Investing in Bonds

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Don46
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Investing in Bonds

Post by Don46 »

I have an IRA worth about 1.2 million with Schwab. My total investment portfolio is about 4 million. I want to put this IRA into fixed income investments for ballast and some steady income. I'm 67, not yet retired, in good health, and probably going to go another two years before I do retire. Overall I probably have about 60 percent of my main accounts in fixed income.
I am transitioning from a managed IRA account and it has not done very well over the past three years.
One option is to put it into a total bond fund but I'm wary of bond funds and wonder if I cannot achieve diversity some better way.
A second option is to go with a Target fund. Does that avoid the problems of a bond fund?
A third is to set up a portfolio of individual bonds that would mature as I move into my 70s and need to withdraw. Can I, with help from Schwab, set up a ladder of bonds that would assure diversity, safety, and income?

I welcome advice.
linuxizer
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Re: Investing in Bonds

Post by linuxizer »

Have you read this?

http://www.bogleheads.org/wiki/Individu ... _Bond_Fund

The only target bond funds available are expensive. For a retirement account they are also unnecessary. If you want to manage an individual bond portfolio, then go for it, but don't do it out of the misconception that bond funds are somehow riskier than the bonds they hold.

You might be in the portfolio size range where a Separate Account Manager such as Larry's company would be a reasonable option.
Twins Fan
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Re: Investing in Bonds

Post by Twins Fan »

I'm no expert, but I'll throw my two cents in.

It's tough to beat the diversity of a total bond fund. Could you do better? I guess if you wanted to be specific like, all treasuries, all intermediate term, all whichever... But none are as diverse as total bond. I'm not a big fan of total bond because of the MBS porting it holds. But, that's just my opinion. Others might like it because it has MBS in it.

A target date fund, like an all in one fund? I don't think it would rid you of whatever bond fund problems you are thinking about. Since you are looking for safety and income here, I'm guessing you would pick a target date fund with a high percentage of fixed income. Which would mean you would have a large percentage of total bond and some TIPS and cash in the fund.

A bond ladder... up to you. In Larry's book, he says if one is to start a bond ladder they should have $500k plus to do so. You definitely have that... nicely done, by the way! :beer

You say you want income. Do you want monthly income, or yearly income? If monthly is the goal, I think funds are the better bet than indivdual bonds there. But again, no expert here. I don't know if a bond ladder would pay monthly income/dividends.

Have you thought of a 1/3 TIPS, 1/3 short term index, 1/3 intermediate term index, or something along those lines. Just an example to get you thinking along different lines there.
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Re: Investing in Bonds

Post by abuss368 »

Twins Fan wrote:
It's tough to beat the diversity of a total bond fund. Could you do better? I guess if you wanted to be specific like, all treasuries, all intermediate term, all whichever... But none are as diverse as total bond.
This is where I am at. It is tough to beat Total Bond Market Index Fund. If it was my decision, I would put whatever amount into this one low cost, highly diversified, monthly dividends, fund and be done with it. Do I sometimes wish it included a real Total Bond Market by including TIPS and perhaps the market weight in High Yield? Sometimes. Perhaps the index will continue to evolve and be updated as the characteristics of the market evolve.

One thing you have to remember is Total Bond includes short, intermediate, and long term bonds. We have been invested with this fund for a long time in all interest rate environments and we are very happy with the simplicity and the results. Could you do better with market timing and perhaps security selection? Maybe or maybe not.

Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!

Every time I think about adding additional bond funds or complexity to fixed income I can not seem to go through with it because of this fund (and Intermediate Term Tax Exempt in taxable). It is that hard to beat.

Thank you Jack Bogle!
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Investing in Bonds

Post by Twins Fan »

abuss368 wrote:Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!
I couldn't help but run some numbers like that either. Although, mine were pretty guesstimate and I was thinking intermediate term index. But, mine came out to $2800/month and change based on the OPs starting sum. I thought, WHOAH... I could handle that!
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Re: Investing in Bonds

Post by rkhusky »

abuss368 wrote: Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!
And you get that monthly income, even if rates go up and the NAV drops, as people have been warning for years now.
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Re: Investing in Bonds

Post by john94549 »

