2 Years From FIRE Add Bonds?

[AlabaMalaysia]

Looking to FIRE in 2 years at the age of 39 for me and 36 for my wife. Targeting a 3.25%-3.5% SWR for the first decade with $1.4M in financial investments/assets, two homes, and no debts.

Currently we have $1.2M invested in a 100% stock index portfolio spread across ROTH IRAs, traditional 401ks, traditional IRAs, and taxable accounts. Around $60k is in the taxable accounts with the rest in the tax sheltered accounts.

My question is about accumulating some bonds over the next two years if this is a good idea in the current rate environment and how much people would think is appropriate. I was thinking around 10% or so into bonds ~$150k.

My thinking was if the interest payments from that plus the quarterly dividend payments = close to our expense needs then if a bad market year and downturn occurs this would provide enough cash flow to not have to sell much stock shares when the markets are down. I'm thinking my remaining taxable account contributions in the next 2 years to buy municipal bonds and then round out within my tax sheltered accounts bond funds to total the $150k these next two years.

 

[GravitySucks]

I went to 90/10 when I retired. Fido advisor convinced me to move to 80/20 the second year or so. Worked out well then, but the first market market drop I didn't sleep well so waited till it recovered and move to 70/30. Next drop I still didn't sleep well so waited and moved to 60/40. Next drop I didn't even notice. It's been moving back up to around 65/45 and I'm sleeping well through this recent bouncing.
By now though I have bonds enough to get me a few years passed 70 SS so counting SS as fixed I'm probably 'safe' for another 15 years.

You might want to look at the recent thread on surviving the black Monday and the Bernstein suggestions of keeping 10+ years of fixed income to ride out the long term downs that seem to come in every generations retirement.

Edit to add link:

https://www.early-retirement.org/forums/showthread.php?t=112572

 

[AlabaMalaysia]

Thank you for the reply and the link. Nice to hear someone who has tried the 90/10 and what they eventually settled on. Since I am planning a 50-60 year retirement the higher stock allocation is a very heavy concern of mine even with a planned SWR of 3.25% fromt he psychological side as you are displaying more so than the mathematical which is pretty clear from the research I have read.

The math of having more bonds seems to work better in high CAPE scenarios initially in retirement like the situation we are in currently, but there seems to be a good case to be made for a glide path approach where you have more bonds in the first decade of retirement for a very young retiree and increase the stock allocation over time. Sources I have been using recently when thinking about what AA I should have either 90/10, 80/20 or 70/30 =

pdf = https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2920322

https://earlyretirementnow.com/2017...e-withdrawal-rates-part-19-equity-glidepaths/

 

[Koolau]

As the worst investor on the forum, I'd only suggest that these are "interesting times" to be preparing for imminent retirement - especially at such young ages. Interest rate increases will likely hurt bonds/funds. Stock prices are still high. Inflation is raging. What could go wrong?

Something to consider: Small amount of precious metals (a hand full of K-rands or maple leafs in your hidey-hole or safe deposit box. Maybe also some junk US silver coins.) No more than 5% of stash and more like 3%. Read up on the traditional "stabilizing" effect of PMs on a portfolio.

Personally I prefer bond funds to bonds, but if you know what you're doing, you can set your own average maturity with several bonds. Also, consider I-bonds - lots of threads here on this subject. I love my old ones - considering more this year due to high inflation.

You should probably not pay any attention to what I have mentioned as YMMV.

 

[punkinhead]

I was 100% in equities up until last Spring when I woke up one day and realized I could afford to retire. Suddenly the specter of sequence of returns risk became very real for me, especially in a market that has been on a bull run for this long. I quickly moved to a 60%/31%/9% stock/bond/cash allocation. I didn't regret the diversification into bonds but I was second guessing myself on the cash allocation. But watching the market drop this month I'm very happy having 3 years of expenses in cash this early in retirement. As time goes on and the sequence of returns risk fades I'll move that cash back into the market and eventually have only a few months of expenses in cash, but being an early retiree who won't see any SS or pension income for another decade it's very comforting having that level of cash right now.

