A " Bond Tent" During the "Retirement Red Zone?"

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
LuigiLikesPizza
Posts: 270
Joined: Tue Jan 05, 2016 7:54 am

A " Bond Tent" During the "Retirement Red Zone?"

Post by LuigiLikesPizza » Sat Dec 02, 2017 6:40 pm

I'm 18 months from retirement and I've been gradually moving my allocation in favor of bonds - currently standing at 60%. Watching market movements lately and holding back on any personal reaction.

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?

Any comments or thoughts on this subject are greatly appreciated.

https://www.kitces.com/blog/managing-po ... -red-zone/

User avatar
Tycoon
Posts: 1098
Joined: Wed Mar 28, 2012 7:06 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Tycoon » Sat Dec 02, 2017 6:47 pm

I have no comments other than I've read the article and I am thinking about the strategy. No action yet.
...I might be just beginning | I might be near the end. Enya | | C'est la vie

User avatar
FIREchief
Posts: 1415
Joined: Fri Aug 19, 2016 6:40 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by FIREchief » Sat Dec 02, 2017 9:29 pm

I'm a strong supporter of this approach. Best way to enjoy long term market growth while mitigating sequence of returns risk.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

mindboggling
Posts: 190
Joined: Sat Sep 06, 2014 6:35 pm
Location: Upstate NY

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by mindboggling » Sat Dec 02, 2017 9:38 pm

I stopped working full-time four years ago when I was 60, although I continued to work part-time for three more years. At 60, I was 60% equities/40% fixed income. I moved to 40/60, and over the next three years, to 35/65 then 30/70. Due to a real estate sale I am now below 30% equities. The low equity allocation helps me relax while I sort out the retirement-thing. I plan to increase my equity position gradually as I adjust to full retirement.
In broken mathematics, We estimate our prize, --Emily Dickinson

User avatar
TheTimeLord
Posts: 4882
Joined: Fri Jul 26, 2013 2:05 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by TheTimeLord » Sat Dec 02, 2017 9:42 pm

I started reading the article then hit this and wondered if this is really true for folks who are saving 35%-50% of their gross income now that the kids are gone. I wonder what percentage contributions would have to be for him to consider them meaningful? And they are also covering expenses for an additional year? If have 25X expenses wouldn't just merely working another year be like adding 4% or 1X expenses to your portfolio since you didn't have to withdraw the 4% to cover your expenses. Add 2 maxed 401k's, a year of covered expenses and some taxable savings on top of that and I am not seeing that amount being dwarfed by returns in an average year.
The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.
All that said the V shaped glide path makes sense to me and is basically what I have been implementing.
Run, You Clever Boy!

curmudgeon
Posts: 1326
Joined: Thu Jun 20, 2013 11:00 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by curmudgeon » Sat Dec 02, 2017 10:35 pm

I retired this year, and am following that model to a degree. There are multiple ways to look at this; for me, I somewhat think of my FI allocation as filling the baseline income until we claim SS in 12 years. The actual implementation of this looks somewhat like a "bond tent", though the pre-retirement side was not a smooth line. My default allocation for the past 35 years has been 100% equity. As I started thinking retirement would come in the next several years, I moved about 10% into FI. This year I shifted a large chunk out of real estate, and put it into FI and paying off the remaining mortgage. This has us about 30% FI now in our investments.

The question for us is where we go from here. If the market takes a serious fall, we will likely hold our equities and spend (a bit reduced) from the FI, which would make the downward slope of the tent. If FI returns climb back off the floor, I may keep an ongoing FI allocation in the 20-30% range, drawing from FI in down markets and equities in up ones. As long as we have big subsidies from ACA, I won't draw much from equities for the next few years because my equities all have large cap gains and my ACA MAGI space will be occupied with Roth conversions. After age 65 we will have more flexibility.

edit to add: We see value in high equity because we do have something of a bequest motive; it's not a huge priority, but we'd like to have something left over when we are gone.

