Consider a 100% bond portfolio

[AlmostThoreau]

I'm a 50 year old recent retiree, and my asset allocation is around 75% stocks, 25% bonds. I figure by accepting more stock risk I can *probably* enjoy a higher standard of living in retirement.

Maybe not. The excellent TPAW retirement planner (https://tpawplanner.com/) shows, with a hypothetical $3M portfolio, I can draw down $10.5k/month in Year 1 with an all bond portfolio, but just $7.5k/month with an all stock portfolio. And that's after bumping up stock returns to 5.3% real, a full 3% over the 2.3% real bond (TIPS) return it assumes.

How is this possible? The variability of stock returns means you've got to be more conservative with spending in the early years of retirement, since a few bad years (sequence of return risk) then can cause you to run out of money later. And that's even with TPAWs variable withdrawal rate scheme, where you withdrawal more or less based on prior year's returns.

Eventually, stocks catch up - by age 64 or so, you can expect to spend a bit more with an all-stock, than an all-bond portfolio. By age 80, twice as much. But does anyone really spend twice as much in retirement at age 80 than age 50?

I've seen few advocates of 100% bond portfolios here. But especially with the availability of TIPS to neutralize inflation, it may be a path to consider.

 

[COcheesehead]

 

[target2019]

Past results do not guarantee a comfortable outcome for me.

 

[pb4uski]

I'm a 50 year old recent retiree, and my asset allocation is around 75% stocks, 25% bonds. I figure by accepting more stock risk I can *probably* enjoy a higher standard of living in retirement.

Maybe not. The excellent TPAW retirement planner (https://tpawplanner.com/) shows, with a hypothetical $3M portfolio, I can draw down $10.5k/month in Year 1 with an all bond portfolio, but just $7.5k/month with an all stock portfolio. And that's after bumping up stock returns to 5.3% real, a full 3% over the 2.3% real bond (TIPS) return it assumes.

How is this possible? The variability of stock returns means you've got to be more conservative with spending in the early years of retirement, since a few bad years (sequence of return risk) then can cause you to run out of money later. And that's even with TPAWs variable withdrawal rate scheme, where you withdrawal more or less based on prior year's returns.

Eventually, stocks catch up - by age 64 or so, you can expect to spend a bit more with an all-stock, than an all-bond portfolio. By age 80, twice as much. But does anyone really spend twice as much in retirement at age 80 than age 50?

I've seen few advocates of 100% bond portfolios here. But especially with the availability of TIPS to neutralize inflation, it may be a path to consider.

There are many bond advocates here. I am currently 100% fixed income and was previously 60/40.

You need to adjust withdrawals for inflation.

FIRECalc indicates that with a 75/25 AA, $3m portfolio and 50 year time horizon that one could withdraw $104,971 annually with 95% success. The same assumptions but with zero stocks will only support $53,394 of inflation-adjusted withdrawals.

 

[Montecfo]

There are plenty of 100% bond folks here. Hang out in the bond threads.

There are also 100% equity folks. They are NOT in the bind threads.

Most of us are in the middle. But there certainly has been a great opportunity to lock in some great yields this year.

To me the problem with 100% bonds is when rates fall 6ou may wish you had some equities but those will have rallied while you clipped coupons.

Not for or against, just sayin'. I clip them myself.

 

[Rianne]

We've designed our portfolio this way:
tIRA will give us $50K in the settlement account every year due to recent purchases of long-term CDs and Treasuries. This is income for us and our capital will remain intact. The tIRA is 55% of our portfolio earning 4.5-5.5%.

Our taxable is mostly stock mutual funds which have provided 5+% over 10 years, 7+% over 3 years. That balance is comfortable for us. Considering taxes and inflation (due to many different RE calculators) we should be good for spending $120K+ and we have less than $3M and SS of $56K/year. Even if SS drops to $35K/year we're good.

 

[mrfeh]

Why 100% anything?

50/50 and you should be golden.

 

[AlmostThoreau]

There are many bond advocates here. I am currently 100% fixed income and was previously 60/40.

You need to adjust withdrawals for inflation.

FIRECalc indicates that with a 75/25 AA, $3m portfolio and 50 year time horizon that one could withdraw $104,971 annually with 95% success. The same assumptions but with zero stocks will only support $53,394 of inflation-adjusted withdrawals.

Ah, it might be that I just didn't look closely enough for the 100% bond folks here.

Interesting how FIRECalc and TPAW arrived at such different conclusions for 75/25 vs 0/100. I assume it's because I was only using a 40 year horizon from TPAW, it uses TIPS at current rates, and it uses a variable withdrawal scheme.

 

[COcheesehead]

FICalc is also a good tool to use to test various withdrawal strategies. Last I looked they had 13 different options.

 

[pb4uski]

There are many bond advocates here. I am currently 100% fixed income and was previously 60/40.

You need to adjust withdrawals for inflation.

FIRECalc indicates that with a 75/25 AA, $3m portfolio and 50 year time horizon that one could withdraw $104,971 annually with 95% success. The same assumptions but with zero stocks will only support $53,394 of inflation-adjusted withdrawals.

Ah, it might be that I just didn't look closely enough for the 100% bond folks here.