 

[FLSUnFIRE]

I'm a long time-horizon FIREe and need to keep up/beat inflation. Bonds have no appeal to me in this market. Backtesting with and without bonds using FIRECalc etc really makes no difference to survivability but does in expected value (and thus less risk in the future... say 20-30 years out when I am in my 60-70 and hopefully still kicking and having fun with another 20-30 to go!).


If (WHEN!) rates go up, bonds prices will go down.. not bad if you hold individual bonds to maturity but if not you are subject to interest rate risk. If in a bond fund, you don't have that luxury and as bond fund returns get hammered, people will leave those funds causing the manager to have to sell more when bond prices are down. Holding to maturity at current yields with the current inflation isn't great either.



I'm close to all equities and will be more so after this year and project my cash flow assuming a 30% drop and relatively anemic growth (and relatively low inflation but the ratio is what really matters) thereafter and know how I'll fund my life. Another hedge against going bust is I own my home free and clear so my cash flow needs are reduced and at current rents, I could move to a lower COL area and could probably live off of free cash flow alone. If you have two houses free and clear, they can act as ballast to a higher equity position (especially if one is spitting out cash flow -or could if TSHTF).



And, as always, plans are worthless but planning is priceless....

 

[Montecfo]

Would prefer cash to bonds in this rising rate environment.

Or if bonds then super short duration or bank loan funds.

 

[Exchme]

I would be nervous about retiring in my 30's with 3+% WR as there haven't been enough independent 50-60 year periods in history to have statistical significance, even if you fully buy in that past performance predicts future results.

However, the trend (at least in the past) was that for long retirements, bonds were not the place to be. My understanding is that the survivability of a portfolio for the very long term increased as the % stock increased.

For the more typical 30 year retirement, the survivability of the portfolio went down at very high stock percentages at some withdrawal rates, but as the retirement horizon lengthens, the need for growth from stocks increases.

 

[AlabaMalaysia]

Thank you for the replies.

Exchme there has been work done looking into the math of 60 year retirements under multiple CAPE scenarios with various asset allocations here = https://papers.ssrn.com/sol3/papers....act_id=2920322

In summary seems like if you are under 3.5% SWR math seems solid even with high CAPE at the start with a glide path AA.

Montecfo thank you for the suggestions to think about to replace accumulating bonds I will look into those like the bank loan funds thank you. It is a real predicament since accumulating stock index funds has always been easy auto pilot versus thinking about reducing risk in a rising rate environment.

FLSUnFIRE yes I will in 2 years have two houses free and clear one in USA and one in Malaysia. I didn't think of it in terms of a ballast against maintaining a high stock ratio, but this does seem helpful mentally. So how you have positioned if I read correctly is your stock dividends provide enough cash flow if there is a 30% drop to fund your expenses without the need to sell any of you stock shares?

My thought was if take 1%0 of roughly 1.5M to put into bonds plus the remaining in stocks those dividends plus interest could be enough to fund expenses in bear years until back over par. Even if the total return of the bond funds is crappy is buying 10% insurance worth the sacrifice of total return for someone my age in the current environment is the question. Seems many think not but hard to see when I look at the research that 100% stock at this current CAPE is the answer.

 

[viking111]

Off topic question. Do you live in Malaysia?

 

[AlabaMalaysia]

Viking currently me and my wife work/live in the USA but when FIRE in hopefully two years we will bounce back and forth to visit our families as we wish. My wife is from Malaysia we bought the house a year before we married and had renters pay off the house for us in 7 years plus paid down when currency spread was good. Now that place is paid off and rented out while we are still working.

We do have some cash in Malaysia fixed deposits yielding 5% interest over there but I don't include that money in our SWR calculations just to be conservative. My wife has some bonds via the EPF fund there and I have a bank account in Singapore for some offshore money hidey place that I opened in 2010 that has a small amount of fixed deposit cash sitting.