ResearchMed
Posts: 5477
Joined: Fri Dec 26, 2008 11:25 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by ResearchMed » Sat Dec 02, 2017 10:48 pm

LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
I'm 18 months from retirement and I've been gradually moving my allocation in favor of bonds - currently standing at 60%. Watching market movements lately and holding back on any personal reaction.

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?

Any comments or thoughts on this subject are greatly appreciated.

https://www.kitces.com/blog/managing-po ... -red-zone/
That "retirement red zone", especially the part just at/after retirement...

"Today is the first day of the rest of your life..."

This is the case whether today is the first day of your retirement, or whether this is the first day of, say, year 2, or year 5, etc.

What is so special about "today", as in "now"? Tomorrow will become "now", as will next year...
At any point, "today" is as though one was just starting retirement... that portfolio is all there is; regular income has stopped.

That is, why is there so much concern about the time precisely around/after the "start" of retirement, and not at any given point later, or should I write, at "every" given point later...?
After all, some people retire at 65 or 70. Others at 55. Others at 75 or 80 or even later.

IF a market downturn "early" would be "bad" just as one retires (+/-, but apparently especially "just after"), how does this differ from a market downturn 1, 5, or 10 years later? And especially given that people are retiring at many different ages...

How/why does it matter if there have already been one or several years of retirement, or just one day?

RM
This signature is a placebo. You are in the control group.

User avatar
Sandtrap
Posts: 2741
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Sandtrap » Sat Dec 02, 2017 10:53 pm

LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
I'm 18 months from retirement and I've been gradually moving my allocation in favor of bonds - currently standing at 60%. Watching market movements lately and holding back on any personal reaction.

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?

Any comments or thoughts on this subject are greatly appreciated.

https://www.kitces.com/blog/managing-po ... -red-zone/
Thanks for the link;
Isn't this also addressed by Bernstein in : Ages of the Investor/ Life Cycle Investing?
Or Ferri?
viewtopic.php?t=75023
Addressed the critical stage between just before retirement and the first phase of retirement as a financially vulnerable time.
It was one of the big reasons for starting out with such a conservative allocation, far beyond my years.

j :D
Last edited by Sandtrap on Sat Dec 02, 2017 11:04 pm, edited 1 time in total.

workerbeeengineer
Posts: 41
Joined: Thu Jun 02, 2016 12:22 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by workerbeeengineer » Sat Dec 02, 2017 10:59 pm

Had not really heard of this fellow, but am aware of sequence of returns risk. I'm close to the same time from retirement and have been adjusting my bond/stock mix for the last few years. The fantastic recent performance of equities has made it easier to dial down the equity exposure.

User avatar
Tyler Aspect
Posts: 552
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Tyler Aspect » Sat Dec 02, 2017 11:14 pm

I have read Michael Kitces' writing on increasing stock allocation during retirement. I felt it would require too much stock sell off just prior to retirement, and too much realized capital gains. Not sure if his strategy is easy to pull off in real life.

I am more comfortable with keeping a steady asset allocation during retirement.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

jalbert
Posts: 2282
Joined: Fri Apr 10, 2015 12:29 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jalbert » Sat Dec 02, 2017 11:30 pm

The bond tent description complicates the issue to my thinking. The real point is a rising equity allocation in retirement. The tent model assumes you got to the point of retirement with a decreasing equity allocation which may or may not be true.

The idea of a rising equity allocation in retirement is that starting low, you are less exposed to an early bear market in equities. And when you rebalance into equities you will rebalance into a larger equity allocation, buying equities when low.

Instead, if equities rally you may not have to rebalance as the equity allocation grows into the new larger allocation. You don't benefit as much as if the equity allocation were larger, but you still benefit. This may lead to less variance in outcones.

And if an equity bear materializes later when equity allocation is larger, you have less total time left to cover liabilities.