An IRA can be used to establish an IRA CD ladder. Custodian-to-custodian transfers. Many threads herein on IRA bond funds, IRA bond/CD ladders, and such. It takes a bit of time to manage, but not too much. Might be some merit to looking into. I harvest the interest from one IRA CD each month for "walking around" money. The CU just plops it in my checking account. Painless.
Last edited by john94549 on Thu Nov 07, 2013 8:20 pm, edited 1 time in total.
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Re: Investing in Bonds

Post by spocksynder »

Don46 wrote:I have an IRA worth about 1.2 million with Schwab.
Slightly off-topic, but I wonder how is possible to accumulate such a sum in an IRA if the annual contribution limits are just $5500 at present, and must have been lower in the previous years?
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Re: Investing in Bonds

Post by john94549 »

Spocksnyder, at our firm, we had employee contribution, employer match, and profit-sharing, all pouring into a 401K. Some years, it seemed like one-third of my total compensation package was going into the 401K. It was a bit hard to understand, but I was assured it was all above-board.

After growing and compounding for a number of years, and rolling into an IRA, the amount does not shock me.
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Re: Investing in Bonds

Post by spocksynder »

john94549 wrote:Spocksnyder, at our firm, we had employee contribution, employer match, and profit-sharing, all pouring into a 401K. Some years, it seemed like one-third of my total compensation package was going into the 401K. It was a bit hard to understand, but I was assured it was all above-board.

After growing and compounding for a number of years, and rolling into an IRA, the amount does not shock me.
Thanks, that clarifies it for me. Direct contributions are not the only way to get money into an IRA.
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Re: Investing in Bonds

Post by john94549 »

Spocksnyder, as with most folks in their forty-something age cohort (some twenty years ago), I never trusted the management committee, siphoning off all the money into these esoteric "tax-advantaged" index funds. Little did I know. Those modest tax-advantaged deferrals would pay off, big time, later on.
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Re: Investing in Bonds

Post by Retread »

spocksynder wrote:Slightly off-topic, but I wonder how is possible to accumulate such a sum in an IRA if the annual contribution limits are just $5500 at present, and must have been lower in the previous years?
Very simple - rollovers from other qualified plans such as 401k's, lump sum pensions, etc.
Bruce
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Re: Investing in Bonds

Post by Twins Fan »

Can't one inherit an IRA also?
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Re: Investing in Bonds

Post by abuss368 »

Twins Fan wrote:Can't one inherit an IRA also?
Yes.
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Re: Investing in Bonds

Post by poppa23 »

abuss368 wrote:
Twins Fan wrote:
It's tough to beat the diversity of a total bond fund. Could you do better? I guess if you wanted to be specific like, all treasuries, all intermediate term, all whichever... But none are as diverse as total bond.
This is where I am at. It is tough to beat Total Bond Market Index Fund. If it was my decision, I would put whatever amount into this one low cost, highly diversified, monthly dividends, fund and be done with it. Do I sometimes wish it included a real Total Bond Market by including TIPS and perhaps the market weight in High Yield? Sometimes. Perhaps the index will continue to evolve and be updated as the characteristics of the market evolve.

One thing you have to remember is Total Bond includes short, intermediate, and long term bonds. We have been invested with this fund for a long time in all interest rate environments and we are very happy with the simplicity and the results. Could you do better with market timing and perhaps security selection? Maybe or maybe not.

Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!

Every time I think about adding additional bond funds or complexity to fixed income I can not seem to go through with it because of this fund (and Intermediate Term Tax Exempt in taxable). It is that hard to beat.

Thank you Jack Bogle!
Would you change your mind if you had a state specific bond fund avail....
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Re: Investing in Bonds

Post by abuss368 »

The original post referenced an IRA.
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Don46
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Re: Investing in Bonds

Post by Don46 »

spocksynder wrote:
Don46 wrote:I have an IRA worth about 1.2 million with Schwab.
Slightly off-topic, but I wonder how is possible to accumulate such a sum in an IRA if the annual contribution limits are just $5500 at present, and must have been lower in the previous years?


