Considering a Bond Ladder. Your opinion?

[Cheesehead]

We are now retiring and want to make our nest egg of $1.1 mil throw off 3% a year. We'd like to make our AA more conservative, I am not an active, math wizard like many here, so I want to keep it simple. My fixed income side has always been bond funds (short term and Vanguard Total Bond) plus CD ladders.

However, now that I would like a somewhat steady monthly income stream from both the equities and bond sides, my Fidelity advisor suggested a bond ladder. With interest rates low I was not enthused, but they presented me with a hypothetical ten year ladder of corporate bonds that will likely average $14K a year from tying up $400K, which is about half of the $30K I would like annually.

Besides committing $400K to the bond ladder, I'd keep $400K in stock funds, and $300K on the side in cash and CD ladders. Our pensions and SS takes care of a lot. The bonds are mainly BBB and BBB+, blue chip companies such as JP Morgan, Kraft Heinz, Ford, GM, AT&T, GATX, Goldman Sachs, etc. I do not have the acumen or desire to buy my own individual bonds, Fido will charge just $400 for this. No need for municipal bonds in this tax protected retirement accounts.

So, what am I missing? What is the downside beside me pulling money out prematurely? I am also running this by our CPA. I don't see how I can get $14K a year from $400K, without risk, by doing it myself with other fixed income investments.

Thanks for your opinion.

 

[DrRoy]

I have most of my investments at Fidelity, and I am doing something similar, although I do pick out my own bonds so as to not pay an extra fee. They have a very good bond screening tool, and I can discuss each option with a trader at the bond desk before buying. If you want to free up $ later, you can just sell a bond, although you lose the bid/ask spread. I would not keep as much in cash/CD's, but otherwise your plan looks fine.

 

[bloom2708]

What are the fees associated with this bond ladder? I am skeptical.

You should be looking at a "Total Return" from your stocks and bonds portfolio. Withdrawing 3% (from appreciation, bond interest, etc) is reasonable.

I think you would be better off with a simple 3 fund style portfolio at 40/60. Total US Stocks, Total International stocks (20% of your stock portion) and Total US Bond index.

Total US Bond is typically an intermediate duration fund at about 2.3% currently.

This portfolio at Fidelity or Vanguard is very low cost. Under .10%.

Fees have to be incorporated into your 3% withdrawal. If the fee is 1%, then you are actually withdrawing 4%.

How many years of expenses does $300k represent? That might be too much as if some of that is in the bond index it will be generating a bit more return. Maybe keep 2 years of cash/CDs.

It might be worth your time to venture over to Bogleheads.org and ask a similar question.

Good luck!

 

[ace8]

So, what am I missing? What is the downside beside me pulling money out prematurely? I am also running this by our CPA. I don't see how I can get $14K a year from $400K, without risk, by doing it myself with other fixed income investments. .

I am not an expert. Hopefully we can learn together.

Why individual bonds? You can buy a treasuries ETF with a TTM yield of 3%, PIMCO 25+ Year Zero Coupon US Trs ETF

I would echo the others that have suggested reducing the your cash position. I have seen others here suggest things along the lines of 3-5 years expenses after known income streams. I am not clear where you plan to get the other half of your income.

Some considerations comparing treasuries and blue chip bonds:

• Default Risk: Higher with Blue Chip bonds
• Principle Risk: Higher with Blue Chip bonds
• Yield: Higher with Blue Chip bonds

Moving a bit higher on the risk scale, you can look at a high yield bond ETF like SPDR Bloomburg Barclays High Yield with a TTM yield of 5.8%

Hopefully one of our 1%ers will be along to shine a light on more nuanced differences.

Congratulations on your impending retirement.

 

[pb4uski]

That Zero fund that ace8 linked has a boatload of interest rate risk.

I have been using PenFed CDs and Guggenheim Bulletshare ETFs and BlackRock iBonds which are pre-made ladder rungs... generally a bit higher credit quality that what you described and a bit higher cost.

https://www.guggenheiminvestments.com/etf/products
https://www.blackrock.com/investing/financial-professionals/advisor-center/insight-center/ibonds

 

[Henry Lili]

That Zero fund that ace8 linked has a boatload of interest rate risk.

I have been using PenFed CDs and Guggenheim Bulletshare ETFs and BlackRock iBonds which are pre-made ladder rungs... generally a bit higher credit quality that what you described and a bit higher cost.

https://www.guggenheiminvestments.com/etf/products
https://www.blackrock.com/investing/financial-professionals/advisor-center/insight-center/ibonds

Have any of the Bullet share funds matured yet and if so did you get all most of principle back? I've been interested in these, but can't get a good feel for the principle return given many of the bonds that are in the ETF s are above par. Assuming one doesn't buy when the ETF is first issued.

 

[pb4uski]

https://www.guggenheiminvestments.com/etf/bulletshares#u_Maturities

To date, Guggenheim has successfully transitioned all of its eleven maturing BulletShares® ETFs.

