Rolling out of a Ladder?

[Al18]

It makes no sense to me to create this fixed income bridge, and then quickly deplete it soon after you retire. For example, you create a 5 year CD or TIPS ladder before retirement, to live off in case of a depressed stock market. You retire and it turns out the market is only down for 2 years and the stock market is dramatically up 3 years.

My alternate plan is to draw 1/2 of your 1st year from the CD, and fund the rest of year 1 by selling stocks. The 2nd year, base your withdrawals on stock market performance - selling mostly stocks in an up market and a small % of your CD for the remains of your bridge years until age 60. At 60, sell some stocks to replenish your 5 year CD ladder and repeat the same way until you receive your SS benefit.

 

[COcheesehead]

It's quite a common practice that has been discussed here and BH many times. Sometimes termed a "bridge to SS." Sometimes termed a LMP/RP approach (liability matching portfolio/risk portfolio).

You are correct, of course, that the overall AA smoothly reverts as the ladder is depleted. I have such a bridge, and I track both my overall AA and the AA of the pot excluding the bridge.

Is it mental accounting? Yes, of course. Why do it that way? Well, a great deal of research has concluded that people are happiest when they have a base income that can cover their needs, and also a pot of money that has the potential for upside growth. (See, for example the Stanford Center on Longevity.) It also allows one to conceptualize the income from the LMP and SS sources without introducing problematic notions about the SS "asset" (which is of course not an asset).

Of course, this mental accounting is more pertinent for people who are not vastly overfunded vis-a-vis their expenses.

I get the bridge concept. I did it myself, but to not include significant assets in your AA is beyond baffling to me.

 

[SJhawkins]

I get the bridge concept. I did it myself, but to not include significant assets in your AA is beyond baffling to me.

This where I'm landing

I'm going to keep my total AA as I have for the past 20 years and include the ladder in the fixed income side/pile. It's the only way to control a risk profile that makes sense to me.

I will roll back into a fund or two as the ladder sells off for simplicity for my future self and for the ease of my spouse as she fully understands how to reblance using funds. This will make updating the IPS simple too, that's a plus.

Knowing that I'm good if all heck breaks loose, inflation and or crash I'm covered prior to SS is good enough (still have X years in a ladder + other fixed income). Think we have enough levers/options to pull if needed.

Will let you know how it works out on the otherside, otherwise it's just a WAG!

 

[pb4uski]

I use a rolling ladder as a bond fund substitute for our bond allocation. Initially, I used individual bond but limited the investment in any one issuer to ~1% of the total portfolio. As a result I had a lot of individual bonds that I could reasonably manage but then it dawned on me that the many individual bonds would be a burden on DW with DD helping her if something happened to me.

So now, I'm transitioning away from individual bonds to BlackRock iBond* target maturity bond ETFs with maturities, calls and interest cash flows. I usually do a maturity analysis by year and compare the results to my target and then use purchase to fill in any gaps working from nearer years to later years.

The end goal, which will take some time if I wait for maturites, will be to have a target maturity portfolio with seven rungs and spread between Treasuries (14%), investment grade corporates (57%) and high yield corporates (29%).

Since my rolling ladder is a bond fund substitute, I include it in my AA. However, if I had a ladder to fund getting to SS I can see excluding it but I still think it would be better to include it.

* not to be confused with Treasury Direct ibonds. I've had TD ibonds and TD was so primitive that I could not stand using it and sold out and am happy to bdone with TD.

 

[5Miler]

I use a rolling ladder as a bond fund substitute for our bond allocation. Initially, I used individual bond but limited the investment in any one issuer to ~1% of the total portfolio. As a result I had a lot of individual bonds that I could reasonably manage but then it dawned on me that the many individual bonds would be a burden on DW with DD helping her if something happened to me.

So now, I'm transitioning away from individual bonds to BlackRock iBond* target maturity bond ETFs with maturities, calls and interest cash flows. I usually do a maturity analysis by year and compare the results to my target and then use purchase to fill in any gaps working from nearer years to later years.

The end goal, which will take some time if I wait for maturites, will be to have a target maturity portfolio with seven rungs and spread between Treasuries (14%), investment grade corporates (57%) and high yield corporates (29%).

Since my rolling ladder is a bond fund substitute, I include it in my AA. However, if I had a ladder to fund getting to SS I can see excluding it but I still think it would be better to include it.

* not to be confused with Treasury Direct ibonds. I've had TD ibonds and TD was so primitive that I could not stand using it and sold out and am happy to bdone with TD.

I have also just recently begun transitioning to the BlackRock iBond target maturity ETF's for my fixed income needs. As a grossly unsophisticated investor I have depended largely upon my investments in S&P 500 funds or similar with a 5% splash of international and what I thought was a goodly portion of fixed income via a Vanguard Target Date fund.

I recently took a deeper look at my holdings and found most of my US based stock funds essentially had similar holdings which were heavily dependent on the top 7 stocks which included 50% of my Target Date fund which I assumed covered my fixed income needs. Sometimes luck favors the ignorant and my heavy S&P 500 tilts has somehow served me well over the years although probably not the ideal AA. What I thought was an 80/20 AA turns out to be more like 85/15.

I also began taking RMDs this year and while completing my first year of distributions, discovered what a giant pain in the backside it is when the markets gyrate like they have been doing this year. Nobody likes moving money around when the market is down.

Thus I decided to go to a 70/30 or maybe a 65/35 AA using the BlackRock iBonds as my fixed income tool as they are liquid if needed quickly and act like an individual bond without the bother of trying to juggle multiple bond purchased. They make constructing a ladder pretty easy even for someone like me. So far I have a 4 year ladder (2027 to 2030) based on my RMD needs. If my equities do well I just roll over the iBond and if my equities do not so well, I use the iBond funds and wait for better market conditions to reconstruct my ladder.

I still have to move a few hundred $K to flesh out a decent ladder so it is still a work in progress. I have decided I am willing to give up some potential equity gains to reduce volatility in my holdings. I really don't need extreme growth these days as my needs are few and I reinvested most of my RMD in my brokerage account this year.

 

[SJhawkins]

Wanted to circle back and give a thank you to all for the input, much appreciated.