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How much in Bonds ??
Old 12-03-2020, 03:57 PM   #1
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How much in Bonds ??

I often struggle with the question how much in Bonds ?

One way I have seen heard /read about is -
1) A percentage of your investments, as Age in Bonds + Cash ( Or Age - 10) as a percentage of their total investments or as often stated 110- age as Stocks % and rest in Bonds

The other way is -
2) Finite number of 10 or say 15 years of living expenses, this implies waiting for the Stock Market downturns in a recession/depression to recover. We know no Market Downturns have lasted more than 5 years, not even great depression.

Generally speaking how many years of living expenses would you be comfortable with (or suggest) & the rest in Equities.

I know the answer is it depends upon one's risk tolerance, but I am just curious to know what you, forum members think/suggest a 64 yr old about to start retirement with paid for house & no debt

No, all Bonds & no equities is not an option
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Old 12-03-2020, 04:19 PM   #2
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I picked my AA based on the success rate in FIREcalc and Trinity Study. These methods use a fixed AA, rebalanced annually, with a certain withdrawal rate, and you can evaluate portfolio survival for a given annual withdrawal rate over a given number of years. Actually, it turns out there is a fairly wide range with very close success rates. Like 45% to 80% equities. So to further refine it, I looked at annual volatility at the various asset allocations and picked something I thought I could live with.

Alternatively I could have looked at terminal portfolio values. Firecalc gives you min, max and average ending portfolio values based on historical data for a given AA, period and withdrawal rate. In general, higher the equity allocation, the higher the average and max ending portfolio values. For someone interested in leaving a legacy, they might be willing to live with higher volatility in order to have a larger portfolio to pass on. In my case maximizing terminal portfolio value was not a priority.

It also depends on how much of the portfolio you need to cover your annual expenses. Someone who has most of their annual spending covered by pension and/or SS might be willing to have a higher equity allocation and be comfortable with the associated volatility. Someone who is dependent on their investments for most or all of their annual income might prefer lower volatility.

So you see there are trade offs and what people are comfortable living with and long term versus short term financial goals. And these turn out to be very individual. So there isn’t one rule that will cover everybody. You really have to review your personal financial situation, goals, and preferences, both long-term and short-term to select the AA that is right for you.

Notice that I didn’t use either age in bonds nor number of years expenses in fixed income. Although I do have a minimum set for number of years in fixed income and I only ran into it once in 2008 when the portfolio was cut by 40%, because I was rebalancing at the time (selling bonds to buy more stocks).
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Old 12-03-2020, 04:38 PM   #3
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It also depends on how much of the portfolio you need to cover your annual expenses. Someone who has most of their annual spending covered by pension and/or SS might be willing to have a higher equity allocation and be comfortable with the associated volatility. Someone who is dependent on their investments for most or all of their annual income might prefer lower volatility.
This is my framework. I’m much more conservative right now. I have a pension, but when mine and DW’s SS kick in, the pension plus SS will cover the bulk of our budget and alone will cover necessities. It that point, I’ll be a lot more comfortable moving my equity percentage up. When I get to that point in 5 to 10 years, I’ll have a better idea of how high I’ll let the equity position go but right now, I’d guess it might float up to 75% as I age and draw down my fixed assets.

So, even the age rule of thumb may not make sense for everyone. If my portfolio looks solid and I’m in my later stages of life, I may spike the ball and try to grow what’s left for my heirs or legacy. Just something that needs looked at as time goes by.
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Old 12-03-2020, 04:46 PM   #4
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"A percentage of your investments, as Age in Bonds + Cash ( Or Age - 10) as a percentage of their total investments or as often stated 110- age as Stocks % and rest in Bonds"
The above is arguably the worst investment advice out there. If you're a healthy 60 year old person you easily could have a 25-30 year time horizon. If you want/need growth why would you want to hold down 50-60% of your portfolio in bonds? Bonds might be an effective way to mitigate volatility , but over the long term inflation and withdrawals can really hurt you.



Investment time horizon, cash flow needs and mental fortitude with volatility are much more important than age.
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Old 12-03-2020, 04:51 PM   #5
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I tell the students in my Adult-Ed investment class that the bonds/age formulas are brain dead. The "right" number depends on the individual's financial situation and attitude toward risk. The example I use is two identical women, both 70YO. The brain dead formulas would give both the same percentage. Now consider that one has total retirement assets of $100K and the other has $10M. Both should be the same? Of course not.

