Advice on Fixed Income/Bond Investments

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Don46
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Advice on Fixed Income/Bond Investments

Post by Don46 »

I am making the transition from a managed account that includes an IRA and a taxable account with Schwab. I have about 3.2 million all together, and another .5 million in employer sponsored retirement accounts. I'm 67, and therefore about 3-4 years out from the point where the Minimum Required Distribution will compel me to begin withdrawals from my IRA. I have more than I need to retire; at least I don't have to take unnecessary risks. I want to allocate my IRA and part of my taxable fund to fixed income/bond investments.

I have learned a great deal from the Bogleheads forum and wiki and have read both of the Bogleheads guides to investing and retirement. But I find myself agonizing over the running debate about the risk of losing value in bonds (funds or individual bonds) in the face of an almost certain rise in interest rates. I understand and accept the Boglehead investment philosophy. I'm not trying to time or beat the market, but I'm still worried about going into bond funds with so much of my money in the face of impending rises in interest rates.

What I'm asking is what are smart people doing with their fixed income/bond investments right now?
What would you advise I do at my age and in my situation?
Many thanks
Last edited by Don46 on Sun Dec 08, 2013 5:27 pm, edited 1 time in total.
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Clark & Addison
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Re: Advice on Fixed Income/Bond Investments

Post by Clark & Addison »

Does your employer sponsored plan offer a guaranteed fund? I just moved a portion of my fixed income/bond allocation to the guaranteed fund. I know that the guarantee is only as good as the company guaranteeing it, but I believe that there is a greater chance of interest rates raising than the company folding.
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ogd
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Re: Advice on Fixed Income/Bond Investments

Post by ogd »

Don46 wrote:But I find myself agonizing over the running debate about the risk of losing value in bonds (funds or individual bonds) in the face of an almost certain rise in interest rates. I understand and accept the Boglehead investment philosophy. I'm not trying to time or beat the market, but I'm still worried about going into bond funds with so much of my money in the face of impending rises in interest rates.
Don: the market is pricing in the future of interest rates. This is visible in the overly steep yield curve and the anticipatory moves in market rates before any QE tapering or rate increases have actually occured. If the market is right, you will get about the SEC yield of a fund or the YtM of a bond, even sold early. To do better, you have to guess better than the market. Very few of us are equipped to do this. If you're listening to this or that commentator, beware that yapping about higher rates has been going on for 3-4 years now and we're still considerably lower than in 2010 even after the most recent moves.

That said, it's quite possible to beat the market with instruments that the market doesn't have access to: Stable Value / G fund (retirement-only deals), CDs (incentives to attract money), I-Bonds (probably too little allowance to matter to you). Personally, I worry mostly about stocks (younger than you) so regular bond funds work just fine for me because of convenience and liquidity, but it's very understandable if with a higher bond alloc you spend some time surfing the CD market, for example.
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Taylor Larimore
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Vanguard Research

Post by Taylor Larimore »

Hi Don:
I find myself agonizing over the running debate about the risk of losing value in bonds (funds or individual bonds) in the face of an almost certain rise in interest rates.
I can't blame you for being worried after reading all the scare stories in the media. It is what sells.

Vanguard's Research Group published a lengthy report on this topic last July: This is a part of their Conclusion:
We continue to encourage investors to view bonds as a diversifier for the riskier assets in their portfolio. Ultimately, most bond investors should consider maintaining their strategic allocation to fixed income and avoid tactical changes that may increase the risk in their portfolios.
Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

Clark & Addison wrote:Does your employer sponsored plan offer a guaranteed fund? I just moved a portion of my fixed income/bond allocation to the guaranteed fund. I know that the guarantee is only as good as the company guaranteeing it, but I believe that there is a greater chance of interest rates raising than the company folding.
In the larger of the two employer linked accounts, I see what I believe is a variable annuity fund offered by Great Western:
Certificate Fund Post-2009 84 Months 10/01/2013 12/31/2020 2.05%

Another is: South Carolina Stable Value Fund 10/01/2013 12/31/2013 2.8%
The last figure is the current yield in each case.