Interesting how FIRECalc and TPAW arrived at such different conclusions for 75/25 vs 0/100. I assume it's because I was only using a 40 year horizon from TPAW, it uses TIPS at current rates, and it uses a variable withdrawal scheme.

FICalc is also a good tool to use to test various withdrawal strategies. Last I looked they had 13 different options.

I ran the same scenarios through FICalc. 75/25 AA supported a $107,000 annual inflation adjusted withdrawals and 0/100 supported $48,000 annual inflation adjusted withdrawals, so pretty similar to FIRECalc.

 

[AlmostThoreau]

I ran the same scenarios through FICalc. 75/25 AA supported a $107,000 annual inflation adjusted withdrawals and 0/100 supported $48,000 annual inflation adjusted withdrawals, so pretty similar to FIRECalc.

TPAW shows $118K/year for 0/100 using a liability matched TIPS portfolio yielding 2.3% real over 50 years, and I suspect it's more accurate, since it's not using historical backtests but mathematically certain yields as of today, with the one caveat that since you can only buy TIPS out 30 years, there may be reinvestment risk.

 

[marko]

I posted this chart a few times, most recently on another thread. A bit dated but still relevant I think. Note that 60/40 carries almost the same risk as 100% bonds but with better returns.

 

[AlmostThoreau]

View attachment 47666

I posted this chart a few times, most recently on another thread. A bit dated but still relevant I think. Note that 60/40 carries almost the same risk as 100% bonds but with better returns.

Yeah, it depends on how you measure risk. If you buy individual TIPS and hold to maturity, there is no risk/volatility. I think that chart is using stock and bond mutual funds with rebalancing. While I proposed all bonds as an idea, I think in practice it's a better idea to have more than one source of risk/return. I'll probably head toward 60/40 soon and stay there.

 

[thefist]

You never said what you need to spend, only what the calcs said you could.
Define your spending and go from there. You’ve probably seen the recent research showing a 30yr TIPS ladder will support a 4.6% withdrawal rate. That’s pretty good, except all the money is spent at the end and it doesn’t handle large lumpy expenses well.

 

[VanWinkle]

Why 100% anything?

50/50 and you should be golden.

+100

 

[dknighd]

Why 100% anything?

50/50 and you should be golden.

I like 33/33/33 %

 

[DangerDad]

View attachment 47666

I posted this chart a few times, most recently on another thread. A bit dated but still relevant I think. Note that 60/40 carries almost the same risk as 100% bonds but with better returns.

Probably we’ve all heard the phrase: if you’re retired and you’ve won the game, any asset allocation from 100% bonds to 100% is acceptable. I’ve seen and heard this multiple times but didn’t realize there were many folks who actually choose one of these extremes.

I like the above graph—I believe it illustrates something called the Efficient Frontier model—which suggests that even a small % of stocks can increase portfolio returns without adding additional risk. I wonder whether this has been demonstrated for multiple 10-20 year time periods..?

 

[Exchme]

TPAW shows $118K/year for 0/100 using a liability matched TIPS portfolio yielding 2.3% real over 50 years, and I suspect it's more accurate, since it's not using historical backtests but mathematically certain yields as of today, with the one caveat that since you can only buy TIPS out 30 years, there may be reinvestment risk.

That re-investment risk beyond 30 years is the rather huge hole in the analysis. Remember, long TIPS yields that were near zero and sometimes negative were the norm just three years ago. So if you live past the longest available TIPS duration of 30 years, you are not getting a guaranteed return, things may well have returned to very low or negative yields and then you run out of money before you run out of days.

 

[DrRoy]

Why 100% anything?

50/50 and you should be golden.

I like 33/33/33 %

+1 on splitting it up.

 

[Fermion]

What is the other 33?

Technically most of us should be 20% or so in precious metals (I am not) just in case there is a government collapse.

If you really want to hit that low risk mark.

 

[COcheesehead]

What is the other 33?

.

Allocation nomenclature is usually equities, bonds, cash.

 

[HI Bill]

I would never be comfortable with 100% bonds due to inflation. To evaluate the risk of an allocation with 100% anything, one just needs to peruse the Callahan Periodic Table of Investment Returns. https://www.callan.com/research/202...c Table of,our other Periodic Table resources.

 

[pb4uski]

I would never be comfortable with 100% bonds due to inflation. To evaluate the risk of an allocation with 100% anything, one just needs to peruse the Callahan Periodic Table of Investment Returns. https://www.callan.com/research/202...c Table of,our other Periodic Table resources.

What if you had a 2% WR? Or were 85 yo with a 4% WR?

 

[imbatman]

IDK if I could buy AA/AAA rated bonds/ notes during high inflation now and get a 5% interest rate when my living plans only need 4%......and not worried about trying to grow my principal.....not sure the problem. All these magical percentages are fine in theory using basic models with defined boundaries....but rarely end up being comparable to the real world.....random starting dates during random economic cycles, random death, random withdrawls, random holdings........us humans in the real world are messy and defy predictability.

 

[MarieIG]

I prefer to keep some stocks and dry powder in the mix but do suspect any stock/bond allocation could work - if the circumstances for that individual were correct (i.e. a large portfolio with a low withdrawal rate and/or a large COLA'd pension, etc).