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What SWR for 100% bond portfolio
Old 06-29-2010, 09:31 PM   #1
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What SWR for 100% bond portfolio

I posted about thinking of going 100% bonds awhile back and was told this was not generally a wise idea. Surely at some SWR, a 100% bond portfolio becomes plausible. My question is what is that SWR? 1%, 2%?

My dilemma is that I am able to save alot of $ each year relative to living expenses. Basically each year of work allows me to save 3-5 years of bare bones living expenses so I am able to accumulate quickly. I am unsure as to whether to go with a higher SWR in retirement with more equity exposure or with an ultra low SWR with zero equity exposure. Obviously the latter would require more time at work which I'd like to avoid but I would sleep alot better with that alternative.
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Old 06-29-2010, 09:49 PM   #2
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For a 30-year retirement, FIREcalc gives you a 100% success rate with a 2.4% SWR for a portfolio of 5-year treasury bonds (contant spending power model), and a 2.5% SWR for a portfolio of 30-year treasury bonds.

For a 40-year and 50-year retirement, it looks like the SWR would have to go down to 1.8% and 1.5% respectively.

Those numbers are probably on the high side given the fact that treasury yields are near their historical lows right now. You might want to look at TIPS (not modeled in FIREcalc because they were introduced only recently). There is a 10-year TIPS auction coming up, we'll see what they yield (1-1.5% real?). The 30-year TIPS were yielding over 2% real at the last auction, IIRC.
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Old 06-29-2010, 10:16 PM   #3
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....Nevermind, I posted an idea then tried it on a spreadsheet and it didn't work as advertised...sorry.

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Old 06-29-2010, 11:00 PM   #4
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I'd consider an immediate annuity for income and equities for COLA and to leave an estate, if desired. Seems safer (longevity wise) than creating your own annuity.
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Old 06-29-2010, 11:01 PM   #5
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Quote:
Originally Posted by accountingsucks View Post
I posted about thinking of going 100% bonds awhile back and was told this was not generally a wise idea. Surely at some SWR, a 100% bond portfolio becomes plausible. My question is what is that SWR? 1%, 2%?

My dilemma is that I am able to save alot of $ each year relative to living expenses. Basically each year of work allows me to save 3-5 years of bare bones living expenses so I am able to accumulate quickly. I am unsure as to whether to go with a higher SWR in retirement with more equity exposure or with an ultra low SWR with zero equity exposure. Obviously the latter would require more time at work which I'd like to avoid but I would sleep alot better with that alternative.
Someone linked to a study a few months ago... it showed that a portfolio of 25% equities, 50% equities, 75% equities and one other allocation all had same success rates for 40+ year periods with a 3.1% SWR.

To me this means once you intend to need a 40-50 year withdraw window, set portfolio to 25% equity and 75% bonds/cash, then use the 3.1% SWR.

So not a direct answer to your question, just save 33X annual expenses and choose the allocation which best suits you.
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Old 06-30-2010, 12:04 AM   #6
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I would be worried about a 100% bond portfolio for several reasons, not the least of which would be diversification concerns. I would also be concerned about interest rate exposure. The problem of keeping up with inflation in the long run would keep me up at nights.

I don't know what SWR to use but it had better be very low.

Instead, I would think it might be preferable to go with your "Plan B" - - a higher SWR in retirement with more equity exposure, even if it is just 25% equities. I like jIMOH's advice above.
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Old 06-30-2010, 10:05 AM   #7
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We are using TIPS. I figure we (especially my wife) sleep better at night. If you're very young, just spend the coupons and figure the maturity value adjusts for CPI. (Yes, I know that means taking a CPI vs. real inflation risk. It seems small to me.)
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Old 06-30-2010, 11:20 AM   #8
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Before the current debacle my assumption was that for a total bond market index you could expect a 1% to 2% real return on average every year. Theoretically intermediate investment grade corporates should return slightly more, say 2% on average, for slightly more risk. I think historically BBB or higher corporates have had a default rate of like .10%.

I have never been a huge fan of treasuries because you have mercantilists buying them not as an investment, but as a way to help their exports. I think this distorts the market and drives the yields down. So, I prefer corporate bonds.

Not too long ago it was possible to buy individual TIPs with 2% real yields. Not too many years before that it was possible to buy I-Bonds with real yields of 3% or so. There may come a time again where good deals can be found on these. I think it is something you have to be ready to jump on, because it doesn't last long.

Pretty recently I shifted my roth ira into a junk bond fund. Theoretically I will get around a 3% real return off of them for the average duration of the fund when I put my principal in. As time goes on the yields will fluctuate, from new bonds purchased in the fund, and my real return will change. I don't consider it something I will buy and hold forever. I will have to re-evaluate every year and at some point sell it for something else, like intermediate investment grade corporates.

I think an all bond strategy in the 401k and roth ira is an ok strategy. That is where I am at for now. In taxable I am 100% individual stocks for now, other than my emergency cash. About 60% of my money is in stocks now.
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Old 06-30-2010, 11:27 AM   #9
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Given some TIPS with a 2% real rate over (CPI) inflation. Over 30 years you could withdraw exactly 4.46% real per year before the portfolio is depleted.

An investor can guarantee a real dollar every year for thirty years by purchasing a series
of zero-coupon, risk-free bonds. The cost of this investment is the sum of the discounted
prices8 $1/(1.02) + $1/(1.02)2 + … + $1/(1.02)30, which amounts to a little less than
$22.40. Alternatively, if a retiree invests in a risk-free bond portfolio, he can safely
withdraw at a yearly rate that is a bit more than $1.00 / $22.40 » 4.46%. This withdrawal
rate—the guaranteed rate—is the maximum withdrawal rate that can be guaranteed to
never fail. This risk-free strategy is analogous to Eric’s strategy and is a special case of
the 4% rule—the limit of zero investment volatility. This version of the 4% rule never has
a surplus, never has a shortfall, and is the cheapest way to receive a constant, guaranteed
payout every year. If a cheaper investment were to exist, then there would be an arbitrage
opportunity.

<from the 4percent.pdf document>

original article at
http://www.stanford.edu/~wfsharpe/retecon/4percent.pdf
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Old 06-30-2010, 02:54 PM   #10
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Quote:
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We are using TIPS. I figure we (especially my wife) sleep better at night. If you're very young, just spend the coupons and figure the maturity value adjusts for CPI. (Yes, I know that means taking a CPI vs. real inflation risk. It seems small to me.)
Yeah, the problem with TIPS is they don't kick off a lot of cash. If you can live on the coupon good for you but its likely to be 1 or 2 %. A ladder would help but then you have to buy at the market and hope you average 2% real.
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