Safe margin of 2.5x to 3x income, 100% long bond portfolio, built in inflation offset

[brewer12345]

So I guess it was just a coincidence that I suggested a few Vanguard funds to the OP and asked the OP what the Vanguard financial planning folks had suggested and then in the very next post you were dissing Vanguard.

Passive-aggressive posters end up on my ignore list in short order.

 

[daylatedollarshort]

So I guess it was just a coincidence that I suggested a few Vanguard funds to the OP and asked the OP what the Vanguard financial planning folks had suggested and then in the very next post you were dissing Vanguard.

If I was referring to your post I would have quoted your post. Most posters here seem to be big on stock and bond mutual funds from either Vanguard or Fidelity. I do not think you are the only Vanguard equity / bond mutual fund investor here. My post was:

"You may want to read some books or sites by Zvi Bodie for a more low return, low risk / won the game stop playing approach than what you will likely hear about from reps at place like Vanguard and Fidelity. "

"Many here favor a Vanguard type mutual fund approach heavy on equities, but if minimizing your losses is more of a goal than higher potential returns, the Vanguard type recommendations may not be the best fit for your AA."

If that is a diss or passive aggressive, please let me know a more diplomatic way I could have phrased it. I thought "may not be the best fit for your AA" was rather neutral. It could be the right approach for some, but maybe not the best fit for what the OP is looking for.

 

[Katsmeow]

Hello all,

I am aware of Firecalc but I decided, why use random monte carlo style numbers when I can use my own honest to God numbers??

If you think that Firecalc uses random monte carlo style numbers then I would submit that you are not familiar with how Firecalc works.

As for your investments all in one long term bond fund, I don't find the idea of putting all of my eggs in one basket particularly comforting.

 

[Earl E Retyre]

This is an interesting thread. I used to have a similar approach as OP only I was thinking of 100% long term muni-bonds at the time. After advice on FIRE and other resources, I have changed my approach. Having said that, I can relate with the OP that the stock market ups and downs (mainly the downs) gives me a lot of trepidation. I currently invest much of my bond allocation in Vanguard BND which is low risk (and at the same time relatively low reward) and balance that with domestic and international stock ETFs. Here is my question for the OP. I looked up Vanguard Long term Corporate bond fund – I assume we are talking VCLT – so I could compare it to BND for my own edification. It appears that VCLT invests 46.5% in baa rated bonds (does not give me a warm fuzzy), has an average maturity of 24 years (not great for inflation), holds only 1333 bonds (relatively low compared to BND), and has been around for less than 5 years (not long term data). If you are putting 100% of your eggs in one low risk basket/fund, is this one really low risk?

 

[clifp]

This is an interesting thread. I used to have a similar approach as OP only I was thinking of 100% long term muni-bonds at the time. After advice on FIRE and other resources, I have changed my approach. Having said that, I can relate with the OP that the stock market ups and downs (mainly the downs) gives me a lot of trepidation. I currently invest much of my bond allocation in Vanguard BND which is low risk (and at the same time relatively low reward) and balance that with domestic and international stock ETFs. Here is my question for the OP. I looked up Vanguard Long term Corporate bond fund – I assume we are talking VCLT – so I could compare it to BND for my own edification. It appears that VCLT invests 46.5% in baa rated bonds (does not give me a warm fuzzy), has an average maturity of 24 years (not great for inflation), holds only 1333 bonds (relatively low compared to BND), and has been around for less than 5 years (not long term data). If you are putting 100% of your eggs in one low risk basket/fund, is this one really low risk?

Excellent points, the one lesson I have learned (often over and over again) is in the world of investing all investment have risk. If you think otherwise you don't understand the investment.

A couple of years ago, a Warren Buffett described bonds as offering "return free risk". As a general rule if you find your doing the opposite of Warren Buffett suggests, you'd be very well advised to ask yourself what do I know about investing that Oracle of Omaha doesn't.

The other thing I am really curious to find out from the OP and to a less extent Earl is why is having a modest say 1/3 (like Wellseley) of your assets in stock so terrifying? I am not arguing I am just trying to understand why it's scary.

 

[eta2020]

Tell me, why do I need the stock market in MY PARTICULAR SCENARIO?

On a long run Dividend yield is much much safer then bond yield that you have. You will have less and less income every year.