Bond Funds include
Black Rock Inflation Protected Institutional, down 5.7% ytd
Pimco Total Return, down .97 ytd

The other account is with TIAA-CREF and I think it may have more fixed income/bond options.
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in_reality
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Re: Advice on Fixed Income/Bond Investments

Post by in_reality »

ogd wrote: regular bond funds work just fine for me because of convenience and liquidity, but it's very understandable if with a higher bond alloc you spend some time surfing the CD market, for example.
Keep in mind that CD's held in a brokerage account will pay dividends to your money market instead of being reinvested. So if you hold CDs in your IRA, there should be cash there for your RMD (do the math of course).
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Don46
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Re: Vanguard Research

Post by Don46 »

Taylor Larimore wrote:Hi Don:
I can't blame you for being worried after reading all the scare stories in the media. It is what sells.

Vanguard's Research Group published a lengthy report on this topic last July: This is a part of their Conclusion:
We continue to encourage investors to view bonds as a diversifier for the riskier assets in their portfolio. Ultimately, most bond investors should consider maintaining their strategic allocation to fixed income and avoid tactical changes that may increase the risk in their portfolios.
Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?

Best wishes.
Taylor
Thank you Taylor. Your comments count a lot with me. The article encourages investors to stay the course and think long term, but I find myself starting over, liquidating risky junk bond investments my manager had put me in and wanting now to rebuild a solid foundation in fixed income/bond investments.

It was with the same mixed emotions that I read at the end of the article: "Although the potential for negative returns in the short term for high-quality bonds has never been higher, [gulp] over long-term holding periods we expect bonds to continue to reduce the risk of loss for balanced investors. Even when interest rates rise, what ultimately matters most for loss-averse investors is the return of their total portfolio, not just the returns of the bond portion of their portfolio."
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Artsdoctor
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Re: Advice on Fixed Income/Bond Investments

Post by Artsdoctor »

Don,

Your concerns are common. There have been hundreds of threads on this forums voicing your very concerns.

You will get many opinions here. A couple suggestions:

There are many ways to do this. Some people will have strong opinions regarding CDs alone, inidividual bonds alone, bond funds alone, short-term and intermediate-term durations, etc. It can get overwhelming. Remember that everyone has to do what will allow them to sleep well at night. I think Taylor has quipped that "stocks makes us eat well and bonds make us sleep well." I think that's sound advice.

Donald Bennyhoff at Vanguard has published several papers on fixed income over the past couple of years, and I've found these to be extremely helpful. Log on to vanguard.com/research in order to read about Portfolio Construction as well as their other topics. Click on Read All and you will find excellent papers on "Bonds versus Bond Funds," among other things.

Although it is almost always better to keep things as simple as you can, I see no reason why you can't have both individual bonds and bond funds (or CDs or stable values). The rule that I have found very helpful is that in this particular environment of exceedingly low rates, cost is extraordinarily important and it is the one thing you can control--so keep costs low. No one expects huge income from bonds so if you're going to buy bond funds, make sure the expense ratios are razor thin (the ones you mentioned to relatively expensive). Likewise, if you're going to buy individual bonds, make sure that the cost is exceptionally low (for example, buy munis at initial offerings or at least learn how to do your due diligence in order to learn what a reasonable price is).

This topic used to be a sleepy one. But fixed income has become more challenging because of the low rates currently in effect. And our inability to predict the future.

Good luck. We're all in this together.
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3easypayments
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Re: Advice on Fixed Income/Bond Investments

Post by 3easypayments »

Don, what do you expect your income tax bracket to be in retirement and what state do/will you live in?

With that nest egg and RMD's, I'd guess you may still be in the 25% bracket or higher?
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

3easypayments wrote:Don, what do you expect your income tax bracket to be in retirement and what state do/will you live in?

With that nest egg and RMD's, I'd guess you may still be in the 25% bracket or higher?
I'm in SC and expect my RMD to run about 75k after I turn 70.5 in 2016. My SS is about 30k, 25.5k taxable. Together with my wife's pension, 25k, and whatever taxable interest, dividends, and capital gains we have in out investments outside the tax advantaged accounts, I expect we will have not far from 150k of income exposed to federal and state taxes, which puts us in the 28 percent tax bracket by my reckoning.
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3easypayments
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Re: Advice on Fixed Income/Bond Investments

Post by 3easypayments »

Don46 wrote:I want to allocate my IRA and part of my taxable fund to fixed income/bond investments... but I'm still worried about going into bond funds with so much of my money
With the size of your nest egg, I would consider accomplishing the above goal by using your taxable money to buy a ladder of high grade, AA or better municipal bonds. Since the interest income wouldn't be included in your AGI, there's no risk that it will push you into an even higher tax bracket and if you do this with enough of your taxable funds you might even be able to drop down to a lower bracket.