I don't have a strong opinion about it either way, but here is some more info:

https://www.onefpa.org/journal/Pages/Re ... 0Path.aspx
Last edited by jalbert on Mon Dec 04, 2017 1:42 am, edited 2 times in total.
Risk is not a guarantor of return.

marcopolo
Posts: 310
Joined: Sat Dec 03, 2016 10:22 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by marcopolo » Sun Dec 03, 2017 12:11 am

ResearchMed wrote:
Sat Dec 02, 2017 10:48 pm
LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
I'm 18 months from retirement and I've been gradually moving my allocation in favor of bonds - currently standing at 60%. Watching market movements lately and holding back on any personal reaction.

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?

Any comments or thoughts on this subject are greatly appreciated.

https://www.kitces.com/blog/managing-po ... -red-zone/
That "retirement red zone", especially the part just at/after retirement...

"Today is the first day of the rest of your life..."

This is the case whether today is the first day of your retirement, or whether this is the first day of, say, year 2, or year 5, etc.

What is so special about "today", as in "now"? Tomorrow will become "now", as will next year...
At any point, "today" is as though one was just starting retirement... that portfolio is all there is; regular income has stopped.

That is, why is there so much concern about the time precisely around/after the "start" of retirement, and not at any given point later, or should I write, at "every" given point later...?
After all, some people retire at 65 or 70. Others at 55. Others at 75 or 80 or even later.

IF a market downturn "early" would be "bad" just as one retires (+/-, but apparently especially "just after"), how does this differ from a market downturn 1, 5, or 10 years later? And especially given that people are retiring at many different ages...

How/why does it matter if there have already been one or several years of retirement, or just one day?

RM
I believe the reason those early years are critical regardless of age of retirement is because if there is a large drawdown in the early years, AND you are withdrawing money to live on, then by the time the market turns around, there might not be enough left in the portfolio to survive the remaining retirement years. On the other hand, if the early years have good returns, the portfolio continues to grow even after the withdrawals are made for living expenses. So, when the downturn comes later, the portfolio is actually larger relative to needed expenses than it was at the start of retirement, so there is more of a cushion now, and less years left to fund. This make the draw down less catastrophic than it is in the early years.

A tool like firecalc will show this effect clearly by looking at each of the individual lines that represent different starting year. Most of the failure scenarios occur when bad things (poor performance, high inflation) happen in the early portion of the curve.
Once in a while you get shown the light, in the strangest of places if you look at it right.

BigJohn
Posts: 1416
Joined: Wed Apr 02, 2014 11:27 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by BigJohn » Sun Dec 03, 2017 12:17 am

Retired just over two years ago and am following an approach similar to this based on Bernstein’s Ages of the Investor and LMP (liability matching portfolio) approach. There are several variations on this theme to manage sequence of return risk in early retirement.

AlohaJoe
Posts: 2630
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by AlohaJoe » Sun Dec 03, 2017 3:44 am

LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
Any comments or thoughts on this subject are greatly appreciated.
I think it probably doesn't actually work in the real world, though it may have behavioural benefits.

The upside of a bond tent can be split into two parts. How it helps before retirement and how it helps after retirement. For the post-retirement it is just a rising equity glidepath which, despite Kitces and Pfau's single article on the subject, most other people are unconvinced by.

For instance, here's a rising equity glide path compared to just 35/65 or just 60/40, during 1966 -- the worst year to retire. (Generally people want bond tents because of tail risk fears, so it is worthwhile to see how they actually performed in the known worst case.)

Image

If that looks like an improvement to you...well, I guess I'd respectfully disagree.

You say, well the worst retirement period isn't what the rising equity helps with -- since that was a slow grinding death. Rising equity is supposed to protect against short, sharp drops in the early years of retirement. Something like the crashes of 2000 and 2008...

Image

The differences are so minimal, you can't even tell the difference between the blue and the green line most of the time.

You might say, "well, AlohaJoe, the problem is you picked the wrong kind of rising equity instead of going up by 1.5% a year it should go up by (insert alternative theory)". Which, I guess is kinda fair. But I feel like the burden of proof is on the rising equity people to show exactly glidepath they are talking about and exactly what situations it outperforms in.