I rolled over a 403b (like a 401k but usually for educators) from a former employer and an individual IRA I had been accumulating. The 403b I was in involved my contribution of 5% of my salary and the employer, a University, put in 10%. I started at about 11K total salary a year. I now have socked away another $485k in three other tax deferred accounts with my current employer. Still a portion of my salary is matched, more like 1 to 1 with this university, but the rest comes out of my salary. I'm deferring taxes, letting pre-tax earnings grow, and paying my taxes later. The minimum distribution rule will kick in in 2016 when I turn 70.5 and I will have to withdraw over $62k each year (my IRA accounts total about 1.7 mil now), and that is when I pay my taxes on these earnings.
Last edited by Don46 on Wed Dec 04, 2013 8:14 pm, edited 3 times in total.
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Re: Investing in Bonds

Post by livesoft »

And perhaps the 403(b) had significant employer contributions. I know that way back in the 80's my employer contributed 15% of my salary to my 403(b) even though I was limited to contributing about 10%.
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Re: Investing in Bonds

Post by Don46 »

Retread wrote:
spocksynder wrote:Slightly off-topic, but I wonder how is possible to accumulate such a sum in an IRA if the annual contribution limits are just $5500 at present, and must have been lower in the previous years?
Very simple - rollovers from other qualified plans such as 401k's, lump sum pensions, etc.
Bruce
Exactly: I rolled over a 403b from a previous employer in 2004.
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Re: Investing in Bonds

Post by magellan »

It's a bit of a hassle compared to funds, but in a somewhat similar situation, I built a 5 yr CD ladder for 50-60% of fixed income, and used Vanguard Intermediate Term Investment Grade bond fund for the rest. Actually, I also blended in some High Yield bond fund, but to keep it less complicated and less risky, you could skip that part.

The idea is to create a fixed income portfolio that has about the credit risk and duration of Total Bond Market, but offers a slightly higher yield. Five year treasuries pay 1.37% while a 5 year CD pays 2%, so there's a bit of a bonus with the CDs.

I made sure the CDs stay under FDIC limits by using creative account titling. For us, the CDs are in taxable, which makes the strategy more tax efficient compared to just holding TBM in both taxable and tax deferred. Income from the lower yielding CDs is taxed, while income from the higher yielding investment grade fund is tax sheltered.

Jim
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Re: Investing in Bonds

Post by Bustoff »

rkhusky wrote:
abuss368 wrote: Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!
And you get that monthly income, even if rates go up and the NAV drops...
Not so fast. I've asked this question and some venerable bogleheads say NO.
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Re: Investing in Bonds

Post by MnD »

linuxizer wrote:Have you read this?

http://www.bogleheads.org/wiki/Individu ... _Bond_Fund

The only target bond funds available are expensive.
That's not true with respect to the iShares Target maturity bond funds (ER .10%). I guess the wiki needs updating.
http://us.ishares.com/solutions/isharesbonds.htm
A ladder of these and individual Treasury bonds would seem to fit the bill and be very low cost.
However if you keep rolling over the the ishare funds and and t-bonds, they aren't going to behave very differently than a traditional bond fund unless you just pretend that price fluctuations "don't apply". What you can do with a dual ladder of treasuries and corporate target funds is stop rolling over, and then be assured (barring defaults) that you will receive your principal back as the duration of your overall "fund" you created reduces from X years to zero.
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Re: Investing in Bonds

Post by rkhusky »

Bustoff wrote:
rkhusky wrote:
abuss368 wrote: Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!
And you get that monthly income, even if rates go up and the NAV drops...
Not so fast. I've asked this question and some venerable bogleheads say NO.
If rates go up, you should get that monthly income or more, unless there are a significant number of defaults. TBM invests in fairly safe securities. But I'm not a bond expert, so perhaps there is some arcane way you could lose income.
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Re: Investing in Bonds

Post by magellan »

abuss368 wrote:Consider this: The Vanguard Total Bond Market paid a monthly distribution of $.02392 on 10/31/2013 with a re-investment price of $10.72.
You are considering $1,200,000. That results in approximately 112,000 shares ($1,200,000 / $10.72 per share). The monthly income is approximately $2,700 (112,000 shares * $.02392). Each and every month from that one fund. If you don't need it all you could re-invest a small portion of that to continue to fight inflation. That is huge!!!
Generally good points in the rest of this post, but I'd add an important caveat on this part.

Currently TBM has a distribution yield of 2.64%, but an SEC yield of only 2.15%. That means that about 20-25% of the fund's monthly distribution represents a return of capital rather than interest earnings. Spending that extra part of the distribution (over the SEC yield) is actually eating into your seed corn.

Fund distributions are determined based on arcane tax rules. They are not an accurate indication of the level of income that a fund is producing. It's a big mistake to think you can always spend the distribution on a bond fund and still preserve your capital.