@audreyh1's thoughtful approach may not be the exactly right one for you, but it illustrates the issues and considerations.

Another factor is your attitude towards asset growth. Some say: "If you've won the game, stop playing." Thus, close to 100% bonds. Others (like DW and me) are making long term equity investments for our heirs. We have been very lucky in life and our 25% bonds allocation may well be more money than we'll ever need. Neither of those strategies are based at all on age, spending, etc. directly and both are different than @audreyh1's.

H. L. Mencken: “For every complex problem, there is a solution that is simple, neat and wrong.”

Sorry to say, no magic. You'll have to make your own way.
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Old 12-03-2020, 04:58 PM   #6
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We can afford to take more risk. So we're gradually reducing bonds from 30%.
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Old 12-03-2020, 05:04 PM   #7
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With every CD that matures I am presented with an investment decision. I am comfortable with that even if if it fly's in the face of the firmly committed AA people. As my position evolves I'm running an even keel between short term cash and income producers. for now.
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Old 12-03-2020, 05:12 PM   #8
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I'm lazy and not very smart, so I look at these issues holistically. Here, that means we have an AA that, based on various metrics (e.g., Vanguard's model portfolios), we expect to achieve a certain return, give or take, based on historical averages and with the caveat that the future is unknown. Our AA is set based on our investment needs and risk tolerance.

So I don't actually care what a subset of our investments, such as bonds, returns. We only care what our investments in aggregate, as invested in a diversified portfolio consistent with our AA, returns. I'd rather be fly fishing than pouring over the returns on various bonds, bond ETFs, or what have you. Set it and forget it; stay the course. Check in occasionally to see if anything has veered off into the ditch. Otherwise, do fun stuff -- and I don't consider agonizing over bond returns to be "fun stuff."
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Old 12-03-2020, 05:22 PM   #9
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I took a poll 3 years back to see how many people use an age based formula for bonds, like I was at the time. https://www.early-retirement.org/for...oll-88258.html
Over 75% did not.

I listened to the reasons why not, and eventually went away from it myself. I can't recall the specific arguments that swayed me.

This is a frustrating topic for me. Unlike "how much do I need to retire", "how much can I withdraw in ER", "when should I take SS", and "how much should I convert to a Roth", I can't find a good metric for how much I should keep in bonds. That's probably one reason why I had an age based formula. I took a look at another formula method I came up with, https://www.early-retirement.org/for...ds-101005.html . When I back-tested it, I realized it wouldn't work well. I learned that just because there is a metric, it doesn't make it right.

So I don't have any advice for you. I'm 60% equities, 40% bonds+cash. But don't blindly follow me, especially since our situations could be quite different. And also because I may not know what I'm really doing. You might come back to me in 10 years complaining about what a bad idea it was, and I may say, "I know, I changed it a month after posting that."
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Old 12-03-2020, 08:01 PM   #10
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I'm currently 58% equities 42% CDs/bonds/savings. That seems to work for me being able to sleep at night. But everyone's tolerance for risk varies. In general as you get older it makes sense to reduce your equity exposure. But there are so many variables that it's hard for us to give meaningful advice to anyone without knowing a lot of details about their personal situation.

What I find more challenging right now is figuring out where to invest my fixed income given how low interest rates or yields are. It's pretty bleak right now.
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Old 12-03-2020, 08:50 PM   #11
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My 80 year old grandmother had a nice 90% bond portfolio in 1990 and she was convinced she was set for life with her safe bonds. Interest rates went down and her bonds got called in and she was down to half her projected income. She was deathly afraid of the stock market, and we all know how that performed during the 1990's...she said she was too old to be in stocks and she also remembered the crash of 29.


Made me realize that bonds are not the safe haven that I've been told they were to rely on in your old age.


Another wise (wealthy) old gentleman about the same time told me what he thought about bonds..."If I feel confident enough to buy a company's debt (bonds) then why wouldn't I just buy the company itself" ( stock ).


I had another business associate that had a $1,000,000 bond with Lehman go to $0 back in the 2008 crises period. The stock % of his portfolio went up in a hurry when the bond portfolio tanked in no time.


