John Bogle on bonds

[REWahoo]

We've seen a lot of concern about the performance bonds/bond funds in what some expect to be a rising interest rate environment. Here is what John Bogle, founder of Vanguard, has to say about the subject:

Bogle's not afraid of bonds: Vanguard founder says to keep investing simple

 

[ejman]

It's very interesting that Bogle considers SS as a part of the bond allocation. I'm not clear on how to bring the SS dollars into the allocation equation though.

 

[Rich_by_the_Bay]

It's very interesting that Bogle considers SS as a part of the bond allocation. I'm not clear on how to bring the SS dollars into the allocation equation though.

I interpreted his comments as meaning do a present value calculation on your SS benefits, and consider that amount as part of your bond allocation when applying the "age in bonds" allocation.

So, a 65 year old with $1mm would normally have $650k in bonds; if his SS benefits corresponded to a present value of $200k, he would allocate $450k to bonds (which would correspond to $650k in bonds when the present value of SS is included). Most spreadsheets have a "PV" function.

 

[REWahoo]

What Rich said.

There are some past threads discussing this subject and I recall no consensus on either the wisdom of following Bogles suggested allocation or on how to arrive at the PV of SS benefits. Big surprise, eh?

 

[Rich_by_the_Bay]

I recall no consensus on either the wisdom of following Bogles suggested allocation or on how to arrive at the PV of SS benefits. Big surprise, eh?

That's true, though Bogle is a hard guy to argue with. I'm sticking with 40-45% equities probably long term, but if I were rich, ailing and in my 80s, that 20% equity position might make sense for me, too.

Did you reduce your bond allocation when you started SS?

Once more time, everyone's situation is different.

 

[REWahoo]

Did you reduce your bond allocation when you started SS?

No, I didn't factor SS into my asset allocation. I've stuck with an equity percentage similar to yours, although the current market slide has made me think Bogle's "100 minus your age" [-]bond[/-] equity allocation may have some merit...

 

[Rich_by_the_Bay]

No, I didn't factor SS into my asset allocation. I've stuck with an equity percentage similar to yours, although the current market slide has made me think Bogle's "100 minus your age" bond allocation may have some merit...

Did you mean Bogle's "your current age in bonds" (or 100 minus your age in stocks")?

 

[ejman]

I interpreted his comments as meaning do a present value calculation on your SS benefits, and consider that amount as part of your bond allocation when applying the "age in bonds" allocation.

So, a 65 year old with $1mm would normally have $650k in bonds; if his SS benefits corresponded to a present value of $200k, he would allocate $450k to bonds (which would correspond to $650k in bonds when the present value of SS is included). Most spreadsheets have a "PV" function.

I see, so all I have to do is figure out how long I'll live and what the future inflation adjusted and law change (if any) adjusted SS payments will be and just plug them into the PV calculation... I can see why neither you or REWahoo have actually made that adjustment. Sounds like a good approach to me. I think when I start collecting SS I'll just let it be and consider it mana from heaven...

 

[REWahoo]

Did you mean Bogle's "your current age in bonds" (or 100 minus your age in stocks")?

In stocks. Thanks for catching my goof.

 

[ejman]

Actually, it just occurred to me that if I were to follow the 25X rule (or conversely stated the 4% withdrawal guideline) then say a $2,000/mo SS payment would translate into a $600K current pot indexed for inflation as part of the bond allocation no?

 

[REWahoo]

Si.

 

[Rich_by_the_Bay]

Actually, it just occurred to me that if I were to follow the 25X rule (or conversely stated the 4% withdrawal guideline) then say a $2,000/mo SS payment would translate into a $600K current pot indexed for inflation as part of the bond allocation no?

Roughly, though SS is COLA-adjusted and the periodic amounts rise by some 8% per year if you delay taking them.

But too much thinking going on here . I think that the 4% rule estimate is fine, and throwing the PV estimate in as a rough amount to help you adjust your asset allocation.

 

[meierlde]

Actually, it just occurred to me that if I were to follow the 25X rule (or conversely stated the 4% withdrawal guideline) then say a $2,000/mo SS payment would translate into a $600K current pot indexed for inflation as part of the bond allocation no?

Or if you want more precision, assume SS is an immediate annuity and figure what it would cost to purchase. (Vanguard has a page that given a monthly amount can give you the needed payment). Of course its hard to find an annunity that also pays 1/2 to your spouse if they have no earnings record etc.

 

[Texas Proud]

Actually, it just occurred to me that if I were to follow the 25X rule (or conversely stated the 4% withdrawal guideline) then say a $2,000/mo SS payment would translate into a $600K current pot indexed for inflation as part of the bond allocation no?

Only if you are about to start taking SS now....

I am early 50s... and I will not start to get SS for a long time... so taking my (lets say) $24k per year X 25 is not what I have... that is what I will have 'then'... I would have to discount it back to today...

 

[oilspill]

Of course its hard to find an annunity that also pays 1/2 to your spouse if they have no earnings record etc.

It's Social "welfare" Security.

 

[ziggy29]

Of course its hard to find an annunity that also pays 1/2 to your spouse if they have no earnings record etc.

Plenty of annuities have a survivor income option.

 

[audreyh1]

I see, so all I have to do is figure out how long I'll live and what the future inflation adjusted and law change (if any) adjusted SS payments will be and just plug them into the PV calculation... I can see why neither you or REWahoo have actually made that adjustment. Sounds like a good approach to me. I think when I start collecting SS I'll just let it be and consider it mana from heaven...

That's my plan. I'm still young enough to not "count" on SS. I haven't even decided what age I'll take it.

But Bogle's advice probably makes sense for someone for whom SS is a big portion of their retirement income.

Audrey