At your expected 28% federal and 7% state income tax rate in retirement, a hypothetical 4% YTM high-grade muni from your state would give you an extremely safe investment with a guaranteed tax-equivalent 6.15% annual return. But if you're right about rising interest rates it would give you more than that for the bonds you buy at that rate because, assuming your RMD will meet your cost of living, you would simply continue to reinvest the tax-free interest payments on new bonds with higher yields.

To mitigate the current interest rate risk, you could avoid very long maturities and also avoid zero coupon bonds for now, so that you can invest the semi-annual interest payments as they're paid out at the later, presumed higher, interest rate.

If you're interested in this approach, here's a book I'd suggest: "Bonds: The Unbeaten Path to Secure Investment Growth" (Bloomberg Press) by Richelson.
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

3easypayments wrote: ...
With the size of your nest egg, I would consider accomplishing the above goal by using your taxable money to buy a ladder of high grade, AA or better municipal bonds. Since the interest income wouldn't be included in your AGI, there's no risk that it will push you into an even higher tax bracket and if you do this with enough of your taxable funds you might even be able to drop down to a lower bracket.

At your expected 28% federal and 7% state income tax rate in retirement, a hypothetical 4% YTM high-grade muni from your state would give you an extremely safe investment with a guaranteed tax-equivalent 6.15% annual return. But if you're right about rising interest rates it would give you more than that for the bonds you buy at that rate because, assuming your RMD will meet your cost of living, you would simply continue to reinvest the tax-free interest payments on new bonds with higher yields. ...
If you're interested in this approach, here's a book I'd suggest: "Bonds: The Unbeaten Path to Secure Investment Growth" (Bloomberg Press) by Richelson.
Thanks. I just ordered the ebook version and will learn more about bonds and the strategy you outline. In any case, I am going to need to deploy some of my taxable account to bonds and tax free makes sense for us. I know one of the Boglehead mottos is simplicity, and that is my goal, but getting there is not always so simple is it? :D
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Re: Advice on Fixed Income/Bond Investments

Post by 500Kaiser »

Part of the advocacy for things like the Three Fund Portfolio is simplicity. As I've gotten older, having a setup that my wife can easily handle (who does not have the same interest as I do in finance/investment). I've not resolved this conundrum, but for me, I believe its something to not dismiss. I keep this in mind with things like rolling bond ladders, rebalancing, and such. If I'm not able to caretake for them some reasons, who will? Don't have the answer, but it feels like it puts a potential constraint on some of the options. Best of Luck.
Higher risk = higher HOPEFUL returns, not expected returns.
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

A follow up question: which funds or ETFs are people recommending for taxable and tax deferred fixed income/bond allocations?
I see VBMFX Vanguard Total Bond Fund as the all time favorite of many on this board.
I am advised, by a fellow at the Schwab bond desk, that I should consider VBISX, the Vanguard Short Term Bond fund, and take a lower return with a much lower risk. He feels VBMFX is more exposed than I need to be to long term bonds.

In the taxable side he advises some individual SC bonds of 10-15 years that are highly rated, low risk, and will provide better after tax returns than the taxable bonds.
Advice and comments welcome, as always.
Thanks,
Don
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Taylor Larimore
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Re: Advice on Fixed Income/Bond Investments

Post by Taylor Larimore »

He feels VBMFX is more exposed than I need to be to long term bonds.
Don:

Below are the current bond maturities in VBMFX (Total Bond Market):

Under 1 Year------1.4%
1 - 3 Years -------26.7%
3 - 5 Years------- 22.1%
5 - 10 Years------33.2%
10 - 20 Years------6.6%
20 - 30 Years------9.6%
Over 30 Years-----0.4%
Total-------------100.0%