I'm not a wealthy guy, but I FIRED at 50 with no bonds at all. I keep a couple years cash on hand to get through a bear market and I sleep just fine.
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Old 12-03-2020, 09:21 PM   #12
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Thank you all, for some insightful replies .
Let me ask for your opinion, about my situation - Am I playing too safe & have too much in Bonds ??

I am 64, DW is 59, we will be retiring next year. Our present AA is 57/43(Bond + Cash) & our yearly expenses have been around $140 to 150 k, including private health Insurance & Taxes.We are generally in 22% Tax Bracket - MFJ. we have no debt, house paid off, both kids have launched, I will take SS at age 70 & DW at FRA. Our investment income is the only income we will have, no other supplemental income.

I am a DIY like many others here and we have a all Vanguard (Flagship Select) portfolio, which is 50 times our living expenses in savings & our Bonds in Tax Deferred Accounts + Tax Exempt Bonds in Taxable can last 20 years of our living expenses. We are fortunate to have won the game so to speak.

Recently CFP from Schwab advised us to start spending from our fixed income in Tax Deferred and increase our rate of Roth conversions, due to increased estimated taxes ahead from RMDs & also on survivor when one of us dies. Our children will have the step up in basis in Stock Funds in Taxable.

Christine Benz of Morningstar in Bucket Strategy of deaccumulation advises 10 years of living expenses in Bonds. (In addition we have 2 1/2 years of expenses in cash.) The implication being no Market downturn in history has lasted more than 5 years & the 10 years in Bonds can also survive a bad sequence of returns situation.

I am thinking of getting the Bonds down to 15 years of living expenses, which will get our AA up to 63 to 65 % Stocks. Instead I may invest in Dividend paying stocks/REITS or our tried & tested VTSAX in tax deferred. At present in Taxable we have VTSAX, VTIAX & VWIUX & in Tax Deferred we have VBTLX & VTABX

I think 15 years of expenses in Bonds would still be safe enough, although Mr Kitches in a article suggests to create a 'Bond Tent" around the start of retirement to mitigate the bad sequence of returns.

I am sorry for a long post, I am seeking your advice, thank you in advance. What would you do ?




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Old 12-03-2020, 09:39 PM   #13
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Quote:
Originally Posted by rkser View Post
I often struggle with the question how much in Bonds ?

One way I have seen heard /read about is -
1) A percentage of your investments, as Age in Bonds + Cash ( Or Age - 10) as a percentage of their total investments or as often stated 110- age as Stocks % and rest in Bonds

The other way is -
2) Finite number of 10 or say 15 years of living expenses, this implies waiting for the Stock Market downturns in a recession/depression to recover. We know no Market Downturns have lasted more than 5 years, not even great depression.

Generally speaking how many years of living expenses would you be comfortable with (or suggest) & the rest in Equities.

I know the answer is it depends upon one's risk tolerance, but I am just curious to know what you, forum members think/suggest a 64 yr old about to start retirement with paid for house & no debt

No, all Bonds & no equities is not an option
From your OP.... 110-64=46 in stocks, therfore 54 in fixed

or 10-15 years at 4% WR = 40-60 in bonds

Not much difference. Run your numbers under FIRECalc and check into "How will changing the allocation -- putting more or less into stocks -- affect the results?" under the Investigate tab. I think you'll find that anything between 45/55 and 90/10 will give similar success ratios... IOW, AA doesn't impact not running out of money very much.

What will differ between different AAs is the range and average terminal values... higher allocations to stock will generally result in higher terminal values.
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Old 12-03-2020, 11:06 PM   #14
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Age in bonds. 100 - age in stocks.

I like easy math that even I can understand .
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Old 12-04-2020, 05:50 AM   #15
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Originally Posted by rkser View Post
I often struggle with the question how much in Bonds ?

One way I have seen heard /read about is -
1) A percentage of your investments, as Age in Bonds + Cash ( Or Age - 10) as a percentage of their total investments or as often stated 110- age as Stocks % and rest in Bonds

The other way is -
2) Finite number of 10 or say 15 years of living expenses, this implies waiting for the Stock Market downturns in a recession/depression to recover. We know no Market Downturns have lasted more than 5 years, not even great depression.