It also means that amateurs like the OP are almost certainly going to build the "wrong" kind of glidepath since they haven't done any of the (apparently necessary) finely detailed research on the hundreds of possible variations.

But maybe a bond tent helps in the "build up" right before retirement?

This is easily checked. Who has the most money in the portfolio on the day they retire? The person who is building up a bond tent or someone taking another approach? In this case, what we are protecting against is a short, sharp crash in the 0-3 years right before retirement that causes us to delay retirement.

Let's check it against the crash of 1929-1930. Let's assume they are planning on retiring in 1931. First let's check the base cases of a 60/40 portfolio and a 30/70 portfolio....

Starting with $100,000...

...someone with 60/40 would have $149,000 at the end of 1931 after the crashes.
...someone with 30/70 would have $116,000 at the end of 1931 after the crashes. (Yes, having lots of bonds left you worse off even in the worst crash in US history.)

So how about when we build a bond tent? Let's say we start at 60/40 in ten years out from our retirement date. And we want to end up at 30/70 (a nice, even 3% a year) at the time we retire.

...you end up with $152,000 at the end of 1931 after the crashes. And extra $3,000 (or 2% of your total portfolio).

2% of your portfolio ain't nothing...but it hardly seems like some amazing strategy, either. That was for the Great Depression, so let's check for the 2000 crash as well. Starting with $100,000 in 1992....

....60/40 ends up with $196,000
....30/70 ends up with $161,000
....bond tent ends up with $197,000

An extra $1,000 (or half of 1%).

Finance and retirement planning is full of lots of "good ideas" that sound fine on paper. I haven't seen any evidence ever presented that the bond tent idea actually has any benefits in the real world.

(I will concede that there are many people who don't care about numbers and stats and just "feel better" when they have a lot of bonds. Which is fair enough but then I don't see those people buying into a rising equity glidepath when they are retired (especially when all actual research shows that risk aversion increases with age). So there wouldn't be a "tent" for these people. It would just be the usual standard glidepath that every retirement plan already offers.)

BigJohn
Posts: 1416
Joined: Wed Apr 02, 2014 11:27 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by BigJohn » Sun Dec 03, 2017 6:22 am

AlohaJoe, a couple of questions about your cases for the graphs. What withdrawal rate were you using for those case? Also, what withdrawal strategy was assumed (ie equal withdrawal from stocks and bonds at all times or bonds only during downturn or ??)?

dcabler
Posts: 310
Joined: Wed Feb 19, 2014 11:30 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by dcabler » Sun Dec 03, 2017 7:22 am

One can wonder what a bond tent composed at least partially of TIPs or Ibonds would have performed during that time, had they existed - given their mechanics, the question is how much they would have helped.

cody69
Posts: 37
Joined: Sat May 03, 2014 7:46 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by cody69 » Sun Dec 03, 2017 8:00 am

When implementing either the "Bond Tent" or Bernstein's LMP approach, are the bond and equity portfolios managed separately -- eg, during a bear market does one rebalance from the bonds to equities, or are they kept separate to buffer the impact of sequence of returns risk?

User avatar
midareff
Posts: 5092
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by midareff » Sun Dec 03, 2017 8:28 am

All interesting stuff when we don't know the markets performance for the next 5 or 10 years, and we are presently 8 years or so into a bull market. I'm more about a conservative AA that resembles Liability Matching than anything else. Six years retired with AA at 45/55 and a 4.3% draw. The 55 is funded for 20 years of draw assuming it pays zero dividends, and I'll be 70 this month.

As you approach retirement, assuming you have accumulated enough, you should protect that enough against the possibility of a potentially adverse event, or series of adverse events. This is generally known as the Sequence of Return Risk. Since we know bonds are less volatile than stocks it would not seem like a difficult decision to conclude holding more bonds and less stock lessens that risk, and continuing to re-balance to your AA will continue to mitigate that risk. I will also assume that as you age you will travel less, eat out less and so forth, and that your medical and dental expenses will probably rise, as the length of time your remaining portfolio has to support you, decreases. None of this is, or should be, unexpected to anyone here on this board.

