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Large Bond Ladder Strategy Decision Looming
Old 02-02-2023, 05:42 AM   #1
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Large Bond Ladder Strategy Decision Looming

I thought about asking this on the Golden thread, but perhaps it is more specific to my situation. I am recently retired (2022) and have picked effectively a 2 bucket system: Bucket 1 - 10 yr bond ladder (includes 18 month's cash), Bucket 2 - diversified stock (ETF) portfolio. I started constructing the individual bonds last year exiting primarily short term bond ETFs. With the active Fed increases over the last 9 months, my bond fund stayed, by design, in primarily shorter term maturities. Additionally, part of the short term strategy was due to my timing in rolling over our 401Ks to IRAs so my "bond guy" can give me specific bond recommendations avoiding ERISA conflicts.

So hears my dilemma, my bonds are split roughly 50/50 between after tax and tax deferred accounts. I view most of my after tax bond allocation as my 1 - 5 year money and tax deferred as 6 - 10. Most of my bond allocation is in Treasuries and a few corporates, but most with maturities or call dates 3 years or less. Next Wed, I have a little over 50% of this allocation maturing so will need to make some significant $$ decisions (i.e. how many bonds to buy to be diversified, how long to go)? I suppose the simplest approach is to do a hard and fast 10 yr bond ladder with the appropriate amounts maturing year after year. But is that the right decision? FWIW, my AA is around 70/30 currently and I view my stock allocation as the primary growth engine and may bond allocation as safer $$ (i.e. Treasuries and BBB+ rated corporates). Also, while my investments fund 100% of my planned spend, my WR is currently in the mid 2% range and highly discretionary.

How would you start placing your bonds if you had over 50% maturing next week?
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Old 02-02-2023, 06:05 AM   #2
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Wow there is a lot there, but my advice would be the second habit of the seven habits of highly effective people: Begin with the end in mind.

Your OP is a nutshell investment policy statement. 70% stocks and 30% fixed income and a 10 year Treasury/BBB+ or better corporate bond ladder for the 30% fixed income. The 30% is ballast and liquidity (the 18 months of withdrawals in cash) and is IMO preferable to a bond fund albeit more work.

What I would do is to do an analysis of all your bond holdings excluding the 50% of maturing bonds by maturity year and then plug in amounts to fill out the ladder consistently with your IPS and see what that looks like. Once you get comfortable with the amounts needed to fill the gaps in the various rungs, it is just a matter of... patiently... searching for bonds that mature in those periods to fill the gaps.

Don't overhink it. It probably wouldn't hurt to have the money languish in a 4.5%+ money market fund while you are patiently searching for bonds to fill in the rungs.

I went through something like this. My ladder was a chaotic mishmash of a bunch of different maturities. I scheduled out what I wanted at the end of the day, determined the amount of gaps in each rung and then went about filling the rungs out. Today, I have a ladder that has roughly equal sized rungs for the next 3 years that are largeer than the rung sizes that I want in the long run and I'm filling in years 4 and 5 as maturities occur (so the rungs in the out years are consistently slightly smaller because I'm lengthening the ladder in aggregate).

Good luck.
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Old 02-02-2023, 06:16 AM   #3
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Wow there is a lot there, but my advice would be the second habit of the seven habits of highly effective people: Begin with the end in mind.

Your OP is a nutshell investment policy statement. 70% stocks and 30% fixed income and a 10 year Treasury/BBB+ or better corporate bond ladder for the 30% fixed income. The 30% is ballast and liquidity (the 18 months of withdrawals in cash) and is IMO preferable to a bond fund albeit more work.

What I would do is to do an analysis of all your bond holdings excluding the 50% of maturing bonds by maturity year and then plug in amounts to fill out the ladder consistently with your IPS and see what that looks like. Once you get comfortable with the amounts needed to fill tgaps in the various rungs, it is just a matter of... patiently... searching for bonds that mature in those periods to fill the gaps.

Don't overhink it. It probably wouldn't hurt to have the money languish in a 4.5%+ money market fund while you are patiently searching for bonds to fill in the rungs.


I went through something like this. My ladder was a chaotic mishmash of a bunch of different maturities. I scheduled out what I wanted at the end of the day, determined the amount of gaps in each rung and then went about filling the rungs out. Today, I have a ladder that has roughly equal sized rungs for the next 3 years that are largeer than the rung sizes that I want in the long run and I'm filling in years 4 and 5 as maturities occur (so the rungs in the out years are consistently slightly smaller because I'm lengthening the ladder in aggregate).

