Still hanging on to my Bond Fund

[pb4uski]

Very few (hopefully none) have their entire portfolio in fixed income. It also assumes today's yields will continue.

Actually, a lot of us are 100% fixed or near to 100% fixed. We are in the "won the game" and no longer care or need to play category... so we took our ball and stick and have gone home.

Overfunding makes inflation less of a concern, but I think I can achieve 2% real return in the long run with less risk than equities.

 

[MichaelB]

FIRECalc indicates otherwise. If you go to the Portfolio tab and select the third radio button and select "A portfolio with consistent growth of 5.0%, and an inflation rate of 3.0%" and then solve for safe spending at 95% success on the Investigate tab it suggests a safe spending level that is a 4.1% WR for a 30 year time horizon.

You’re right, a 5% interest rate with a 3% inflation rate over 30 years should allow 100% survival with a constant standard of living. As long as there’s not a lot of volatility in the inflation rate.

This is not a realistic scenario for a 100% fixed income portfolio - or any portfolio.

When I use FIRECalc, set up a portfolio with a 3% initial withdrawal rate, use the “Your portfolio” tab and indicate 100% 1 month treasuries, the success rate falls to 65%, 57% with LT corporate debt and 35% using LT treasuries.

When I look at the 10 year real (inflation adjusted) rate for 10 year treasuries (here) it has been 2% real for just a couple of years. It spent just as many years negative or at zero, and most of the rest of the time at 1% or less.

 

[Tranquility Base]

So in such cases you need some low duration funds. Which is another way of saying that putting all of your bond eggs into the total bond basket (at say 6.5 duration) is not a great plan because that gives you just one bucket from which to pull funds for spending, rebalancing, etc.

Is a total bond fund like a total stock fund (VTI, SCHB) in that it hold bonds of all types and from all sectors? Does it also hold bonds of a variety of durations or just longer terms?

 

[Chuckanut]

I use a variable withdrawal rate spreadsheet that lets me withdraw more if my investments earn more than inflation and cuts withdrawals when they fall below the inflation rate. The year to year changes are very small, but over 5 years they can add up if they are a trend. It also takes into account the expected number of years I have left on this planet. That helps to take the edge off the bad years.

Withdrawal money not spent stays around in the event I have extra costs in another year. For example, Left over money from the Covid lockdowns was used to pay for my new mini-split system this year.

The above are all guidelines in my mind. Not strict rules. Life is unpredictable.

 

[RetireAge50]

FIRECalc indicates otherwise. If you go to the Portfolio tab and select the third radio button and select "A portfolio with consistent growth of 5.0%, and an inflation rate of 3.0%" and then solve for safe spending at 95% success on the Investigate tab it suggests a safe spending level that is a 4.1% WR for a 30 year time horizon.

Wouldn’t this approach be locking in one of FIRECalc’s worst case results? There has to be a better way to be conservative and also get some upside potential.

 

[COcheesehead]

You’re right, a 5% interest rate with a 3% inflation rate over 30 years should allow 100% survival with a constant standard of living. As long as there’s not a lot of volatility in the inflation rate.

This is not a realistic scenario for a 100% fixed income portfolio - or any portfolio.

When I use FIRECalc, set up a portfolio with a 3% initial withdrawal rate, use the “Your portfolio” tab and indicate 100% 1 month treasuries, the success rate falls to 65%, 57% with LT corporate debt and 35% using LT treasuries.

When I look at the 10 year real (inflation adjusted) rate for 10 year treasuries (here) it has been 2% real for just a couple of years. It spent just as many years negative or at zero, and most of the rest of the time at 1% or less.

I use actual expenses not a set percentage. Use the LT bond rate and FireCalc tells me I can have 0% equites for a 35 year retirement at 100% success.
I still have about 30% in equities, but likely will never go above that.

 

[Tranquility Base]

I do not think I'd buy "total" bond fund in a taxable account. I hate paying taxes on dividends, while watching my balance go down. Been there, done that.

I am asking from more a theoretical perspective because I am not yet at the point of having to take RMDs (although my wife will be in a few years), I am not drawing any SS yet, and I sell positions in order to do some landscaping and continue on my mission to simplify things.


One of the aspects of bonds and bond funds (still a dirty word in my mind as I struggle to wrap my head around them in light of the past few years) is where to hold them. I don't want to pay taxes on dividends and interest if they are held in a taxable account either. I can mitigate that to the extent I own US Treasuries. But if the point is to have them be available for annual income, isn't a taxable account a better place to hold them than a tax deferred account?