AlohaJoe
Posts: 2630
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by AlohaJoe » Sun Dec 03, 2017 8:37 am

BigJohn wrote:
Sun Dec 03, 2017 6:22 am
AlohaJoe, a couple of questions about your cases for the graphs. What withdrawal rate were you using for those case? Also, what withdrawal strategy was assumed (ie equal withdrawal from stocks and bonds at all times or bonds only during downturn or ??)?
Are you saying those things have an effect on when a bond tent does and does not work? That is, it works with some withdrawal rates but not with others? And it works with some withdrawal strategies but not others? That makes it sound pretty fragile, like anyone on Bogleheads who ended up doing it, might do it "wrong".

I think the burden of proof lies with the bond tent crowd. Show the exact strategy and exact situations that it provides better outcomes.

radiowave
Posts: 1298
Joined: Thu Apr 30, 2015 5:01 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by radiowave » Sun Dec 03, 2017 9:56 am

Interesting discussion

There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?

Also, Kitces seems to indicate a high bond percent around 75% or so from the 4th graph, then withdraw funds from bonds in early retirement which will slowly increase equity portion over time. Would a smaller bond percent say around 50% be a useful strategy if a smaller withdrawal rate from bonds is anticipated?

Lastly, in the comments below the article, the type of bonds are discussed and Kitces seems to indicate corporate bonds are not recommended as they tend to correlate with stocks, so would a total bond fund be less appealing than say a mix of treasury funds and TIPS/CDs?
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

BigJohn
Posts: 1416
Joined: Wed Apr 02, 2014 11:27 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by BigJohn » Sun Dec 03, 2017 10:04 am

AlohaJoe wrote:
Sun Dec 03, 2017 8:37 am
Are you saying those things have an effect on when a bond tent does and does not work? That is, it works with some withdrawal rates but not with others? And it works with some withdrawal strategies but not others? That makes it sound pretty fragile, like anyone on Bogleheads who ended up doing it, might do it "wrong".

I think the burden of proof lies with the bond tent crowd. Show the exact strategy and exact situations that it provides better outcomes.
I wasn't trying to be provocative, just asking questions on your methodology. To answer your questions... since the intent is to manage sequence of return risk I think the success would depending on both withdrawal rate and strategy. Here's my reasoning, the risk comes from having to sell stock assets at market lows therefore having less shares that will see the eventual recovery. It would seem to make sense that the risk would be magnified at higher withdrawal rates. I would almost certainly not work as well to protect from that risk if you were selling equal proportions of stock/bonds during a downturn rather than just bonds.

I adopted this strategy based on reading several well respect authors thoughts on the matter. It doesn't seem any more fragile to me than other strategies, all require some judgement on asset allocation and withdrawal rates/methodology that could be "wrong". However, I have no further proof to offer on exact situations were it will or will not provide better outcomes. Like many things on this forum, I recognize there is not unanimity of opinion on the merits.

User avatar
jhfenton
Posts: 2271
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jhfenton » Sun Dec 03, 2017 10:24 am

The basic concept is something I'll likely consider as we get close to our target retirement date and for the period between retirement and taking our SS at age 70. Assuming we want to retire at age 62 (currently 47), we'll be looking at a period of maybe 10 years of heightened risk, from 60-70.

The exact numbers and approach, though, will depend on where the market is in 2030 (age 60).

dbr
Posts: 24132
Joined: Sun Mar 04, 2007 9:50 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by dbr » Sun Dec 03, 2017 10:31 am

I never had a bond tent because whatever the tent would have been was/is just the asset allocation we have anyway.