But you have nice nest egg. You will not live on street

 

[pb4uski]

If I was referring to your post I would have quoted your post. Most posters here seem to be big on stock and bond mutual funds from either Vanguard or Fidelity. I do not think you are the only Vanguard equity / bond mutual fund investor here. My post was:

"You may want to read some books or sites by Zvi Bodie for a more low return, low risk / won the game stop playing approach than what you will likely hear about from reps at place like Vanguard and Fidelity. "

"Many here favor a Vanguard type mutual fund approach heavy on equities, but if minimizing your losses is more of a goal than higher potential returns, the Vanguard type recommendations may not be the best fit for your AA."

If that is a diss or passive aggressive, please let me know a more diplomatic way I could have phrased it. I thought "may not be the best fit for your AA" was rather neutral. It could be the right approach for some, but maybe not the best fit for what the OP is looking for.

I was responding to the "heavy on equities" portion of your post and was quite specific on that in my response (BTW, a question that you never answered). IME most posters here favor a low to moderate (30-60%) equities allocation, although I concede that 30-60% equities may be considered "heavy" on equities by some people who are generally uncomfortable with equities. I've been an equity investor for over 30 years and returns from equities is part of the reason that I was able to retire early, so I'm planning to continue to include equities in my retirement portfolio (60% in my case).

I'm not totally sure what a "Vanguard type mutual fund approach" is unless you are referring to no-load, low-cost index funds, be them from Vanguard or Fidelity or others. In any event, a total bond approach as the OP proposes is suboptimal for most people, although the OP may be able to pull it off because their WR is so low, and as brewer points out, a total corporate bond approach is even more risky than a total bond approach.

A total bond approach has a lower success rate in Firecalc than a low to moderate equities mix. Assuming a 3% WR and 30 year time horizon 0/100 AA = 87.7% success rate; 30/70 AA = 100% success rate; 60/40 = 100% success rate.

 

[pb4uski]

Passive-aggressive posters end up on my ignore list in short order.

I have yet to put someone on my ignore list although I have been very tempted a couple times.

 

[Earl E Retyre]

Excellent points, the one lesson I have learned (often over and over again) is in the world of investing all investment have risk. If you think otherwise you don't understand the investment.

A couple of years ago, a Warren Buffett described bonds as offering "return free risk". As a general rule if you find your doing the opposite of Warren Buffett suggests, you'd be very well advised to ask yourself what do I know about investing that Oracle of Omaha doesn't.

The other thing I am really curious to find out from the OP and to a less extent Earl is why is having a modest say 1/3 (like Wellseley) of your assets in stock so terrifying? I am not arguing I am just trying to understand why it's scary.

I will answer Clifp's question and I hope OP chimes in from his perspective.

To begin with, I do today invest in Wellseley, VTI US stock and VXUS Intl stock. I am not 100% bonds any more.

To answer your question, what is "terrifying" is when the market takes a big dip (often for no big reason) and I see my hard earned portfolio lose thousands of dollars each day it dips. I now realize, stay the course, and it will go back up.

I think the trepidation comes from my past experience. Back in the dotcom bubble era I lost literally hundreds of thousands of dollars. If I had stayed the course, it would have all bounced back (in hindsight now). Back then I sold close to the bottom and it took many years for me to get back in to the stock market. Since I was still working full time back then, while it was emotionally devastating, I was able to get all the losses back. I also had an awful financial advisor (another story). Now, I realize it is wasteful to pay 1% of your portfolio to someone else (especially if they give you bad advice).

Fast forward to today, and I am still getting adjusted to the whole balanced portfolio approach. I do keep funds in cash and when the market takes a big enough dip over enough days, I now view this as a good thing (it is a buying opportunity!). I am quite happy with my overall returns and somewhat comfortable with market swings. It has been about 2 years and I think the more time, the more I will get comfortable, and perhaps the more I will add to the equities component of my asset allocation.

I also now use ETFs instead of mutual funds. This allows me to avoid the dotcom nightmare happening to me again. If the market dips too long for too many executive days, the ETFs will automatically sell (still at a profit to me based on my price to sell). So, I cannot lose. If this ever happens then the trick would be to know when to buy back in. I know many would disagree with that approach since it sounds like market timing, but if it allows one to sleep at night then it has to be good. I also hope the sell never triggers.

So, bottom line is that I do agree that a balanced portfolio is the way to go - especially if one can meet their SWR targets on 30% (or less) equities. But wanted to answer Clifp's question and see if others feel the same way.