 

[COcheesehead]

I am asking from more a theoretical perspective because I am not yet at the point of having to take RMDs (although my wife will be in a few years), I am not drawing any SS yet, and I sell positions in order to do some landscaping and continue on my mission to simplify things.


One of the aspects of bonds and bond funds (still a dirty word in my mind as I struggle to wrap my head around them in light of the past few years) is where to hold them. I don't want to pay taxes on dividends and interest if they are held in a taxable account either. I can mitigate that to the extent I own US Treasuries. But if the point is to have them be available for annual income, isn't a taxable account a better place to hold them than a tax deferred account?

My taxable account is 95% laddered muni bonds. That’s where we pull all our income from.
I was in the second highest tax bracket when I started the ladder and it only made sense. I’ve added some taxable, but at the duration I was buying, I could get the tax equivalent yield comparable to taxable bonds. I get low six figures tax free.

 

[Phroig]

Is a total bond fund like a total stock fund (VTI, SCHB) in that it hold bonds of all types and from all sectors? Does it also hold bonds of a variety of durations or just longer terms?

Investment grade only.

 

[mrfeh]

Is a total bond fund like a total stock fund (VTI, SCHB) in that it hold bonds of all types and from all sectors? Does it also hold bonds of a variety of durations or just longer terms?

Here are the holdings of one of the more popular total bond funds:

https://www.morningstar.com/funds/xnas/vbtlx/portfolio

 

[pb4uski]

Below are the holdings of BND ETF. ~2/3 US government bonds and the remainder investment grade corporate bonds.

 

[TickTock]

I use a variable withdrawal rate spreadsheet that lets me withdraw more if my investments earn more than inflation and cuts withdrawals when they fall below the inflation rate. The year to year changes are very small, but over 5 years they can add up if they are a trend. It also takes into account the expected number of years I have left on this planet. That helps to take the edge off the bad years.

It’s a guideline I use.

+1

This is an area that is finally (IMO) getting the attention it deserves. The original Trinity study and most retirement calculators assume a rigid withdrawal rule. Why? Well, it's easy. And it does provide useful information. But real humans tend not to act that way - after a bad run they're nervous and put off the vacation/don't buy the new set of golf clubs/cut back on Starbucks/stop the massages/whatever's in their "nice, but not needed" spending bucket. Conversely, after a good run, they tend to "Blow That Dough!" [Seems like I've seen a thread on that...]

Vanguard now has a guiderails approach where you adjust yearly spending, but not more than 5%, according to the prvious year's results.

 

[Phroig]

I am asking from more a theoretical perspective because I am not yet at the point of having to take RMDs (although my wife will be in a few years), I am not drawing any SS yet, and I sell positions in order to do some landscaping and continue on my mission to simplify things.

But if the point is to have them be available for annual income, isn't a taxable account a better place to hold them than a tax deferred account?

If you put fixed income in taxable, you’d have to put equities in tax-deferred to maintain your asset allocation, which is not ideal.

 

[pb4uski]

You’re right, a 5% interest rate with a 3% inflation rate over 30 years should allow 100% survival with a constant standard of living. As long as there’s not a lot of volatility in the inflation rate.

This is not a realistic scenario for a 100% fixed income portfolio - or any portfolio.

When I use FIRECalc, set up a portfolio with a 3% initial withdrawal rate, use the “Your portfolio” tab and indicate 100% 1 month treasuries, the success rate falls to 65%, 57% with LT corporate debt and 35% using LT treasuries. ...

But nobody would invest 100% in 1 month Treasuries!

If I change your scenario of 3% withdrawals ($30k spending on $1m portfolio for 30 year time horizon) and just change equities from 75% to 0% to use the long interest rate then the success rate is 88.6%... using 5 year Treasuries it is also 88.6%. Flipped around, FIRECalc indicates that a 100% bond portfolio could provide 2.7% inflation adjusted withdrawals.

The point is that if your retirement is well-funded or over-funded that one can prudently use a retirement portfolio that is 100% bonds. I then add a little spice with some hiqh quality corporate preferred stocks.

 

[Ncc1701]

The long Term rate of return on VBTLX is 3.2% with risk

You can buy a 10 year CD right now and lock in 4.2% with no risk.

What's to think about?

 

[Markola]

VBTLX has been a complete bummer. However, its Duration is a little over 6 years and we’re 2.25 years into the Fed rate hikes. I’m going to grit my teeth and bear it to see what happens. It will either work out or it will be an expensive lesson, which comes with the territory of investing.