I don't think there's much disagreement that retirees should invest for total return and ignore the income that investments happen to throw off. Sure, fund distributions are important for tax and cash flow planning, but they don't offer any indication of how much you can safely withdraw from your portfolio each year.

Jim
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Re: Investing in Bonds

Post by Don46 »

My goal would be preservation of capital, ballast to protect against downside risk in the overall portfolio, and enough total return to offset to some degree at least inflation and taxes.
When we are talking about Total Bond Fund, is this the best choice: Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
I am seeing an expense ratio of .10 pct and average total returns of:
–1.18% 2.90% 6.04% 4.75% 4.72% for 1, 3, 5, 10 year, since inception, 2001.
I'm doing much worse than this with the managed account I have had for the past 3+ years, that's for sure. :annoyed
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Re: Investing in Bonds

Post by reggiesimpson »

Agree with magellan above. I am in a similar position as the OP. I would recommend a ladder of individual bonds.
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Re: Investing in Bonds

Post by Don46 »

Twins Fan wrote: I'm not a big fan of total bond because of the MBS porting it holds. But, that's just my opinion. Others might like it because it has MBS in it.
I'm clueless: what is MBS? And why is this a problem with the Total Bond Fund? I'm still learning here.
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Re: Investing in Bonds

Post by spocksynder »

Don46 wrote:
spocksynder wrote:
Don46 wrote:I have an IRA worth about 1.2 million with Schwab.
Slightly off-topic, but I wonder how is possible to accumulate such a sum in an IRA if the annual contribution limits are just $5500 at present, and must have been lower in the previous years?


I rolled over a 403b (like a 401k but usually for educators) from a former employer and an individual IRA I had been accumulating. The 403b I was in involved my contribution of 5% of my salary and the employer, a University, put in 10%. I started at about 11K total salary a year. I now have socked away another $485 in three other tax deferred accounts with my current employer. Still a portion of my salary is matched, more like 1 to 1 with this university, but the rest come out of my salary. I'm deferring taxes, letting pre-tax earnings grow, and paying my taxes later. The minimum distribution rule will kick in in 2016 when I turn 70.5 and I will have to withdraw over $62k each year (my IRA accounts total about 1.7 mil now), and that is when I pay my taxes on these earnings.
Thank you for the detailed explanation. That was very helpful for my knowledge! :happy
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Re: Investing in Bonds

Post by Twins Fan »

Don46 wrote:
Twins Fan wrote: I'm not a big fan of total bond because of the MBS porting it holds. But, that's just my opinion. Others might like it because it has MBS in it.
I'm clueless: what is MBS? And why is this a problem with the Total Bond Fund? I'm still learning here.
Mortgage Backed Securities... Total bond holds about 23% MBS, or around there.

My blue collar explanation... The MBS portion is really an unknown. There is no good way to determine the duration. As interest rates go down, the duration can be shorter. As interest rates go up, the duration can be longer. So, recent times with interest rates going down to very low levels it was like a short term duration with all the refinancing, home buying and so on. If or when interest rates go up again, it will lengthen the duration with less refinancing, home buying (maybe?), and so on. I.E. many or most will be sitting on the low rate mortgages they have gotten into the past few years and sitting on them for a long time.

I could see the MBS portion being a drag on total bond going forward. Just my opinion, and again, I'm no expert.
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Re: Investing in Bonds

Post by abuss368 »

I will say I am really happy with Total Bond Index - Admiral shares all the way around. Do I wish the index the fund tracks be updated...maybe. But this fund is hard to beat. I may be misstaken but I believe this is the largest bond index fund in the world (i.e. PIMCO has the largest bond fund overall and an active one at that with Bill Gross). Net Assets of the Total Bond Index are just shy of $200 BILLION.
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Re: Investing in Bonds

Post by RYD »

Magellan you wrote

"Currently TBM has a distribution yield of 2.64%, but an SEC yield of only 2.15%. That means that about 20-25% of the fund's monthly distribution represents a return of capital rather than interest earnings. Spending that extra part of the distribution (over the SEC yield) is actually eating into your seed corn."

My understanding is that the SEC Yield represents a backwards look at interest earned on the bonds and NOT any return of principal. My read of your post is that the SEC yield represents some return of principal.

Which is correct?

RYD
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Re: Investing in Bonds

Post by magellan »

RYD wrote: My understanding is that the SEC Yield represents a backwards look at interest earned on the bonds and NOT any return of principal. My read of your post is that the SEC yield represents some return of principal.