LuigiLikesPizza
Posts: 270
Joined: Tue Jan 05, 2016 7:54 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by LuigiLikesPizza » Sun Dec 03, 2017 11:04 am

I felt it would require too much stock sell off just prior to retirement, and too much realized capital gains'

For some of us, much of our equity position may be inside a 401K or similar plan...we can reallocate without triggering taxable events, particularly during the last few years of retirement, which are often the peak earning years.

2015
Posts: 970
Joined: Mon Feb 10, 2014 2:32 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by 2015 » Sun Dec 03, 2017 12:28 pm

midareff wrote:
Sun Dec 03, 2017 8:28 am
As you approach retirement, assuming you have accumulated enough, you should protect that enough against the possibility of a potentially adverse event, or series of adverse events. This is generally known as the Sequence of Return Risk. Since we know bonds are less volatile than stocks it would not seem like a difficult decision to conclude holding more bonds and less stock lessens that risk, and continuing to re-balance to your AA will continue to mitigate that risk. I will also assume that as you age you will travel less, eat out less and so forth, and that your medical and dental expenses will probably rise, as the length of time your remaining portfolio has to support you, decreases. None of this is, or should be, unexpected to anyone here on this board.
This paragraph, in all its simplicity, nails it for me. Why people default to complexity (with all of the behavioral pitfalls that default entails) when all this is not really rocket science is beyond me.

BigJohn
Posts: 1416
Joined: Wed Apr 02, 2014 11:27 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by BigJohn » Sun Dec 03, 2017 2:11 pm

LuigiLikesPizza wrote:
Sun Dec 03, 2017 11:04 am
I felt it would require too much stock sell off just prior to retirement, and too much realized capital gains'

For some of us, much of our equity position may be inside a 401K or similar plan...we can reallocate without triggering taxable events, particularly during the last few years of retirement, which are often the peak earning years.
Luigi, this was my situation and so implementing a strategy like this was painless as far as tax consequences. I did much of it in the few years leading up to retirement and then made the final adjustments to my target when I rolled over my 401k into a tIRA.

heyyou
Posts: 2773
Joined: Tue Feb 20, 2007 4:58 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by heyyou » Sun Dec 03, 2017 2:23 pm

My opinion is that the market is supplying the appearance of certainty to those who demand it, using high tech calculations that are based on too small of a historical sample. Note that sequence risk is only for those who blindly continue to WD for 20 years after the early retirement environment that changed the numbers on which those retirees used to retire.

The solution is simple, we have to continue to monitor and to live within our means, same as when we were working. Sequence risk is less a problem for those who can adapt to variable income in retirement.

wolf359
Posts: 1015
Joined: Sun Mar 15, 2015 8:47 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by wolf359 » Sun Dec 03, 2017 2:54 pm

radiowave wrote:
Sun Dec 03, 2017 9:56 am
Interesting discussion

There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?
The Kitces article is addressing the sequence of returns risk faced by people who are dependent upon their investment portfolios. The article doesn't apply to people who don't have the sequence of returns risk.

If you have reliable fixed income from other sources that completely cover your standard of living in retirement, then you don't face sequence of returns risk. Use your investments for the "extras" in life. If the market crashes, cut back on the extras. Your pension and social security will cover your living requirements.

3feetpete
Posts: 144
Joined: Sun Dec 14, 2014 7:30 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by 3feetpete » Sun Dec 03, 2017 6:37 pm

For someone retiring 5 years from now the bond tent probably makes sense because we are at historically high stock values. However for someone retiring now, had they adopted the bond tent 5 or ten years ago, they would have missed out on this amazing bull run. I just retired 6 months ago and am very happy that I remained heavily invested in stock funds since the low in 2008. The bull run may continue for a while but I am not counting on it. So i continue to be heavily invested in stocks 72% but have enough in bonds and cash to take me well past 70 at which time I will start taking SS which will cover most of my needs. At that point it won't bother me if the market goes up or down because I will always keep enough in bonds to carry me through a bear market and out of the red zone.