 

[Montecfo]

A lot of people here don’t rebalance.

Particularly those living off interest from fixed income or dividends from equities.

That's fine but does not really address my question.

 

[audreyh1]

That's fine but does not really address my question.

My point is folks who live off interest or stock dividends from their investments don’t generally rebalance. They prefer to leave their underlying investments alone, except for replacing maturing bonds.

 

[mrfeh]

The long Term rate of return on VBTLX is 3.2% with risk

You can buy a 10 year CD right now and lock in 4.2% with no risk.

What's to think about?

The SEC yield (an estimate of what it will return over the next <average duration> years) of VBTLX is 4.65%

https://investor.vanguard.com/investment-products/mutual-funds/profile/vbtlx

 

[Ncc1701]

The SEC yield (an estimate of what it will return over the next <average duration> years) of VBTLX is 4.65%

https://investor.vanguard.com/investment-products/mutual-funds/profile/vbtlx

That figure omits any appreciation or depreciation and is absolutely no way "an estimate of what it will return over the next <average duration> years".

If the Fed starts tightening again 5 years from now, we're back to its 3.2% long term rate of total return

 

[pb4uski]

The SEC yield (an estimate of what it will return over the next <average duration> years) of VBTLX is 4.65%

https://investor.vanguard.com/investment-products/mutual-funds/profile/vbtlx

In theory perhaps... but then why is the distribution yield based on actual distributions that the fund has made in the last 9 months only 2.8-3.2%?

Type	$/Share	Payable date	Record date	Reinvest date	Reinvest price	Distribution yield
Dividend	$0.025740	09/01/2023	08/31/2023	08/31/2023	$9.44	3.23%
Dividend	$0.025385	08/01/2023	07/31/2023	07/31/2023	$9.52	3.14%
Dividend	$0.024502	07/03/2023	06/30/2023	06/30/2023	$9.55	3.11%
Dividend	$0.024639	06/01/2023	05/31/2023	05/31/2023	$9.61	3.01%
Dividend	$0.023717	05/01/2023	04/28/2023	04/28/2023	$9.74	2.97%
Dividend	$0.024104	04/03/2023	03/31/2023	03/31/2023	$9.71	2.95%
Dividend	$0.021782	03/01/2023	02/28/2023	02/28/2023	$9.49	2.96%
Dividend	$0.023135	02/01/2023	01/31/2023	01/31/2023	$9.76	2.81%
Dividend	$0.022785	01/03/2023	12/30/2022	12/30/2022	$9.48	2.79%

 

[Montecfo]

Is a total bond fund like a total stock fund (VTI, SCHB) in that it hold bonds of all types and from all sectors? Does it also hold bonds of a variety of durations or just longer terms?

Yes. If it tracks the Bloomberg Agg then it holds a sliver of all investment grade bonds, govt and corp, of various durations.

 

[Montecfo]

My point is folks who live off interest or stock dividends from their investments don’t generally rebalance. They prefer to leave their underlying investments alone, except for replacing maturing bonds.

Yes, as you stated. But laddering does not mean you are 100% bonds or living off interest and/or dividends.

Many people have been led or misled to abandon bond funds and ladder.

If you do so exclusively there is no easy way to rebalance to maintain your AA, except in the rare case your AA is 100% bonds.

That was my point.

 

[Phroig]

Distribution rates still reflect coupon rates when the bonds were issued. If a $100 bond issued with a coupon of 2% drops in value to, e.g., $85 because the yield climbed to 5%, the distribution rate is only 2/85, that is, 2.35%. Distribution rates will increase as low coupon bonds mature and are replaced.

 

[audreyh1]

Yes, as you stated. But laddering does not mean you are 100% bonds or living off interest and/or dividends.

Many people have been led or misled to abandon bond funds and ladder.

If you do so exclusively there is no easy way to rebalance to maintain your AA, except in the rare case your AA is 100% bonds.

That was my point.

It’s true - someone who is laddering bonds in their fixed income allocation yet attempting to maintain an overall AA using rebalancing has to plan for rebalancing events. If they don’t have sufficient cash on hand, they’ll have to wait until some of the bonds mature to obtain the cash to buy more equities, or sell some bonds on the secondary market to do this. They also have to take into account annual withdrawals if interest/dividends don’t cover their annual needs.

Personally I’m not interested in running my own bond fund, but clearly many here are these days.