Bond Tent to Reduce Retirement Risk Window

[Tekward]

This was new to me, but the article makes sense. There is a retirement risk window:

"Which means an ill-timed bear market takes its biggest financial slice when the portfolio’s size is at its peak, potentially leaving the portfolio with too little in dollar terms to sustain the retiree’s current standard of living. After all, a “mere” 20% decline on a portfolio in a bear market evaporates 5 years’ worth of spending at a 4% withdrawal rate."

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

 

[Markola]

Thanks Tekward. It is a very logical approach, isn’t it? Speaking as a 52 year old who would like to FIRE at 55, it definitely applies to me but that doesn’t mean I want to do what he says. What he advocates is a form of timing, isn’t it? The article’s logic also misses some psychological factors that are real in the current climate, factors that also involve the dreaded word “timing”.

For example, is now a great “time” to be stocking up on bonds since interest rates are historically low and clearly rising? Logically, yes, according to Kitces but logically not if one prefers to buy low and sell high rather than the reverse. Are stocks enjoying newly-freshened tail winds, where all of the world’s major economies are suddenly growing in synch, making it a great “time” to have more equity exposure? Or, is the CAPE 10 signaling we are entering the predictable, greedy, Euphoric “time” we often see at the tail end of many bull markets, where someone out there is about to become the “greater fool” by buying overpriced equities while the smart money is getting more conservative by buying bonds and cash right now? Beefing up cash instead of bonds means the certainty of loss from inflation, which is not logical either, but maybe that’s better than buying bonds right now.

I admit to being torn between “fixing the roof while the sun is shining” (getting more conservative like Kitces says) and FOMO (buying stocks due to fear of missing out.) Regardless of inner turmoil due to cognitive dissonance, I have, in fact, gotten more conservative since the fall, going from 80/20 to 70/30, getting more internationally diversified and putting half of our bond allocation in DW’s G Fund as an inflation hedge; and I plan to reach 50/50 - 60/40 at FIRE time in 3 years, so I guess I’m grudgingly doing what Kitces advocates.

What about others? Are you taking any action or are you the stealy-eyed, emotion-free and fearless type with an iron-clad constitution that the books and authors like the impressive Mr. Kitces seem to say we all should be?

 

[Spaceman]

I'm two years into retirement and can't find much of a good case for holding many bonds. Have 5.5M invested. I have only 5% in one bond fund (PIMIX), 10% CD's, and the rest in stock (70% USA / 30% foreign).

I have come to believe that the larger the nest egg, the more stocks you can hold. Stock dividends and SS cover my living expenses. I see bond funds only going down as interest rates rise, and expect any short term bond to be less than 2 or 3 percent which is at the CD rates.

I don't see the attraction to bonds, or a bond tent for me. What am I missing?

 

[RobbieB]

I'm not buying bonds as interest rates rise.

I'm selling stocks and buying a Lincoln Continental -

 

[marko]

Per the Executive Summary:
"Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement".

This is sort of what I did totally by accident (or gut feel?). Knowing that I didn't know what I was doing, I got really conservative in my first few years of RE, weathered the recession and then as my portfolio, confidence in my investing and my NW grew, got more aggressive again upping my equities.

The only thing I take issue with (if I'm reading the article correctly) is the assumption that the portfolio with be at its maximum value at the time of retirement and declining thereafter. That does not seem to be the case with folks here, myself included.

 

[GravitySucks]

I'm not buying bonds as interest rates rise.

I'm selling stocks and buying a Lincoln Continental -

Solves the inflation worries.... Buy everything now!
[emoji1]

 

[RobbieB]

Yeah Baby!

I'm looking forward to buying my first new car. With everything I want, go down the checklist.

My Pops owned 1 Lincoln and he bought it brand new. He won a Michigan scratcher (lottery) for 5 grand for a new USA made car. He was going to get a Buick but one of out neighbors (Ford VP) said forget that I can get you set up in a new Lincoln for a great price. And so it was, a fully loaded Town Car (huge) with the 460 cid Lincoln motor (Son your gonna drive me to drinkin' if you don't stop drivin' that hot rod Lincoln) and the huge leather seats and all the shiny stuff.

I think he wrote a check for 3 grand. His cost 8 grand and mine will be 80. Ten X.

I'm jazzed! Imma gonna do it! Full speed ahead and damn the expense -

 

[USGrant1962]

Based on this concept, rising glidepath, actuarial concepts, and a bit of DMT, I settled on age in stocks from 55 to 65 with +5/-4% rebalance bands. I turned 55 in 2017. But it wasn't very smooth tent, almost all of my bond allocation was bought in the last 1 to 3 years when I got serious about ER.

I consider it a nominal 60/40 portfolio for the various retirement calculators.

 

[Markola]

Based on this concept, rising glidepath, actuarial concepts, and a bit of DMT, I settled on age in stocks from 55 to 65 with +5/-4% rebalance bands. I turned 55 in 2017. But it wasn't very smooth tent, almost all of my bond allocation was bought in the last 1 to 3 years when I got serious about ER.

I consider it a nominal 60/40 portfolio for the various retirement calculators.

I like that, “Age in stocks”, not bonds.

 

[Winemaker]

I took $60K from my Stable Value Fund in my 401k on January 2 and made it all back by last Friday. I will re-balance this week, replenishing the cash. I think it's only prudent at this point. In my other accounts, I will also trim some of my winning positions. It's w@rk getting everything in line, but I'm getting well paid these past 14 months. Some will go to TIPS and Total Bond.