The beauty of VBMFX is its diversification in high-quality bonds--sometimes called the only "free lunch" in investing.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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500Kaiser
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Re: Advice on Fixed Income/Bond Investments

Post by 500Kaiser »

Here are 2 articles, one by Larry Swedroe, and one by Mike Piper discussing alternatives to TBM. VFTIX is an intermediate term treasury fund. I use this fund for my wont spend it in a long time, i want no credit risk bucket. I also use the Short Term Bond Index because of the shorter duration than TBM. This is for stuff that has a shorter (but not immediate) time horizon.

http://www.cbsnews.com/news/why-gnmas-s ... nd-choice/

http://www.obliviousinvestor.com/total- ... reasuries/
Higher risk = higher HOPEFUL returns, not expected returns.
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Re: Advice on Fixed Income/Bond Investments

Post by Kevin M »

Don46 wrote: Another is: South Carolina Stable Value Fund 10/01/2013 12/31/2013 2.8%
The last figure is the current yield in each case.
This probably is a good alternative. If it's like a typical SV fund, the principal value does not fluctuate, so you eliminate the interest-rate risk you are concerned about. Also, 2.8% is a very good rate, although it may drop in January. If I had access to it, I probably would use it in the current low-rate environment.

There is no getting around interest-rate risk if you use bonds or bond funds. You can reduce it by using shorter-term bond funds, but of course that also results in lower yields.

You can use direct CDs (purchased directly from a bank or credit union) to reduce your interest-rate risk to a relatively small, fixed amount; i.e., the amount of the early withdrawal penalty (EWP). A great deal now is a 5-year CD from PenFed earning about 3% with an EWP of one year of interest. So you are earning more than the 2.2% SEC yield of Total Bond Market fund, and your downside risk is capped at 3%. You can do an IRA transfer if you want to hold these in an IRA account, but there is a risk that the rate will drop before the transfer is complete. You also would want to keep your total IRA balance under $250K at PenFed or any other bank or CU, although you could exceed that if you also held them in a taxable account.

Another nice feature about PenFed IRA CDs is that you can do penalty-free withdrawals at your age, including but not limited to your RMDs. So if rates were higher than 3% when you started taking RMDs, you could take them from the PenFed CD.

I personally prefer direct CDs to short-term bond funds and treasuries, since they have a higher yield with less risk. I have 2/3 of my fixed income in these types of CDs, and 1/3 mostly in intermediate-term investment-grade and tax-exempt bond funds (the former in IRAs, the latter in taxable accounts). So, with 2/3 exposed to no credit risk and very little interest-rate risk, I'm comfortable taking some credit risk and more interest-rate risk in the bond funds. In terms of credit risk, this isn't that much different than TBM which has about 2/3 in government bonds, but I believe it has lower interest-rate risk and somewhat higher expected return than TBM. I've explained why in many other posts.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

I had a good conversation with the bond specialist at Schwab today and feel like I'm moving in the right direction. He persuaded me to park my tax advantaged money in VBISX, the Vanguard Short Term fund, for now and see how things feel in two years or so. For the taxable account, he sent me a long list of SC MUNIS with a coupon of about 4 percent, some with 10 and 20 year maturities, some less.

For the employer linked funds I'll probably just let them ride in the target 2010 funds and then roll them over into the Schwab IRA when I retire; that will give me more options at at much lower ERs. I don't know what kind of service people get with Vanguard or Fidelity and the others, but I like what I'm getting with Schwab.

Thanks for all these very helpful comments.
--Don
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3easypayments
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Re: Advice on Fixed Income/Bond Investments

Post by 3easypayments »

Don,

Sounds like your plan is shaping up nicely, glad to hear it.