Ticker	ETF Name	Maturity Date	Final Net Asset Value Per Share
BSCG	Guggenheim BulletShares 2016 Corporate Bond ETF	12/31/2016	$22.08361
BSJG	Guggenheim BulletShares 2016 High Yield Corporate Bond ETF	12/31/2016	$25.81599
BSCF	Guggenheim BulletShares 2015 Corporate Bond ETF	12/31/2015	$21.67973
BSJF	Guggenheim BulletShares 2015 High Yield Corporate Bond ETF	12/31/2015	$25.74107
BSCE	Guggenheim BulletShares 2014 Corporate Bond ETF	12/31/2014	$21.15144
BSJE	Guggenheim BulletShares 2014 High Yield Corporate Bond ETF	12/31/2014	$26.25136
BSCD	Guggenheim BulletShares 2013 Corporate Bond ETF	12/31/2013	$20.76709
BSJD	Guggenheim BulletShares 2013 High Yield Corporate Bond ETF	12/31/2013	$25.56137
BSCC	Guggenheim BulletShares 2012 Corporate Bond ETF	12/31/2012	$20.45780
BSJC	Guggenheim BulletShares 2012 High Yield Corporate Bond ETF	12/31/2012	$25.41900
BSCB	Guggenheim BulletShares 2011 Corporate Bond ETF	12/30/2011	$20.11990

I don't know what the original offering prices were but with a little digging in old prospectuses I'm sure you could find out. Looking at historical prices for the ticker it looks like ~$20 for BSCG and BSCF.

 

[hesperus]

We have been transitioning to a bond ladder for the last year, with the help of a fixed income advisor. In a rising rate environment I prefer this, and like knowing the fixed income money is stable and relatively secure. Govt and Munis make up more than half, with corporate bonds not far behind. Currently carrying approximately 2.2 million in bonds and bond funds, or about 25% of portfolio.

 

[Henry Lili]

https://www.guggenheiminvestments.com/etf/bulletshares#u_Maturities



I don't know what the original offering prices were but with a little digging in old prospectuses I'm sure you could find out. Looking at historical prices for the ticker it looks like ~$20 for BSCG and BSCF.

Right. So if I buy above $20 pretty sure I'd not see that premium back like when one buys a bond above par knowing that what they bought for will not all come back. I'm assuming this is what will happen with these offerings just looking for any real experience.

 

[pb4uski]

Not sure about that... in part because I'm not sure what the original offering price is. I think you're reading too much into it.

What I am sure of is that your expected yield would be roughly what the calcuator on the website calculates given your input of your purchase price... less any credit losses... which should be minimal for the corporate versions.

I did find this tool interesting: https://www.guggenheiminvestments.com/etf/resources/etf-bond-ladder

 

[Henry Lili]

I get what you're saying it's the unknowns I can't figure. If I buy $1,000 face value bond for $1,100 I know I'm $100 down on initial investment at maturity. Which I can "fund" from the coupons over time to figure my YTM.

 

[Henry Lili]

Not sure about that... in part because I'm not sure what the original offering price is. I think you're reading too much into it.

What I am sure of is that your expected yield would be roughly what the calcuator on the website calculates given your input of your purchase price... less any credit losses... whcih should be minimal for the corporate versions.

I did find this tool interesting: https://www.guggenheiminvestments.com/etf/resources/etf-bond-ladder

Btw, have always appreciated your posts an insights over the years. Not to mention your handle

 

[pb4uski]

I get what you're saying it's the unknowns I can't figure. If I buy $1,000 face value bond for $1,100 I know I'm $100 down on initial investment at maturity. Which I can "fund" from the coupons over time to figure my YTM.

I think it is all built into the yield because the yield is based on the coupon rate and the difference between par and fair value of the underlying bond portfolio (amortization of premium or accrual of discount) and presumes that the par is received at maturity. They then reduce the portfolio yield for expenses (0.24%) and then further adjust it for any difference between NAV and what you buy for (purchase premium or discount... 9 bps in the example below).

BSCM NAV:
as of 9/18/2017 $21.34
21.42
Calculate Reset
as of 9/18/2017

Net Asset Value (NAV) $21.34
Weighted Average Yield to Worst1 2.59%
+ Price Adjustment 2 -0.09%
= Price Adjusted Weighted Average Yield to Worst3 2.50%
- Expense Ratio -0.24%
Estimated Net Acquisition Yield4 2.26%

 

[ace8]

That Zero fund that ace8 linked has a boatload of interest rate risk.

Isn't a 'boatload of interest rate risk' just a layman's way of saying 25+ year duration?

 

[pb4uski]

Yup. Hard to get more duration than that.

 

[ace8]

BulletShares Corporate seem to track CD rates (or the other way around) at CD length duration.

What is your strategy that requires BulletShares? More liquidity than CDs?

 

[aja8888]

Is any of this BulletShare discussion helping the OP with his question? I'd like to hear more about what he can do to get to his goal.