 

[REWahoo]

If the market dips too long for too many executive days, the ETFs will automatically sell (still at a profit to me based on my price to sell). So, I cannot lose. If this ever happens then the trick would be to know when to buy back in. I know many would disagree with that approach since it sounds like market timing...

The reason it sounds like market timing is that it is market timing.

Good luck on the bolded part of your quote if you do go this route.

 

[pb4uski]

The decision to get out is usually easy to see because the sky is falling.... the decision to buy back in is much more subtle and the Achilles heel of market timing IMO. Hence my view is that it is best to select an AA and stick to it and rebalance as needed.

 

[Andre1969]

I can understand being afraid of the stock market. I'm invested fairly risky, and since I started back in 1998, I've seen two 40%+ hits to my portfolio. The first was somewhat long and drawn out, during the tech bubble burst, 9/11 tragedy, and ensuing recession. I lost about 5.4% in 2000, then another 30% in 2001, and 23% in 2002. It took about 2 1/2 years to gain back those losses.

The second time was in the "Great Recession", where I lost about 42% in 2008. But, this time, I recovered in maybe a year and a half, if that.

But, what about a strategy of investing, a little at a time, into stocks that pay around 3-5% annually in dividends? They usually keep growing the dividends over time. And, while the stock values will rise and fall, they tend to go up over time, as well.

In general, stocks in that range tend to be less volatile than growth stocks that pay very little dividends, like Apple and such. And also less volatile than stocks that pay higher dividends. Of course, there's always the possibility you can lose your shirt. So, just don't put your whole portfolio into them!

 

[target2019]

I can understand being afraid of the stock market. I'm invested fairly risky, and since I started back in 1998, I've seen two 40%+ hits to my portfolio. The first was somewhat long and drawn out, during the tech bubble burst, 9/11 tragedy, and ensuing recession. I lost about 5.4% in 2000, then another 30% in 2001, and 23% in 2002. It took about 2 1/2 years to gain back those losses.

The second time was in the "Great Recession", where I lost about 42% in 2008. But, this time, I recovered in maybe a year and a half, if that.

But, what about a strategy of investing, a little at a time, into stocks that pay around 3-5% annually in dividends? They usually keep growing the dividends over time. And, while the stock values will rise and fall, they tend to go up over time, as well.

In general, stocks in that range tend to be less volatile than growth stocks that pay very little dividends, like Apple and such. And also less volatile than stocks that pay higher dividends. Of course, there's always the possibility you can lose your shirt. So, just don't put your whole portfolio into them!

You made the point I was going to raise about investing in solid companies. There will be plenty of opportunity...

The OP is in a good position for the next few years. In a conservative position for Earl retirement, and able to invest for growing equity side according to a plan.

 

[sengsational]

You might want to read up on owning individual TIPS ladders and and I bonds that can be held to maturity. They are indexed to inflation.
...

+1

I wouldn't try to talk the OP into any % equities...that's not in the cards. The game has been won, it's time to eliminate as much risk as possible.

If all of that is true, then a TIPS ladder seems like a perfect fit and would isolate the portfolio from the risks associated with lending money to corporations. There is a lot of overlap between corporate and government bonds, but if the game has been won, and corporate equity risk is too high, why not eliminate corporate lending risk too?

 

[brewer12345]

I have yet to put someone on my ignore list although I have been very tempted a couple times.

IMO, it is always open season and there is no bag limit.

 

[Earl E Retyre]

The decision to get out is usually easy to see because the sky is falling.... the decision to buy back in is much more subtle and the Achilles heel of market timing IMO. Hence my view is that it is best to select an AA and stick to it and rebalance as needed.

I hear you ... and have read many people on this forum (and others) say the same thing. You are probably right (not being sarcastic). And, I will probably be giving that same advice to others over time when I get more and more used to the swings (or when and if I get burned by the Achilles heel).

I agree that it is much easier to sell when the sky is falling than to decide when to buy back in. My approach to get back into the market (if it ever hit my trigger points) would be to Dollar Cost Average as the market continues to dip down (perhaps every 1% it dips) until I am completely bought back in at the levels when it triggered. At that point, I would stay the course. If I had done this back in the dotcom bubble days it would have been awesome. However, I certainly see that if the market hits my trigger and then bounces back too quickly, I may not get back in at the levels I wanted and would be stuck holding the cash bag. Therefore, I agree it could be my Achilles Heel assuming the market continues to climb and I never get the opportunity to buy back in at the level I wanted.