Good luck.
This is where my head is at. I am new to individual bonds so while I know this may be some work, I have the time and interest to get my hands dirty and learn. Like you said, my goal is not to over think and scrap for every decimal point of yield, but at the same time, want to be prudent. Plan is to hold to maturity, so not looking to really trade these bonds once purchased.
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Old 02-02-2023, 07:40 AM   #4
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One thing to consider is the idea of taking the last portion of your expenses by selling equities at the LTCG rate. Ie Ss, Rmd, Roth or ltcg.
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Old 02-02-2023, 07:53 AM   #5
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One thing to consider is the idea of taking the last portion of your expenses by selling equities at the LTCG rate. Ie Ss, Rmd, Roth or ltcg.
?? Not sure I understand your point here?

My bond ladder is designed to fund the years the market is down so annual funding decisions will be dictated by stock market returns which may obviously create a capital gains event triggered by me. Right now, naturally occurring interest/dividends/CGs that come off of my after tax account cover almost 50% of my planned spend. While I started Roth conversions last year, I will be getting more aggressive converting going forward (24% bracket) so I am still navigating the tax implications. Plan is to try and be tax smart with gains and tax loss harvesting. A little bit of an annual jigsaw puzzle I will try and put together annually with the info available.
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Old 02-02-2023, 07:55 AM   #6
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I will explain more later. On tablet and busy right now. Easier to type on computer.
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Old 02-02-2023, 09:31 AM   #7
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I was watching some youtube from a channel called something like safeguard wealth management and they covered some strategies for minimizing taxes in retirement.

One concept was "forced income". You have to take social security. You have to take RMD's. If you have bonds or CD's in taxable you have to pay tax on interest.

In retirement you need to take a certain amount for expenses each year. When you take it you can consider it to be stacked in order: Standard Deduction, SS, RMD. If that covers all your expenses, then you can't do much to change things.

If you need more for expenses you have to take them from somewhere. They say that you should maintain optionality. That is, be able to take from taxable, IRA or ROTH depending on what works best.

Tax on social security depends on how much the rest of your income is and if you hit a certain amount you end up causing more of your SS to be eligible for taxation. Effectively if you are in the 22% bracket, taking a dollar is taxed 22% but also causes 85% of a dollar of SS to be taxed at 22% as well.

So, if you are up into that range, after SS and RMD it may make sense to take the rest from ROTH or from a cash portion of taxable to avoid adding more SS to the taxable pile.

What I was referring to in the original post, which I had not considered, is that if you have a choice of taking more money from the 22% bracket, it may be better to sell some equity and pay only the LTCG tax, which may be 15% but if your other income is low enough could be 0%.

You mention only selling equities when they are high to rebalance. That makes sense and could be balanced between taking the last bit of expense from ROTH or taxable equities. However, keep in mind that there is no wash sale rule if you sell a position at a profit. You could sell some equities for expenses and pay 15% or to lock in the 0%, but then buy them right back. Maybe avoid taking some bond money out of IRA for expenses by selling equity in taxable and buying back in IRA with bond money. Although this would maybe just push paying the normal income rate on the equity in the IRA down the road.

In any case, I guess my main point is that I felt that I should at least consider the possibility of using LTCG equities as an expense source in my planning.

The videos probably explain better than I have.

https://www.youtube.com/c/safeguardwealthmanagement
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Old 02-02-2023, 10:03 AM   #8
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Dawgman,
Just wanted to let you know that after reading your initial post on your approach, I went ahead and did the same for myself. Retired Jan 2022, same 70/30 and having to learn here about buying individual bonds.
In my case I have the rungs for the next 5 year with the estimated amounts I will need if it's not advantageous to sell equities. The additional bonds to get to 30% mature in 2028, so should not face your situation until such time.
Good luck and keep posting if you can. I learned a lot from that discussion
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Old 02-02-2023, 01:55 PM   #9
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retired (2022) and have picked effectively a 2 bucket system: Bucket 1 - 10 yr bond ladder (includes 18 month's cash), Bucket 2 - diversified stock (ETF) portfolio.

.


To my way of thinking thatís 3 buckets. The 18 months cash is itís own bucket. Is there any reason you donít want or need the 18 month cushion going forward?
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Old 02-02-2023, 01:58 PM   #10
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Next Wed, I have a little over 50% of this allocation maturing

Curious to know why you have so much coming due at once. Was there some reason it was set up that way?
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Old 02-02-2023, 02:06 PM   #11
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To my way of thinking thatís 3 buckets. The 18 months cash is itís own bucket. Is there any reason you donít want or need the 18 month cushion going forward?
I suppose you could call the cash it's own bucket, however, I blend it with my 10 yr money. I move money as needed from my money market account into my checking account as opposed to some systematic monthly withdrawal. Right now, money markets are yielding enough that I'm fine holding 18 months there. I can also see a time when perhaps I only hold 3 - 6 months, but have say the remaining 12 - 15 months in short term T-bills. I basically look at the 18 months as my first rung of the ladder (yr 1 spend) with a 6 month security blanket... at least for now.
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Old 02-02-2023, 02:21 PM   #12
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Curious to know why you have so much coming due at once. Was there some reason it was set up that way?
As mentioned in my OP, I went through a strategy transition last year, by design, which moved me from a pure total return/set AA rebalance investor to effectively a bucket investor. This entailed defining my 10 yr planned spend for my ladder, selling existing bond ETFs, and then start buying individual bonds/Treasuries. Part of my "free" advisory team at Schwab includes a bond specialist who helps me identify and buy bonds. In addition to repositioning these bond ETFs with individual bonds in my after tax accounts, I was also closing down my LLC at the end of 2022 and completing the rollover of DW and my 401Ks to IRAs, which would allow my bond guy to then assist me on. I chose to park those bond $$ in Treasuries that all come due next week. Remember, we have also been in a pretty good shorter term bond yield environment as the Fed had continued to raise interest rates. All of this contributed to where I am today, arguably by design, based on the above circumstances.