Which is correct?
SEC yield is generally the best representation of a fund's interest earnings and doesn't include return of principal.

I was contrasting SEC yield with a fund's distribution yield. The distribution yield is the amount of the last distribution per share divided by the share price. Some people think that as long as they only spend a fund's distributions, they're preserving principal. But in fact, the amount a fund distributes each month is set by arcane IRS rules about how bond premiums are amortized. As a result, a fund's distribution yield can become disconnected from its SEC yield.

Short Version - For tax and cash flow planning, use distribution yield to see how much cash a fund is throwing off each month. To see how much income a bond fund is generating, look at SEC yield.

Jim
Last edited by magellan on Fri Nov 08, 2013 12:33 pm, edited 1 time in total.
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Re: Investing in Bonds

Post by magellan »

If you'd like to dig deeper into the reasons behind distribution yield and SEC yield differences, check out this thread:

http://www.bogleheads.org/forum/viewtop ... 8#p1380443

Jim
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Re: Investing in Bonds

Post by abuss368 »

Where I am hung up is if the distribution includes a return of principal, why then does the year end tax reporting not detail that (i.e. like REITs)?
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Re: Investing in Bonds

Post by RYD »

Magellan

Thanks for the clarification.

Curious if I am planning on living off the interest I would need to have the SEC yield sent to me monthly or quarterly. Does Vanguard do this?

RYD
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Re: Investing in Bonds

Post by abuss368 »

RYD wrote:Magellan

Thanks for the clarification.

Curious if I am planning on living off the interest I would need to have the SEC yield sent to me monthly or quarterly. Does Vanguard do this?

RYD
You only need to report what is on your year end Form 1099s.
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Re: Investing in Bonds

Post by RYD »

Abuss 386

My question is more around having Unguarded seed me a check each month or quarter for what the SEC yield was.

I looked at the V site and I have an option to have endives ad interest reinvested so I guess I would chose to have Interest sent to me. I just want to insure that it is interest only and no principal.
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Re: Investing in Bonds

Post by dbr »

RYD wrote:Magellan

Thanks for the clarification.

Curious if I am planning on living off the interest I would need to have the SEC yield sent to me monthly or quarterly. Does Vanguard do this?

RYD
You don't really mean what you are asking. Total Bond pays a dividend monthly based on earnings that month less expenses. Distribution yield is a measure of the historic magnitude of those dividends. SEC yield is not what is ever distributed as such. If you want to see now that has worked recently the distribution data is here:

https://personal.vanguard.com/us/funds/ ... =INT#tab=4

If you want to live on the dividends Vanguard will just pay those into a sweep account or presumably some other account you can set up with them.

The fund can also make capital gains distributions if it has sold assets at a net profit. If you are afraid of raiding principal, then you should reinvest those distributions.
I am not sure when a fund like TBM would actually distribute a return of principal, but it would have to be identified as such on a 1099, and you could then be sure to reinvest it.
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Re: Investing in Bonds

Post by abuss368 »

RYD wrote:Abuss 386

My question is more around having Unguarded seed me a check each month or quarter for what the SEC yield was.

I looked at the V site and I have an option to have endives ad interest reinvested so I guess I would chose to have Interest sent to me. I just want to insure that it is interest only and no principal.
Thank you for clarifying.
John C. Bogle: “Simplicity is the master key to financial success."
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magellan
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Re: Investing in Bonds

Post by magellan »

RYD wrote:Curious if I am planning on living off the interest I would need to have the SEC yield sent to me monthly or quarterly. Does Vanguard do this?
We may be getting off into the weeds a bit. Vanguard doesn't offer that type of service, but you can specify periodic redemptions of fixed dollar amounts.

IMO, retirement cash flow planning is a whole other topic. For me, aside from tax and cash flow planning issues, I'm indifferent as to whether our annual spending is funded from interest, dividend distributions, or share redemptions.

We have all distributions from our tax deferred accounts automatically reinvested back into the same account/fund. All distributions from taxable accounts are automatically sent to our checking account. In general, I don't want any money leaving tax deferred accounts unless it's a planned withdrawal. The exact amount of interest any given IRA account is earning at any instant isn't important in terms of cash flow or withdrawal planning.

At a high level, I know how much I want to withdraw each year and when I do portfolio rebalancing, I figure out roughly where the money will come from.

Jim
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