IMO, the reason it is difficult for some of us to take the "just stick with the AA" approach no matter how low it goes, is due to what I will call the magic number syndrome. Most of us, work hard, save, work hard, save, and so on in order to hit that "Magic Number". The number each individual believes they need to hit in order to safely retire [early]. Once one hits the magic number, and takes the leap into retirement, they do not want to ever have their portfolio fall below that number they worked so hard to hit. After all, that was their magic number. They want their portfolio returns to cover their annual expenses and ideally their portfolio continues to rise (at least until social security, pension or some other additional revenue stream kicks in to play). Many will even work a little longer to have some pad to account for big dips so they never fall below their magic number. But, if the market ever takes a big enough dip, to where their portfolio would come back down to their "magic number" then it is scary. Not sure if that makes sense or if others agree ...

 

[daylatedollarshort]

+1

I wouldn't try to talk the OP into any % equities...that's not in the cards. The game has been won, it's time to eliminate as much risk as possible.

If all of that is true, then a TIPS ladder seems like a perfect fit and would isolate the portfolio from the risks associated with lending money to corporations. There is a lot of overlap between corporate and government bonds, but if the game has been won, and corporate equity risk is too high, why not eliminate corporate lending risk too?

+1. My earlier point was that any mutual fund employee, be it Fidelity, Vanguard or wherever, is not going to go to great lengths to explain investment options like a TIPS ladder, a credit union CD ladder or I bonds. If an investor wants other advice other than mutual funds or products the mutual fund companies sell, he has to go to other sources for advice.

Amazon doesn't have links to library free Overdrive ebook rentals on their site, Toyota dealers do not steer customers to Ford, and Fidelity, Vanguard and other mutual fund reps may not be the best places to go to learn about TIPS ladders. Our experience is that we were discouraged from TIPS in favor of a stock / bond portfolio with a potential 50% worst year loss, when we are okay with the low returns from TIPS in order to avoid the big dips, which sounds like more of what the OP is looking for.

I am okay with anyone putting me on their ignore list for making these statements. I do not think they are untrue or unkind in any way, and the Zvi Bodie advice may be the kind of advice the OP is seeking.

 

[OrcasIslandBound]

Not bad, but perhaps vulnerable to inflation

...
Tell me, why do I need the stock market in MY PARTICULAR SCENARIO? I would hard pressed to think of a LIKELY scenario where the fed allows a 10% annual inflation Rate. Also, this is a pure income "spend the dividends only" strategy. I really do not care about the share price, just share count. Each of those shares is a little cog in my income gear. If rates go up (and who said they will--->Japan comes to mind); principle will be "lost" but at least I will spend income generated. This is what is so attractive about this strategy--> None of it depends upon capital appreciation. As John Bogle said-the enemy of a good plan is the dream of the perfect plan.

Is Anyone else on the forum living off the income of bonds exclusively??

Hello Quantum,
This bond fund appears to match the description of VWESX, a Vanguard long term bond fund. Do I have this right? Anyway, the price and dividends match up with your numbers.

My situation is closer to your situation than many others on this forum. While I have some equities, (40%), it is a lot less than most on the forum.

The way I see it, to retire, we need to approximately cover our living expenses + inflation. Bonds are much more predictable and less volatile then stocks are. The simple math, for me, is to consider stocks returning about 10% long term and bonds returning about 3%. A weighted averaged of 60% bonds + 40 % stocks produces a return of about 5.8%. This provides 3.5% to live off of and 2.3% for inflation.

In your case, the weighted average is simply the present return on that fund, which is about 4.5%. You seem to be able to live off of only about 1/2 of that amount providing about 2.2 or 2.3% for inflation. If this is what you expect for inflation, as I believe it is, then we'll both come out approximately o.k.

Another way to look at this is to compare the combined expected growth of money invested in 10% - 40% total stock fund + balance in VWESX, what you have, against a 100% invested in VWESX. If you ran this simulation, you'll likely find that the dips and peaks will be less volatile as you increase the % in stocks up through about 20% stocks (the minimum volatility %) and then the volatility increases again. Thus, by going with 20% of your investments in a total stock fund, you would have similar overall returns without having to watch declines in your total net worth.

Just my 2 cents, for what it is worth.

 

[Earl E Retyre]

This bond fund appears to match the description of VWESX, a Vanguard long term bond fund. Do I have this right? Anyway, the price and dividends match up with your numbers.

.

That fund looks a lot less risky than the fund I thought OP was talking about. Thanks for the clarification.

