Am I thinking about bonds the right way?

[Yipper]

My bond journey has likely been a common one I am guessing but want to get some feedback on how I'm viewing them now and going forward.

At the start of my professional career and thus savings journey, I put everything into 401K mutual fund options and pretty much in various growth funds. I essentially just "set it and forget it" back then bumping up my savings % as quickly as I could until I was at the max limits and things stayed that way for tax deferred savings for a long time.

In my 40's I started thinking more about retirement getting closer (working in the tech field will do that as many know) and I started learning more and more about investing and the importance of fees, lazy portfolios, etc. etc. and have learned so much over the years thanks to this forum and other sources.

The one thing I haven't been as good about is fully understanding bonds and bond funds until the last year. 2022 taught me how this was a mistake and now thanks mostly to the fine people who post here, I feel that I really understand the differences between individual bonds, bond funds and related fixed income options.

So here's my thinking... I'm about to retire in the next two months and I'll need to guard against SORR as I'll have a little over 10 years before I plan to file for SS at 70. Given the current rate environment I've implemented a ladder approach using a combination of brokered CDs and target maturity bond ETFs (iShares iBonds) as well. The plan is to leverage these both to fund as much of the bridge years as possible leaving most of the equity investments alone in case of a downturn in the early years. BTW - I understand the tradeoffs with the target maturity ETFs but felt the diversification and inexperience with individual bonds made these a good choice (for me, for now).

Apologies for the super long post but I am just looking for opinions on what I've chosen for guarding against SORR.

 

[OldShooter]

Personally, I think high inflation is at least as much risk as SORR. Recent history tends to confirm this IMO.

Nassim Taleb says "Don't tell me what you think, show me your portfolio."

In 2006/2007 we bought high six figures in TIPS, the 2s of 2026. We view the yield difference between TIPS and ordinary govvies just like we view the fire insurance premium on our house. We don't want the house to burn and we don't want inflation to go nuts again, but we are at least somewhat prepared. We don't hold any bond funds and would never consider it. Nor do we hold any individual govvies or corporate bonds. YMMV

 

[COcheesehead]

Google Kitces Bond Tent or rising equity glide path strategy.

 

[Yipper]

Google Kitces Bond Tent or rising equity glide path strategy.

Thanks for this recommendation. Seems there are different views on the Glide Path approach using static vs. rising equity paths. Based on what I'm reading it seems the overall outcome is only slightly better (like ~1.5%) but the danger of SORR is better with the rising path due to percent in bonds.

Am I understanding this correctly?

For the Bond Tent by Kitces it seems very similar in that say ramping down equities to around a 30/70 allocation in the decade leading to retirement and then in the first decade of retirement returning back to around a 60/40 has a better chance of sustaining through early downturns.

Thanks for sharing these. I have some thinking to do given current CAPE... hmm. Wondering if it's time to take some profits from equities and move the allocation to higher % in bonds and move steadily to say my current 55/40/5 allocation over the next 10 years based on these approaches.

 

[COcheesehead]

Thanks for this recommendation. Seems there are different views on the Glide Path approach using static vs. rising equity paths. Based on what I'm reading it seems the overall outcome is only slightly better (like ~1.5%) but the danger of SORR is better with the rising path due to percent in bonds.

Am I understanding this correctly?

For the Bond Tent by Kitces it seems very similar in that say ramping down equities to around a 30/70 allocation in the decade leading to retirement and then in the first decade of retirement returning back to around a 60/40 has a better chance of sustaining through early downturns.

Thanks for sharing these. I have some thinking to do given current CAPE... hmm. Wondering if it's time to take some profits from equities and move the allocation to higher % in bonds and move steadily to say my current 55/40/5 allocation over the next 10 years based on these approaches.

I used Kitces Bond Tent strategy and retired into two bear markets almost immediately 2020 and 2022. I can tell as of right now I am sitting on about $60,000 more than the day I retired. Not a lot, but I also took out $370,000 over that same time period. So the bond tent saved my portfolio. In January, I slowly started to redeploy some funds back into equities, but I am still at about 30/70.
I went bond heavy in the five years prior to retirement from almost 100% equities. If you have enough, protecting it, getting income from it and then growing it should be the priorities, in that order. IMHO.
FYI, you are the same age as me and I did a bond ladder to bridge to SS at 70 as well.

 

[ut2sua]

I like the idea of having around 10x of yearly expenses in CDs and Treasuries. If the stock market crashes hard, the portfolio will have ~10 years to recover without having to sell stock. This is a pretty good way of avoiding SORR. If the stock market keeps gaining, the remaining part of the portfolio (15x->20x) should provide good gain. This is assuming a 25x->30x portfolio to start retirement. If the stock market starts a 30 year bear run (Japanese market) then at least one has 10 years to prepare for the worst.

 

[Yipper]

I used Kitces Bond Tent strategy and retired into two bear markets almost immediately 2020 and 2022. I can tell as of right now I am sitting on about $60,000 more than the day I retired. Not a lot, but I also took out $370,000 over that same time period. So the bond tent saved my portfolio. In January, I slowly started to redeploy some funds back into equities, but I am still at about 30/70.
I went bond heavy in the five years prior to retirement from almost 100% equities. If you have enough, protecting it, getting income from it and then growing it should be the priorities, in that order. IMHO.
FYI, you are the same age as me and I did a bond ladder to bridge to SS at 70 as well.

Thanks COcheesehead - it helps to hear your real world experience. I have a lot less than you but correspondingly have a smaller spend as a result.

Came to the conclusion earlier this year that a couple more OMYs might make the numbers better but that’s just a couple fewer “good” years I have left. I have enough to be secure and happy but not a huge amount of buffer before it impacts lifestyle… so that’s why I want to get the SORR defensive plan as solid as possible.

 

[Echard]

What’s the trade-off for ishares iBonds? Shouldn’t they be pretty close in performance to a bond of the same maturity, except perhaps the last year of interest?

 

[ImThinkin2019]

We have an income bucket and an equity (growth) bucket. We live on the income from the income bucket and don't take money from the growth bucket.

We decided on this strategy many years ago, mostly during the sideways market of the early 2000's. We did not want the stress of depending on the stock market for our living expenses - so we decided to build an income bucket to use instead. We fund this income bucket just enough to provide living expenses plus grow with inflation.

The income bucket contains individual bonds and private placement instruments. Recently we've added some covered call ETF's as well, since there are fewer private placement opportunities than we want.

We do not buy bond funds because of the interest rate risk on the principal. We might consider them when we think interest rates will fall, as trading opportunities.

 

[Yipper]

What’s the trade-off for ishares iBonds? Shouldn’t they be pretty close in performance to a bond of the same maturity, except perhaps the last year of interest?

So that's my understanding. The trade-off is that you get diversified bond portfolio but an expense ratio (~0.10) and the ease of buying/selling of an ETF.

Am I understanding that correctly?

I have noticed that the Treasury series of iBonds ETFs have yields in the 4% range while investment grade corporate series have yields in the 5% range.