FYI, your bond broker should be telling you which of the bonds on the list he sent are currently discount bonds (discounted by more than the allowed "de minimis" % below the original issue price). You should be aware that these bonds if purchased in the secondary market will have a tax impact even though they're tax free munis. IMO, the two main drawbacks in buying one of these are (1) you will have to keep track of and report some of your earnings and (2) this taxable amount effectively reduces the listed YTM a bit.
When I consider a discount bond, I attempt to calculate this "penalized YTM" as I call it my spreadsheet by calculating the yield with a final par value that is reduced by the tax I expect to owe on the discount amount, based on my expected gross tax rate. It's not always a huge hit, but it may change which bonds you would pick. For example, a YTM 4.5% bond I considered really had a penalized YTM of 4.28%. For now you may want to simply exclude these from consideration, but expect to see a higher percentage of discount bonds on the secondary market if rates rise.
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Re: Advice on Fixed Income/Bond Investments

Post by Electron »

Don46 wrote:But I find myself agonizing over the running debate about the risk of losing value in bonds (funds or individual bonds) in the face of an almost certain rise in interest rates. I understand and accept the Boglehead investment philosophy. I'm not trying to time or beat the market, but I'm still worried about going into bond funds with so much of my money in the face of impending rises in interest rates.
Here is a thread and chart illustrating the Point of Indifference concept in bond funds.

http://www.bogleheads.org/forum/viewtop ... 0&t=120947
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Re: Advice on Fixed Income/Bond Investments

Post by Artsdoctor »

3easypayments wrote:Don,

Sounds like your plan is shaping up nicely, glad to hear it.

FYI, your bond broker should be telling you which of the bonds on the list he sent are currently discount bonds (discounted by more than the allowed "de minimis" % below the original issue price). You should be aware that these bonds if purchased in the secondary market will have a tax impact even though they're tax free munis. IMO, the two main drawbacks in buying one of these are (1) you will have to keep track of and report some of your earnings and (2) this taxable amount effectively reduces the listed YTM a bit.
When I consider a discount bond, I attempt to calculate this "penalized YTM" as I call it my spreadsheet by calculating the yield with a final par value that is reduced by the tax I expect to owe on the discount amount, based on my expected gross tax rate. It's not always a huge hit, but it may change which bonds you would pick. For example, a YTM 4.5% bond I considered really had a penalized YTM of 4.28%. For now you may want to simply exclude these from consideration, but expect to see a higher percentage of discount bonds on the secondary market if rates rise.
It is true that if you buy a discount bond, you will owe capital gains when the bond matures. I always search out premium bonds and amortize them (and the interest) for that very reason.

The OP is in SC. SC GO bonds are rated quite high and in order to get a YTM of 4% or more, he'd have to go pretty far out on maturity, I'm estimating 25 years approximately. I don't think it's worth exposing yourself to that kind of risk, and for what it's worth, he would be in his 90s at the maturity of the bond. Long bonds are also more difficult to trade, which is something to consider.

Right now, the sweet spot on munis is somewhere in the 9-13 year range, depending on the rating.

And to the OP, if you're going to buy your individual munis, make sure you understand how to see what a fair asking price might be.
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

Artsdoctor wrote: The OP is in SC. SC GO bonds are rated quite high and in order to get a YTM of 4% or more, he'd have to go pretty far out on maturity, I'm estimating 25 years approximately. I don't think it's worth exposing yourself to that kind of risk, and for what it's worth, he would be in his 90s at the maturity of the bond. Long bonds are also more difficult to trade, which is something to consider.

Right now, the sweet spot on munis is somewhere in the 9-13 year range, depending on the rating.

And to the OP, if you're going to buy your individual munis, make sure you understand how to see what a fair asking price might be.
You are right, all the bonds on the Schwab list have 4% coupons and are over 20 years out. I wonder if the SC tax exemption is worth it if it means excluding otherwise more attractive MUNI bonds. SC does not have high taxes. Social Security is not taxed and it looks like seniors, over 65, are not taxed on up to 30k (filing jointly) on retirement income (RMD). I'm looking at the Kiplinger State by State Guide to taxes, a handy site, by the way
http://www.kiplinger.com/tool/retiremen ... /index.php
If I expand to the rest of the Union, :wink: what should I look at? It sounds like you would recommend bonds maturing in about 9-13 years and trading above par.
Last edited by Don46 on Wed Dec 11, 2013 4:10 pm, edited 1 time in total.
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Re: Advice on Fixed Income/Bond Investments

Post by HawaiiBrewer »

