Bond allocation-retire in 2 yrs

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goGators
Posts: 55
Joined: Thu Apr 04, 2013 10:01 pm

Bond allocation-retire in 2 yrs

Post by goGators »

I would like your advice on bond allocation.

Background: I'm 49 and planning to retire in 2 years, wife 46 retired, 2 kids 14 and 6. We own a home and have no debt.
For the past 20 years our allocation has been 100% stocks and emergency cash for 1 year.
Currently, we have 31% of our savings in Roths, 46% 401ks, 21% taxable accts, and 2% cash.

Questions:
1) What should be our bond allocation? My wife says 0% but I disagree with her.
2) What bond funds should we buy? We have accounts at Vanguard and Fidelity.
3) In which accounts should we buy bonds? Roth? 401k? Taxable?
4) Should we worry about the risk of rising interest rate?

Thanks
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Duckie
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Re: Bond allocation-retire in 2 yrs

Post by Duckie »

goGators wrote:What should be our bond allocation?
Between 30% and 50%.
My wife says 0% but I disagree with her.
So she's comfortable potentially losing 50% of your retirement portfolio? She's got a cast-iron stomach.
What bond funds should we buy? We have accounts at Vanguard and Fidelity.
(VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.08%) at Vanguard and/or (FSITX) Spartan U.S. Bond Index Fund Advantage Class (0.10%) at Fidelity.
In which accounts should we buy bonds? Roth? 401k? Taxable?
Not taxable. What are the bond options in the 401k? When you retire you can roll the 401k into a TIRA and buy one of the above bond index funds. Bonds are better in TIRAs than Roth IRAs (or rather, stocks are better in Roths).
Should we worry about the risk of rising interest rate?
No. With 100% of your retirement assets in stocks you should worry about a stock crash.
Topic Author
goGators
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Re: Bond allocation-retire in 2 yrs

Post by goGators »

What are the bond options in the 401k?
We should have FSITX. Our 401ks are in Fidelity BROKERAGELINK.
lack_ey
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Re: Bond allocation-retire in 2 yrs

Post by lack_ey »

I think the answer to a lot of questions around here is "it doesn't really matter," but here I think you've got a pretty big decision to make that may well matter a lot. You're looking at potentially a very long retirement.

And there's not really an obvious answer. It should depend on what kind of spending you'll require in the future (also education expenses too?), how much assets you have now, any pensions if available, how much Social Security would provide, how much you value having more money past a certain point vs. how painful having to cut back might be, what kind of work you might be able to find if things go south and you need to unretire, how willing you would be to keep working if the market tanks in the next couple of years, and more.

I will say that 0% bonds is probably not the best idea.

Interest rates are probably not all that much a concern, but if you want to use I Bonds and/or CDs (5-year rates 2.25% at online banks) instead, those are very reasonable options too, generally a bit better than what's available in the bond markets right now. What kind of fixed income (short of junk bonds, long-dated issues) matters less than how much you have in these assets. The most crucial aspect you're interested in is the "not being stocks" attribute.
555
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Re: Bond allocation-retire in 2 yrs

Post by 555 »

What does (Total Assets) divided by (Annual Spending) equal?

What will that ratio be if/when some income streams such as SS/Pension are available.

If your assets are >50 times annual spending, then 100% stock may be okay. (It may be more prudent to have 5 or 10 years spending in safer assets to help weather market storms.)
Fclevz
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Re: Bond allocation-retire in 2 yrs

Post by Fclevz »

I've been following the Frank Armstrong method for a lot of years and haven't missed a meal yet.
Basically,
  • Keep one year of living expenses in cash
  • Put between five and seven years of expenses in bonds (or maybe out to ten, ala Grangaard, or if you have a tendency towards panic selling)
  • Keep the rest of your portfolio in stocks
http://news.morningstar.com/articlenet/ ... 9&_QSBPA=Y
Topic Author
goGators
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Re: Bond allocation-retire in 2 yrs

Post by goGators »

lack_ey wrote:...what kind of spending you'll require in the future (also education expenses too?), how much assets you have now, any pensions if available, how much Social Security would provide, how much you value having more money past a certain point vs. how painful having to cut back might be
555 wrote:What does (Total Assets) divided by (Annual Spending) equal?
What will that ratio be if/when some income streams such as SS/Pension are available.
Without taking SS/Pension into account, our Assets/Fix Expenses = 75 and Assets/(Fix + Discretionary Expenses) = 37.5.
Our combined pension available @ 55 and SS @ 62, they alone should cover 100% of our fix expenses.
For college, we plan to send our kids to in-state schools to keep the cost down
Fclevz wrote:I've been following the Frank Armstrong method for a lot of years and haven't missed a meal yet.
We really like this method!
Fclevz wrote:if you have a tendency towards panic selling
No, we have the opposite tendency/problem. In 2008-2009, we zeroed out our emergency cash to buy more stocks.
555
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Re: Bond allocation-retire in 2 yrs