Probably a more convoluted answer than would you would have liked...
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Old 02-02-2023, 03:47 PM   #13
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Dawgman-

I would seek to invest your money coming due promptly, filling your longest needed durations first since this has been a falling rate environment.

I would probably seek higher quality issues than low investment grade, since we appear to be recession-bound. No need to stretch here, your equities will do the heavy lifting.

I do not see a need to distinguish the cash bucket but that is personal preference.
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Old 02-02-2023, 04:00 PM   #14
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Probably a more convoluted answer than would you would have liked...


Thanks. The whole scheme past and present is highly convoluted to me but Iím sure youíll get to where you need to go.
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Old 02-02-2023, 04:50 PM   #15
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...
Tax on social security depends on how much the rest of your income is and if you hit a certain amount you end up causing more of your SS to be eligible for taxation. Effectively if you are in the 22% bracket, taking a dollar is taxed 22% but also causes 85% of a dollar of SS to be taxed at 22% as well.

So, if you are up into that range, after SS and RMD it may make sense to take the rest from ROTH or from a cash portion of taxable to avoid adding more SS to the taxable pile....
Good post, but I have a quibble with this part.


If you are in the 22% marginal tax bracket, you are almost certainly to the point where 85% of your social security already is taxable. You aren't getting taxed twice on that additional dollar. Here's the math (all for Married Filing Jointly):

22% tax bracket starts at $89,459 taxable income. Add the standard deduction of $27,700 and your AGI is $117,150.

Let's assume that you and your spouse are collecting $48,000 in social security ($2000 per month for each of you). This post (https://www.early-retirement.org/for...ml#post2506932) shows you how to calculate how much social security is subject to taxation, but I have developed a shortcut for determining when you will hit the 85% mark (call it X). Specifically, for Social Security > $12k per year (which is the case assumed here), X = (1.5 x social security) + $36,941. Here, ($48k x 1.5) + 36,941 = $108,941 , so you are already over the AGI for taxation of 85% of social security. In fact, you can reverse the equation and say that, so long as your combined social security is less than $53,473 , if you are in the 22% bracket you are being taxed on 85% of your social security >> (117,150 - 36,941)/1.5 = $53,473.
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Old 02-03-2023, 05:15 AM   #16
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Dawgman-

I would seek to invest your money coming due promptly, filling your longest needed durations first since this has been a falling rate environment.

I would probably seek higher quality issues than low investment grade, since we appear to be recession-bound. No need to stretch here, your equities will do the heavy lifting.

I do not see a need to distinguish the cash bucket but that is personal preference.
Yep, I hear ya. Its a rather large sum to redeploy at once, but I will report back after my meeting with my "bond guy" with what goodies I was able to purchase. My guess is he won't deploy it all at once in an effort to diversify it, especially since this part of the ladder is $$ earmarked more for corporate bonds as opposed to Treasuries. It's not the worst thing to let some of the $$ sit in a money market at 4.3+% if it takes a week or 2 to deploy. TBD
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Old 02-03-2023, 08:44 AM   #17
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Bonds should be boring and easy. Figure out the cashflow you need/want and invest accordingly. You will never time things exactly and as you said, you can get 4.3% in a MM so there is no downside - now. The downside happens when you are sitting on the sidelines when rates reverse - and perhaps they already have, just compare yields now to last October - November. I don’t know the future, just observing the yield curve.
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Old 02-03-2023, 05:48 PM   #18
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I don't know the best strategy for you DawgMan, but I have been dollar cost averaging buying individual fixed income (mostly Treasuries, CDs and agency bonds) about 3 years out and then DCAing TIPS at auction for the longer maturities. Pensions and SS cover most of our expenses, so I invest our fixed income allocation for capital preservation mainly. This works for us with zero angst or worries and it is pretty simple to implement.
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Old 02-03-2023, 05:52 PM   #19
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...If you are in the 22% marginal tax bracket, you are almost certainly to the point where 85% of your social security already is taxable. You aren't getting taxed twice on that additional dollar. ...
+1 the marginal tax would be 22%
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