the bonds (when cashed) will not exceed the threshold where I would owe any federal income tax. Basically, I figure I will be able to turn my savings bonds into a tax-free investment this way. I'm curious whether others have tried this and, if so, whether they have any advice concerning this strategy.
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Re:  Works for us.
Old 06-13-2004, 11:12 PM   #2
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Re:  Works for us.

We've been keeping the retirement portfolio 100% in stocks with a five-year pad of annual expenses. (OK, technically that brings the numbers down to more like 92%, but this will rise as our expenses are dropping.) The five-year cash pad is in laddered five-year CDs.

Bernstein recommends bonds to reduce volatility while improving returns, but I've never seen an analysis of holding expenses in cash and the remainder in stocks. I figure if the cash stash prevents selling stocks when the market is down-- somewhere during a five-year period-- then I don't care about volatility.

FWIW, it seems to have worked for the first two years!
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Re: Using Savings Bonds as Gap Filler
Old 06-14-2004, 05:34 AM   #3
 
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Re: Using Savings Bonds as Gap Filler

100% in stocks? Very interesting. I would never do that
myself, except if I was quite young with decades until
retirement. On second thought, I wouldn't even do it then.

John Galt
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Re: Using Savings Bonds as Gap Filler
Old 06-14-2004, 01:26 PM   #4
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Re: Using Savings Bonds as Gap Filler

Otto,

I'ts always good to let tax sheltered assets grow as
long as you can. Some of your older savings bonds
are probably paying good rates so cash them last.

Cheers,

Charlie
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Yep, could be misleading, but less confusing.
Old 06-14-2004, 02:04 PM   #5
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Yep, could be misleading, but less confusing.

That's almost as controversial as the active-passive management debate. I agree that asset allocation could consider the contribution of a pension, but unless it's a govt pension the debate seems to heat up from there. It's hard (and perhaps even more misleading) to declare a pension to be the equivalent of corporates or junk. Or preferreds if it has a COLA? Or should we stick to ERISA-guaranteed annuitized values?!

But you're right, adding in the pension (as a non-stock asset) knocks the retirement portfolio's stock contribution down to less than 50%. Adding in the projected #2 pension & SS (17-19 years away!) knocks it down to your 8% neighborhood. I tell my kid that a military pension seems like fair compensation for all those decades of risking having your assets shot off-- as long as you're one of the unharmed survivors.

I'd be even more hesitant to count home equity as a "value" until it's been realized through a HELOC or a sale or a reverse mortgage. And I'd only value rental property for its cash flow, not its equity.

But if I did throw annuitized pensions & home equity into the mix, and came out with less than an 80/20 stock/bond allocation, what then? Leveraged mutual funds? Options or futures contracts? Perhaps keeping the retirement portfolio ("liquid" or not, the brokerage account part of it, anyway) in 92% stocks doesn't seem so extreme after all. And I'm glad I don't invest in bonds or REITs.

It seems easier to reduce the allocation discussion to unfunded expenses. We all have varying degrees of income (pensions, rentals, employment, gifts) and expenses. We're all able to quantify those numbers to varying degrees. We're all able to say "This is my cash flow" and then assign a number to the unfunded part of the concept. How much of a portfolio (and its allocation) is necessary to cough up that number is a fairly well-documented process.

I'm typing without Bernstein next to me, but I think most asset-allocation recommendations are based on meeting the unfunded expenses and not with regard to the quality of pensions & real estate.

With today's impending rate increases, Bernstein's advice seems to be of the "bonds don't suck too badly" ilk, and I'm earning at least that much with laddered five-year CDs. I can find plenty of low-suck investments, but I want to choose profitable ones.

Like you, the main drag on our retirement budget is our kid. (Presumably there are other benefits to parenthood and I'm sure I'll think of one soon.) Maybe we should just keep cash on hand until we're empty nesters!

Ours is also looking for a nice new car to celebrate that day-- I smile gently, pat the dashboard of our '94 Taurus wagon (only 87K miles!) and say "Someday, kid, this will be all yours..."
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Re: Using Savings Bonds as Gap Filler
Old 06-14-2004, 03:40 PM   #6
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Re: Using Savings Bonds as Gap Filler

I know that some advisors tend to capitalize
income streams from SS, pensions, annuities, etc
and treat them as bond equivalents in determining
your asset allocation mix.

Personally, I find that a bit silly. IMHO, you should
just consider the stock/bond mix you need to meet
your "unfunded" needs. For example, if I only needed
1.5% return to meet my unfunded expenses, I would
feen perfectly happy following Nord's strategy even at
my tender age of 70.

The rubber hits the road, so to speak, when your
stash has to last 30+ years and you need 4% or
better. That's what "investment strategy" is all
about.

Cheers,

Charlie
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GDER, the advantage to your system...
Old 06-14-2004, 06:50 PM   #7
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GDER, the advantage to your system...

... is that you can keep those SBs as long as you don't have to cash them in during a horrible bear market.

We consume a five-year CD every year and only replenish it if the stocks have grown/returned at least that much. We put in trailing sell stops and wait for the "dip". If it's a down year we grit our teeth, cash in another CD, and see how it goes...
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