William,
I'm not disagreeing, but I don't think I'd want to use GNMA's. I agree with F. Armstrong that one would certainly NOT want to withdraw from equities when they're down (reverse DCAing). The longer maturities of nominal bonds, longer than 7-10 years for example, do not really compensate one for the increase inflation and interest rate risk, in my opinion. Not to mention that the longer the maturities and the lower the credit quality, the higher the likelihood of higher correlations to your equities. TIPS (on the other hand) are very good at hedging inflation risks for longer term bonds, and should have much lower correlations with equities than nominal long-term bonds. You cannot buy the longer maturities of TIPS (greater than 10 years I believe) from the Treasury any more, but you can buy the longer maturities from the secondary market.
Here's what I was thinking. It's definitely a good idea to take your cash flow situation (including upcoming purchases) into account. Since you have a relatively large purchase (a car) it should make sense to have more in cash then someone who doesn't have a large purchase coming up. You could do something like:
1) have one years withdrawal in a MM (perhaps something like ING Direct paying 2%) - 4% & 1% for car
2) have years 2-5 withdrawals in a ST bond fund like ST corporate or ST bond index - 16%
3) rest of bonds in high paying I bonds and TIPS - 7% I bonds & 16% TIPS
So, your bond allocation could look something like:
4% - MM
1% - Treasury note for car
16% -ST bonds (either low cost fund or ladder of Treasuries/CD's)
7% - I bonds
16% - TIPS (maybe laddered in 5-10 [or whatever] year maturities)
The incredibly good thing about the I bonds is that if equities do go on a multi year, over 4 years, bear market, and if you run through your MM & ST bonds, you still have the I bonds which can be cashed in whenever, yet still earn those high real returns. And obviously, you'd want to keep the TIPS for last to let them mature. Or, if you have another bond maturing, you can always defer sale of the I bonds for when you have a gap in income.
Jaye Jarrett (
http://jjarrett.home.texas.net/) did a study on optimal fixed income allocations in retirement. I found it interesting:
http://jjarrett.home.texas.net/resFi...omePortion.pdf
If I read it correctly, Intermediate Term Gov't bonds (with maturities of around 5 years) were better than Tbills or longer maturity nominal bonds (of 20 years). Unfortunately, TIPS and HY bonds haven't been around long enough for much studying.
I think the thing about this method is that if equities go into a multi year down period early in one's retirement, one may have to reduce his/her withdrawal rate slightly for a year or two (or three) until the equities take off again. Being diversified the way your equities are should alleviate this somewhat, but not totally. Anytime equities go on massive tears, it would probably be good to rebalance out of them and save the excess returns for the down years (so you won't have to reduce your withdrawal all that much).
- Alec