Generally speaking how many years of living expenses would you be comfortable with (or suggest) & the rest in Equities.

I know the answer is it depends upon one's risk tolerance, but I am just curious to know what you, forum members think/suggest a 64 yr old about to start retirement with paid for house & no debt

No, all Bonds & no equities is not an option
We're planning on sticking to 60/40 forever.

Kind of a middle ground to the 2 options you present here.
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Old 12-04-2020, 05:51 AM   #16
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Originally Posted by Ready View Post
I'm currently 58% equities 42% CDs/bonds/savings. That seems to work for me being able to sleep at night. But everyone's tolerance for risk varies. In general as you get older it makes sense to reduce your equity exposure. But there are so many variables that it's hard for us to give meaningful advice to anyone without knowing a lot of details about their personal situation.

What I find more challenging right now is figuring out where to invest my fixed income given how low interest rates or yields are. It's pretty bleak right now.
So close to me 57/43. +1 on the rest.
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Old 12-04-2020, 06:02 AM   #17
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I imagine that my active 79 Y.O. parents (who are rather risk averse) have a 50/50 blend of stocks/bonds. They honestly don't know, but their FA who handles every detail does. They are still making more than they spend, and have to re-invest some $$ every year.

These are people who only had one income/pension/SS from a factory for 41 years, and only had $100K in the 401K when he retired, they are doing rather well, and live very comfortably in a nice home on an acre+ lot in a LCOL area.
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Old 12-04-2020, 06:37 AM   #18
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Originally Posted by rkser View Post
I often struggle with the question how much in Bonds ?

One way I have seen heard /read about is -
1) A percentage of your investments, as Age in Bonds + Cash ( Or Age - 10) as a percentage of their total investments or as often stated 110- age as Stocks % and rest in Bonds

The other way is -
2) Finite number of 10 or say 15 years of living expenses, this implies waiting for the Stock Market downturns in a recession/depression to recover. We know no Market Downturns have lasted more than 5 years, not even great depression.

Generally speaking how many years of living expenses would you be comfortable with (or suggest) & the rest in Equities.

I know the answer is it depends upon one's risk tolerance, but I am just curious to know what you, forum members think/suggest a 64 yr old about to start retirement with paid for house & no debt

No, all Bonds & no equities is not an option

3) A Fixed stock and bond allocation for life. This is one of the most common methods out there.

Overall it depends on why you hold bonds in the first place. Many people hold them as ballast against stock volatility since stocks and bonds over long periods are uncorrelated. In recent history, they can become uncorrelated over short periods. But that wasn't always the case. To me this is thinking about reducing short term volatility (sleep at night factor) while trying to minimize any penalty there might be for long term growth. That's the balance to strike. Anyway, this thinking leads to #3

Some people are of a mind that their stock holdings are the engine of their growth. But they want some degree of protection against protracted, long term downturns. For them, they hold a certain number of years of expenses in bonds - sort of a rainy day fund. This needs to be thought of carefully as inflation could eat into this if the holding isn't always updated. Additionally, there can be interest rate risk as well. Meaning that one must always make sure there is actually enough to cover N years of expenses. This thinking leads to #2

Regarding #1, there are plenty of articles out there that point out why this might be a bad idea. Here's one with some examples run in firecalc https://www.forbes.com/sites/phildem...h=7ea89e9646c6

#4 Increase your stock allocation over time. This is referenced in the article above to another article by Pfau and Kitces.

#5 Then there are those who consider their stock and bond allocations as totally separate entities. For them, they often think a lot about having a fixed income stream from their bonds. Perhaps they use a TIPs ladder and/or Ibonds for this. Today it's hard to get excited about this with nominal intermediate treasury bonds having a yield of 0.5% and TIPs real yields being negative.

And of course there are considerations for SS or Pensions and your actual need and willingness to take risk when you have guaranteed income streams.

Finally, there are considerations about how you plan to make withdrawals. The internet (including this forum) is chocked full of different ideas. Most of the literature out there, however, regarding stock/bond allocations are all geared toward the Bengen/Trinity Study/4%-rule type of withdrawal method. If you're doing something different than that, then some of the underlying assumptions those articles make might not be valid.

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