Post by 555 »

You're all set. You can do what you want. 100% stock would be okay, but it's prudent to keep a few/several years spending in cash/bonds.
dbr
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Re: Bond allocation-retire in 2 yrs

Post by dbr »

If by retirement you mean you are going to start living from withdrawals from your portfolio for the next fifty years or so, then the one thing that matters above all is how fast you intend to withdraw. Once you settle that you may find that exactly how you are allocated is of lesser importance. You should probably start reading up on the area of safe withdrawal rates, etc. Note, you cannot asset allocate yourself out of the fatal spiral of trying to spend too much money combined with the bad luck of retiring into a bad year to retire. Which years are the bad years to retire is hard to determine in advance, especially for a long retirement.
lack_ey
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Re: Bond allocation-retire in 2 yrs

Post by lack_ey »

Yeah, never mind. With those assets you can use pretty much whatever allocation you want. 2.66% withdrawal rate to start with discretionary spending and 1.33% if tightening the belt? It's hard to make that go wrong.

I agree with keeping at least several years worth of fixed expenses in less volatile assets, though. Sometimes stocks do decline and stay down for a long time. If 10 years worth of fixed expenses is 13% of your assets, you're not losing much at all in terms of potential growth.
dbr
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Re: Bond allocation-retire in 2 yrs

Post by dbr »

Sorry, I missed the details about the spending. Still, why not follow a course of not taking any more risk than necessary and moderate some in bonds. A 60/40 allocation might be pretty good, or 70/30. It might be a good idea to implement a running model of what is happening using some of the retirement calculators out there.

Actually the real risks in a long retirement don't involve financial calculations but rather life changes from expenses being quite different from estimated to major changes such as those involving such things disability of self or a family member, divorce, and death or other unforseen cirumstances.
Topic Author
goGators
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Re: Bond allocation-retire in 2 yrs

Post by goGators »

555 wrote: but it's prudent to keep a few/several years spending in cash/bonds
lack_ey wrote:I agree with keeping at least several years worth of fixed expenses in less volatile assets, though. Sometimes stocks do decline and stay down for a long time. If 10 years worth of fixed expenses is 13% of your assets, you're not losing much at all in terms of potential growth.
Yes, We have been on saving mode for the past 20 years. Spending on our savings is the area we have no experience on and really need to learn how to do it right. What are the rule of thumbs? Should we put all income generated assets (bonds/CDs) in our 401k, then convert to and withdraw from Roths to pay for our expenses?
dbr wrote: You should probably start reading up on the area of safe withdrawal rates, etc.
Could you point us to a link?

Again,thank you all very much for valuable advices. They give us more confident to enter the next phase of our lives.
Dandy
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Re: Bond allocation-retire in 2 yrs

Post by Dandy »

You will have approximately 40 years in retirement. A suggested starting point is age in bonds (read that fixed income). If you don't have the ability to earn much in retirement you may need a bit more equities than age in bonds. Another way to look at it is what percent can you afford to lose before you panic - multiply that by 2 and that amount in equities is a decent starting point.

Almost 100% equities is as aggressive as you can normally get. If it got you to a nice number that is great. That doesn't mean it will get you through 40 years of retirement. My guess is you need more like 60/40 with the goal of gradually reducing that over time.
chessmannextmove
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Re: Bond allocation-retire in 2 yrs

Post by chessmannextmove »

I agree with your wife.
555
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Re: Bond allocation-retire in 2 yrs

Post by 555 »

goGators wrote:
555 wrote: but it's prudent to keep a few/several years spending in cash/bonds
lack_ey wrote:I agree with keeping at least several years worth of fixed expenses in less volatile assets, though. Sometimes stocks do decline and stay down for a long time. If 10 years worth of fixed expenses is 13% of your assets, you're not losing much at all in terms of potential growth.
Yes, We have been on saving mode for the past 20 years. Spending on our savings is the area we have no experience on and really need to learn how to do it right. What are the rule of thumbs? Should we put all income generated assets (bonds/CDs) in our 401k, then convert to and withdraw from Roths to pay for our expenses?
dbr wrote: You should probably start reading up on the area of safe withdrawal rates, etc.
Could you point us to a link?

Again,thank you all very much for valuable advices. They give us more confident to enter the next phase of our lives.
Look at the wiki.
https://www.bogleheads.org/wiki/Main_Page
Okay, asset allocation is the easy bit. Now you need to think about asset location. And you need to think about how to optimize taxes considering how to withdraw from taxable, Trad, Roth (and maybe Roth conversion), taking into account SS/pension, and throw PPACA and FAFSA into the mix. It could get complicated, but it's worth figuring out.
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