 

[ace8]

Is any of this BulletShare discussion helping the OP with his question? I'd like to hear more about what he can do to get to his goal.

More information about the goal is required.

We have established that 3.5% (14k/400k) is within the possible range of bond returns. Individual bonds, fixed duration bond ETF, fixed maturity (bullet) and credit risk (Treasury, Corp, Hi Yield) are all open questions / variables.

As OP indicated he was entering retirement, I'll suggest that bullet shares are not appropriate as maturity is too near term (< 10y).

The Gugenheim data does suggest that if we want to establish 3% as a lower yield boundary and also minimize Bond ETF duration (as interest rates are expected to rise), and use Corporate bonds (not Treasuries or Hi Yield), then you can establish a rough duration of 7-8 years.

OP will need to decide if a 3% coupon on individual bonds is preferred over bond ETF. Google can find many sources comparing individual bonds to bond funds. The most important of which is that the bond ETF will attempt to maintain a roughly constant duration.

In considering individual bonds, I'd compare them to something like Vanguard Intermediate-Term Corporate Bond ETF, Duration 6.5 years, yield 3%. Individual bonds may have a longer duration matched to OP's needs.

I will also note that long term individual bonds will create a significant interest rate risk if the bonds need to be sold before maturity with longer duration.

If the OP is looking to match the bond duration to retirement duration and that is more than 10 years, then individual bonds may fit this requirement better than an ETF with a constant duration. Bullet's would work but only for short duration.

If the amounts of money are small, the ETF may provide a better vehicle for diversification of risk than individual bonds including the ability to mix Treasuries and Hi Yield to hit the target yield.

Also consider inflation, 2.5% inflation over 30 years will half the purchasing value of the bond at maturity. Or your 400K will be worth 200K in 2047 with 2.5 annual inflation.

 

[Henry Lili]

Bulletshares are a potential alternative to individual bonds. They are a package of bonds that mature the same year and principle is returned. Laddering Bulletshares maturity dates is Worth considering as an option to buying many individual bonds as is ladderind CDs.

 

[Henry Lili]

Bulletshares are a potential alternative to individual bonds. They are a package of bonds that mature the same year and principle is returned. Laddering Bulletshares maturity dates is Worth considering as an option to buying many individual bonds as is ladderind CDs.

Here's a link to the Guggenhime site that May help https://www.guggenheiminvestments.com/bulletshares.

No matter what OP pursues. To get 3% in today's interest rate environment one either accepts some interest rate risk or credit risk.

 

[daylatedollarshort]

Another option is to add a TIPS ladder into your mix for inflation protection.

 

[ace8]

Another option is to add a TIPS ladder into your mix for inflation protection.

More specifically, TIPS protect against higher than expected inflation.

Or from another perspective, the spread between nominal and TIPS treasuries is the expected inflation rate .... ~2.5% / year.

 

[Golden sunsets]

OP; We have a 10 year bond ladder in each of DH's and my IRA. The bonds are corporate investment grade, Bullet Share targeted maturity, as pb4uski suggested or Government agencies. The amounts were chosen based on estimates of RMD's which start for DH this year. We have made sure that we don't invest any more than one year's maturity in any entity unless it is a Bullet share or a US agency. Each year we add one more year of maturity so we maintain a constant 10 year ladder. The rest of our fixed income allocation is in our taxable account invested in a short duration muni Low cost mutual fund or short duration(3year) CD's.


Sent from my iPad using Early Retirement Forum

 

[pb4uski]

BulletShares Corporate seem to track CD rates (or the other way around) at CD length duration.

What is your strategy that requires BulletShares? More liquidity than CDs?

I view them as a CD substitute, albeit with a bit more credit risk, in that if I hold to maturity I know what my interest rate will be. I could just as easily use brokered CDs but I think the Bulletshares are slightly more liquid. Bank CDs don't work for me because I don't want to have numerous tIRA accounts with different vendors to keep track of when I can use these in my existing tIRA account at Vanguard. I did make an exception for that 3% PenFed CD offer a few years ago since the rate was so attractive.

 

[pb4uski]

Is any of this BulletShare discussion helping the OP with his question? I'd like to hear more about what he can do to get to his goal.

If the OP were to do a bond ladder with 50% Corporate/50% High-Yield Bulletshares spread across all durations, the yield would be ~ 3.5% and the duration would be 3.32 years. He would also have greater diversification... over 3,000 bonds rather than 40 or so.

I think the OP is getting 3.5% because of credit rather than duration but it is hard to tell from the info in the OP. That is more credit risk that I would take on but I don't see how he is getting to 3.5% without some substantial credit risk.

Yield to Maturity 3.89%
Yield to Worst 3.51%
30-Day SEC Yield 3.30%
Distribution Rate 3.51%
Effective Duration 3.32 yrs
Holdings (#) 3749
Portfolio Range 2018 - 2026