 

[beanctr88]

I may have missed it but with so little in pre-tax savings and at your age, what is the strategy to be able to pull your full SWR without penalties?

I’d be more worried about that than your equity vs bond mix.

 

[statsman]

Speaking as someone who has been heavily into bond funds since the fall of 2007 and did quite well until COVID-19, "NO". I'm watching our investments crater this month, and pretty much most of the past two years. I'm still sleeping at night, but I am not happy about this. Doesn't matter if the stock markets go up, go down, go sideways, the bond funds are getting killed. And we're not even into long-term bond funds. It's all being manipulated, and fixed income options are not safe havens.

 

[AlabaMalaysia]

beanctr88 we will have around $390K in ROTH contributions, $150k in taxable, and $860,000 in our traditional IRAs after rollovers. Idea was to live off the ROTH contributions while converting the pre-tax savings to ROTH staying in a very low tax bracket while converting all the amount over xx years. We paid low tax while we have been in working years fully utilizing the traditional 401k max contribution deductions and when converting manipulate our income to low tax by living off tax free ROTH contributions during the conversions. Basically detailed here = https://www.madfientist.com/how-to-access-retirement-funds-early/

If we only take 32-38k per year that 390K of ROTH contributions is already 10 years of expenses while the conversions starting laddering in.

 

[viking111]

Speaking as someone who has been heavily into bond funds since the fall of 2007 and did quite well until COVID-19, "NO". I'm watching our investments crater this month, and pretty much most of the past two years. I'm still sleeping at night, but I am not happy about this. Doesn't matter if the stock markets go up, go down, go sideways, the bond funds are getting killed. And we're not even into long-term bond funds. It's all being manipulated, and fixed income options are not safe havens.

So are you going to sell all the bonds and wait till the interest rate increase is over so you can re enter?

 

[young-ish]

Yes, I would absolutely decrease risks of big losses close to retirement. Bonds & cash reduces volatility and ensure that the early part of your retirement is a smooth ride.

No need to take lots of extra risks if your WDR is <4%. A heavy stock portfolio is for those who want to increase future spending or have to take the risk because they didn't save enough. The latter does not apply in your case.

 

[38Chevy454]

I would stay in cash until the market settles down and stabilizes. That also includes waiting for Fed to determine what interest rate increases this year. Rising interest rates hurts bond funds. In general fixed income allocation is tough environment now.
It might be considered market timing, but just save cash for now. Concur that becoming a bit more conservative allocation than your current is good.

 

[Koolau]

I'm a long time-horizon FIREe and need to keep up/beat inflation. Bonds have no appeal to me in this market. Backtesting with and without bonds using FIRECalc etc really makes no difference to survivability but does in expected value (and thus less risk in the future... say 20-30 years out when I am in my 60-70 and hopefully still kicking and having fun with another 20-30 to go!).


If (WHEN!) rates go up, bonds prices will go down.. not bad if you hold individual bonds to maturity but if not you are subject to interest rate risk. If in a bond fund, you don't have that luxury and as bond fund returns get hammered, people will leave those funds causing the manager to have to sell more when bond prices are down. Holding to maturity at current yields with the current inflation isn't great either.



I'm close to all equities and will be more so after this year and project my cash flow assuming a 30% drop and relatively anemic growth (and relatively low inflation but the ratio is what really matters) thereafter and know how I'll fund my life. Another hedge against going bust is I own my home free and clear so my cash flow needs are reduced and at current rents, I could move to a lower COL area and could probably live off of free cash flow alone. If you have two houses free and clear, they can act as ballast to a higher equity position (especially if one is spitting out cash flow -or could if TSHTF).



And, as always, plans are worthless but planning is priceless....

I suspect we could be moving into an era when bonds AND equities will take a hit due to increasing FED rates. If anyone has a strategy to deal with ALL the effects of rising FED rates, I'd be interested in hearing it though YMMV.