 

[eta2020]

Bonds are much more predictable and less volatile then stocks are. The simple math, for me, is to consider stocks returning about 10% long term and bonds returning about 3%. A weighted averaged of 60% bonds + 40 % stocks produces a return of about 5.8%. This provides 3.5% to live off of and 2.3% for inflation.

Can You Rely on Income Spit Out by Stocks? - Barron's

Living of off equity dividend yield is much more predictable then living of off bonds. Trick is you have live from dividend yield not from selling stocks. Then you can care less if market goes 20% down or up.

OP has 2.4 million. That would easily generate 60k Dividend on which he would pay 0% federal taxes.

 

[Bestwifeever]

Per the OP:

THEREFORE: Potentially 90k can return to the portfolio if I decide just to stick to my budget annually. 90,000 divided by 10.60 current share price x.0404 = 1st year income raise of $4100.00 (about a 10% annual inflation bump, somewhat less if I spend another 3k per month).

Personally, I would sleep quite well at night with a portion in the bond fund to generate enough to cover only my routine expenses (no "raise") and then break the other portion into other funds whose yields would cover the nonroutine expenses (and likely much more over time) plus diversify the portfolio. That would lessen the eggs-in-one-basket risk in my unsophisticated mind.

From reading his earlier posts, OP will be ~50 at retirement (and in other threads was interested in other AAs than the 100% bond fund) The nest egg will have to last a pretty long time for him and his spouse--is a single longterm bond fund the best way to preserve it for 40 to 50 years?

But I agree with others that it seems OP has already decided 100% in his bond fund is his plan so good luck to you.

 

[FIRE'd@51]

a TIPS ladder seems like a perfect fit and would isolate the portfolio from the risks associated with lending money to corporations.

In more normal times when TIPS had a real yield of 2.0 - 2.5% this could work, but not at today's rates. The real yield on 5-yr TIPS is negative 0.4% and on 30-yr TIPS 0.8%. There is no way to achieve a SWR of 1.75% using TIPS at these rates.

Furthermore, if individual TIPS are held in a taxable account, the "phantom interest" is taxed as well as the actual interest paid.

 

[FIRE'd@51]

My earlier point was that any mutual fund employee, be it Fidelity, Vanguard or wherever, is not going to go to great lengths to explain investment options like a TIPS ladder, a credit union CD ladder or I bonds. If an investor wants other advice other than mutual funds or products the mutual fund companies sell, he has to go to other sources for advice.

One of the best position papers on TIPS that I have read was written by Vanguard. Remember, Vanguard (and Fidelity) have brokerage businesses as well as mutual funds.

 

[FIRE'd@51]

Funny how we all look at the world so differently; that is to say, have significantly different utility functions.

While I agree that OP's 100% VWETX portolio would work at a 1.75% SWR; if I had a large enough portfolio that I could live well off a 1.75% SWR, my inclination would be to put 100% of my portfolio into an S&P 500 index fund (currently yielding about 1.85%) and live off the dividends, probably in perpetuity. Over the past twenty years the S&P 500 dividend has increased about 2.5 percentage points above inflation annually. This not only maintains the CPI purchasing power of one's income, but more importantly, it maintains (or grows) the "living well" purchasing power, which I believe exceeds the CPI.

 

[daylatedollarshort]

One of the best position papers on TIPS that I have read was written by Vanguard. Remember, Vanguard (and Fidelity) have brokerage businesses as well as mutual funds.

From a Zvi Bodie interview:

"I don’t like to ascribe negative motives to people, but let’s face it: If everybody starts investing in I-bonds and TIPS, both of them are buy-and-hold investments. How is the investment professional community going to make money? Now, I have an answer to that, but from their point of view, it’s really been easy money up until now. "

https://www.mint.com/blog/investing/risk-less-and-prosper-an-interview-with-zvi-bodie-022012/

Rate are very low right now. The idea of a ladder is to get a rolling average without ever losing principal. Rates have not been that low for the past 10 years.

The Zvi Bodie and also Harry Browne ideas are to make your money from your human capital, then invest more towards portfolio preservation rather than portfolio gains. It is a different concept than many here follow. The mutual fund approach may be right for you and not right for others. Some posters here can live off income steams like rental income or pensions alone and may be happy with just making a riskless 0% real return on their portfolios. Even a 20% drop on a $2M portfolio is $400K. For retirees who can live on $40K a year, that is ten years worth of living expenses gone in one year. For a retiree household they might never live long enough to get that principal back.