Aloha Don, I like SC and have been every year for the past 35 yrs since my parents retired there...I might end up there too. You never mentioned if your pensions and SS income streams essentially cover your expenses...meet your "floor" as some say. Is your future RMD essential to meeting your expenses or just "gravy" to use for fun, possible emergencies and to leave to heirs. I'm about in the same situation....4 years younger and trying to make similar decisions. My wife is big on wealth preservation after we have accumulated all of it so I'm setting a path for a 25% US equities; 10% International equities; 30% bonds; 30% CD's, money market, I Bonds; 5% REIT; 1% cash. I'm using the Vanguard index funds for the first 3, plus REIT....PenFed for CD's, Treasury Direct for I Bonds. My floor is more than covered with my pension(annuity from past employer), wife's pensions and SS when we take it at 70. I plan to sell my individual stocks if we need money to bridge any gap before 70...our tax rate is low so taking a CG hit is no big deal. Since SS has COLA aspects, I'm delaying as much as possible. Our RMD will most likely be $50k-$65k unless I decide to convert some to Roth. We have no heirs and don't want a hearse full of money. We've lived like "cheapskates" for most of our lives, but having no kids helps save a lot of $$. We spent our "kids money" with trips to Europe and living here in Hawaii. Unless inflation takes off big time, our funds could sit in a money market and we'd still be OK....BUT just in case there is a big change, our AA should keep us well covered. If I'm 80 and our portfolio has grown even more.....then I'm buying that Ferrari and flying first class.

Aloha,
Paul :beer
Footnote: all of this financial discussion wasn't possible until I discovered the Bogleheads 4 months ago.....
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Re: Advice on Fixed Income/Bond Investments

Post by Artsdoctor »

Don46 wrote:
Artsdoctor wrote: The OP is in SC. SC GO bonds are rated quite high and in order to get a YTM of 4% or more, he'd have to go pretty far out on maturity, I'm estimating 25 years approximately. I don't think it's worth exposing yourself to that kind of risk, and for what it's worth, he would be in his 90s at the maturity of the bond. Long bonds are also more difficult to trade, which is something to consider.

Right now, the sweet spot on munis is somewhere in the 9-13 year range, depending on the rating.

And to the OP, if you're going to buy your individual munis, make sure you understand how to see what a fair asking price might be.
You are right, all the bonds on the Schwab list have 4% coupons and are over 20 years out. I wonder if the SC tax exemption is worth it if it means excluding otherwise more attractive MUNI bonds. SC does not have high taxes. Social Security is not taxed and it looks like seniors, over 65, are not taxed on up to 30k (filing jointly) on retirement income (RMD). I'm looking at the Kiplinger State by State Guide to taxes, a handy site, by the way <http://www.kiplinger.com/tool/retiremen ... 20Carolina>
If I expand to the rest of the Union, :wink: what should I look at? It sounds like you would recommend bonds maturing in about 9-13 years and trading above par.
Don,

I'd recommend familiarizing yourself with "bondspeak" in order to compare bonds. There's a difference between the coupon rate and the yield to maturity. You'll need to also be very familiar with "yield to call" and "sinking bonds" so you don't make mistakes in comparing bonds. I live in a very high tax state and yet still buy individual munis (usually with the initial offering) from other states. Personally, I buy premium bonds so I don't have to deal with the capital gains in the end (but you'll have to learn about "amortization of premium bonds"). I look at the "slope of the curve" to see where interest rates might be beneficial; I generally use 15 basis points per year to justify going out on the curve.

The like Annette Thau's "The Bond Book." It'll give you enough of the basics to make decent decisions with munis. If you prefer individual bonds, it'll teach you how to make informed decisions. And there's absolutely nothing wrong at all with doing both (national bond funds and individual munis).