 

[ImThinkin2019]

Viking currently me and my wife work/live in the USA but when FIRE in hopefully two years we will bounce back and forth to visit our families as we wish. My wife is from Malaysia we bought the house a year before we married and had renters pay off the house for us in 7 years plus paid down when currency spread was good. Now that place is paid off and rented out while we are still working.

We do have some cash in Malaysia fixed deposits yielding 5% interest over there but I don't include that money in our SWR calculations just to be conservative. My wife has some bonds via the EPF fund there and I have a bank account in Singapore for some offshore money hidey place that I opened in 2010 that has a small amount of fixed deposit cash sitting.

Hi Alaba you brought back nice memories for me. I had a customer in Panang and enjoyed visiting there very much. I liked the assortment of cultures and mutual respect.

I also had an interesting experience sitting in the KL airport and watching the various cultures represented. Malaysian women in head covers, long sleeves, long dresses. Chinese women in micro short shorts. Indians in traditional dress. A unique place in the world!

Re your question about bonds, we have two portfolios - a stock market one and a fixed income one. We manage our income by treating the stock market money as "not dependable", and the fixed income money as "we will live on part of the income from this". We take that part of the income and reinvest the rest to keep the portfolio healthy.

Our fixed income stream comes from pensions, Social Security, individual instruments like private placement debt, bonds, and recently ibonds and JEPI. Since you have familiarity with several countries, maybe you will have access to higher interest investments than we do in the US.

We find the above strategy for a blended to portfolio lets us sleep at night.

People on this forum have helped us very much. I'm sure you will find what you are looking for here.

 

[AlabaMalaysia]

young-ish thank you for the reply and opinion of reducing risk on our AA.

38Chevy454 thank you for the suggestion about waiting to buy bonds for now, but that I should own some. I do still have 2 years to go until FIRE, so I could wait awhile and always shift some stock funds or cash as you suggested once rates stabilize and calm down later. Side note my first car when I turned 16 was a 67 Chevy 2 with a nasty 350 in it that me and my father-in-law built ground up. Before I turned 18, I had tubbed it out with a 454 having draining the gas tank within two days, but felt like the badass guy at my high school. My father-in-law and me built it from nothing as a project to learn how to make something of your own which probably played a part in my personality in adulthood.

ImThinkin2019 everything you typed about Malaysia is spot on. My wife is Chinese descent from Penang that's where our M'asia house is at. Penang is quite a unique place to have my other 1/2 of life and family at as a USA Southern raised guy lol. Thank you for the perspective how you look at your bond holdings versus your stock holdings. I am thinking to grab some I bonds as a starting bond position because of the current rate in those specifically and reading others on here. The overseas rate my thought is inflation over there tends to be higher especially with real estate not so much for food and I feel like the higher rate doesn't give much above inflation but my wife always disagrees with me on that one.

 

[AlabaMalaysia]

I have been looking into some different scenarios of what types of bonds and how much income I would want from them once we hit our FIRE number in hopefully 2-3 years. Based on the feedback you guys gave here that seems like I should definitely have some bonds and not stay 100% stock index funds like we have been during the accumulation phase. I would like some feedback =

Looking at some bond CEFs something like PDI for example if I took $200k of the $1.4M-$1.5M nest egg and put there it would generate ~$20k per year at today's distribution rates. Add $50k of something like BND and some muni bonds just for diversification that would yield enough plus the remaining $1.2M of stock index funds dividends to more than pay for our annual estimated SWR/expenses.

So with $250k in bonds for income only purposes, and the remaining $1.2M of stock index holdings for growth to keep up with inflation costs would this be a valid strategy for our age? I realize CEFs using leverage could have some wild swings, but if the purpose of the $250K is only for income even if say that $250k got eroded by 1/2 in 10 years my overall portfolio 10 years later would be much higher anyways due to the 85% stock holdings. Am I missing anything with a scenario like this. Thank you for any replies/opinions.