Others may disagree, but I would not buy a bond with a maturity date which is further into the future than either I or my spouse could realistically hope to see. You can always be surprised and live to be 110, but unless you have a longevity gene . . .
Last edited by Artsdoctor on Thu Dec 12, 2013 9:24 am, edited 1 time in total.
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Don46
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

HawaiiBrewer wrote:Aloha Don, I like SC and have been every year for the past 35 yrs since my parents retired there...I might end up there too. You never mentioned if your pensions and SS income streams essentially cover your expenses...meet your "floor" as some say. Is your future RMD essential to meeting your expenses or just "gravy" to use for fun, possible emergencies and to leave to heirs.
My wife is about 5 years behind me and will take SS at 66. I suppose our minimal living expenses would be covered by pension, and two SS checks, but we plan to spend lots on the "gravy," travel, hobbies, charities, gifts, and, sigh, health care as needed. No pockets in a shroud. My children are earning more than I am and should be fine. Her two children, from a previous marriage, I hope :? , will be on their feet in another couple of years. We are not planning on leaving them a major inheritance. :sharebeer
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Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

Artsdoctor wrote: Don, I'd recommend familiarizing yourself with "bondspeak" in order to compare bonds. There's a difference between the coupon rate and the yield to maturity. You'll need to also be very familiar with "yield to call" and "sinking bonds" so you don't make mistakes in comparing bonds. I live in a very high tax state and yet still buy individual munis (usually with the initial offering) from other states. Personally, I buy premium bonds so I don't have to deal with the capital gains in the end (but you'll have to learn about "amortization of premium bonds"). I look at the "slope of the curve" to see where interest rates might be beneficial; I generally use 15 basis points per year to justify going out on the curve.

The like Adrian Thau's "The Bond Book." It'll give you enough of the basics to make decent decisions with munis. If you prefer individual bonds, it'll teach you how to make informed decisions. And there's absolutely nothing wrong at all with doing both (national bond funds and individual munis).

Others may disagree, but I would not buy a bond with a maturity date which is further into the future than either I or my spouse could realistically hope to see. You can always be surprised and live to be 110, but unless you have a longevity gene . . .
I understand what you are saying enough to know I probably want either to get help from Schwab's bond experts. But I need to know enough to know what to ask for, you are telling me, and I see your point. More complications to get to simplicity! :annoyed
Let me ask the forum: is there a low cost fund or ETF that might meet my needs for tax efficient or tax free fixed income, once I free myself from SC bonds and go national? The lowest ER I'm seeing so far for an intermediate bond fund is .47. Thanks.
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Don46
Posts: 198
Joined: Sun Feb 24, 2013 5:53 pm

Re: Advice on Fixed Income/Bond Investments

Post by Don46 »

Allow me to run this option by the group. My Schwab broker sent me flyers on two MUNI fund managed account options, one of which is the PIMCO MUNI Bond Ladder Program with an annual ER of .35 for accounts below $1mil and goes down to .20 for those with $5million. There is some language that says these fees are maximums; individual fees will vary downward. I believe that this is a management fee that can be treated as a tax deductible expense since this is a managed account, so that brings it down to an effective .25 at the 28 pct tax bracket. This gets down to Boglehead tolerances, I should think and it seems like this might be worth it to let the pros screen the bonds for me, for a price I realize.

The PIMCO program allows one to choose according to return, average duration, 1-6 1-12 etc.. There are two ladders for California; the others are national. As I understand it, a bond ladder has rungs with different maturities, and each year the bottom rung matures and one buys more at the top rung of the ladder.
This link takes you to the PIMCO program, but it looks like you have to register to get the flyer my Schwab broker sent me.
https://managedaccounts.pimco.com/pages/648.aspx

I seem unable to copy yield data, but in brief, yield to maturity rates run .87 for the 1-6 year ladder, 1.65 for the 1-12; 2.19 for the 1 to 18.

Is this a reasonable and wise alternative path to tax free investing? Or can I do better some other way? I welcome your thoughts.
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HawaiiBrewer
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Location: Hawaii

Re: Advice on Fixed Income/Bond Investments

Post by HawaiiBrewer »

I went to the link you offered and then to the Schwab site to see their info. I didn't see the yields offered by PIMCO but if you are paying 0.30% management fees and only receiving 0.87% based on what you show( I couldn't find a prospectus), wouldn't that mean your net is just 0.57%....figuring in your tax rate it will be a bit more, but why not go for a CD ladder at PenFed and get 0.70%-3.0% based on time periods chosen? I must be missing something with the PIMCO ladder because 0.87% seems way to low. You may want to check this link too........provided by a well known member http://www.bogleheads.org/forum/viewtop ... 1#p1607440

Aloha...

Paul :beer
If you don't know where you are going, any road will get you there
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