User avatar
jhfenton
Posts: 2271
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jhfenton » Sun Dec 03, 2017 7:23 pm

3feetpete wrote:
Sun Dec 03, 2017 6:37 pm
For someone retiring 5 years from now the bond tent probably makes sense because we are at historically high stock values. However for someone retiring now, had they adopted the bond tent 5 or ten years ago, they would have missed out on this amazing bull run.
You may get grief for this, but I agree with you. I was going to add to my comment earlier that my exact approach will depend on where the market is in 10 years (5 years from our hypothetical retirement). If markets are down 40-50%, I'm probably going to be at 90% stocks (currently 80%), maybe higher. If markets have been setting all-time highs for several years again, valuations appear stretched, and we're already at our number, I'm probably going to move to 50%, maybe 30% or 40%, depending on how extreme it seems. (I consider present valuations to be moderately high, but not extreme. Extreme would be late 90's U.S. or late 80's Japan.) My default formula is set to have us at 65% when we hit our number. That's what I believe will feel like "normal."

Once we get closer to 70 and collecting SS, our withdrawal rate will drop substantially, and we can move back to our neutral number with the period of heightened risk over.

itstoomuch
Posts: 4823
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by itstoomuch » Mon Dec 04, 2017 1:55 am

I built an GLWB annuity structure. Pretty strong IMO. The structure is layered and can be strengthen or reduced as needed.
Ummm.ymmv :annoyed
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

Dandy
Posts: 4815
Joined: Sun Apr 25, 2010 7:42 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Dandy » Mon Dec 04, 2017 10:48 am

I like the idea of those approaching or newly retired to tone down their risk. One goal might be to have enough "safe" assets to fund withdrawals to get you to your desired Social Security collection age e.g. 66 or 70. In my case I made sure I had and/or created via taxable distributions enough "safe" assets to fund retirement from age 60 to 70 (next year). I used mostly Savings and CDs vs bonds funds.

As you get later in retirement a modest increase in risk can be a decent idea. Retirement can present some new financial challenges as you adapt to the loss of wages/bonuses/contributions/company matches/loss of human capital/bridging any gap to Medicare and Social Security/Withdrawing from your assets, etc. It is nice to have something like a bond tent as you navigate the changes and possible market negatives.

User avatar
FIREchief
Posts: 1415
Joined: Fri Aug 19, 2016 6:40 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by FIREchief » Mon Dec 04, 2017 1:58 pm

ResearchMed wrote:
Sat Dec 02, 2017 10:48 pm
How/why does it matter if there have already been one or several years of retirement, or just one day?

RM
The difference is that when you are five years into retirement, you will live exactly five less years going forward. That reduces the risk of failure.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
David Jay
Posts: 4067
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by David Jay » Mon Dec 04, 2017 2:10 pm

radiowave wrote:
Sun Dec 03, 2017 9:56 am
There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?
I would say "no". If one is not making regular withdrawals then there is no sequence-of-risk problem.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

3feetpete
Posts: 144
Joined: Sun Dec 14, 2014 7:30 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by 3feetpete » Mon Dec 04, 2017 2:20 pm

While most of the threads on this site concentrate on maximizing investments while minimizing risk. It is also important to consider the other side of the equation, the cost to live comfortably. Managing your future costs as you entire the red zone can also play a major role in limiting your sequence of returns risk. Let's say you managed to reduce your yearly expenses by 25K by downsizing and paying off your mortgage. That's 25k that you won't have to spend every year and take out of your investments. It would require almost a million dollars in bonds to earn that 25k. And if most of your money is in 401k's or traditional IRA's you would have to withdraw more like 30K to cover 25k in costs along with the taxes on the withdrawal.

hirlaw
Posts: 187
Joined: Tue Sep 29, 2009 10:20 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by hirlaw » Mon Dec 04, 2017 2:52 pm

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?
Responding to the OP's original question: We are about 1 year from retirement. After hitting our number goal, we have gradually decreased our equity stake from about 60% to presently about 38% (I would go down to 35%, but running out of sale options without springing capital gains). The plan is to draw from the non-equity portion in the first several years of retirement.

User avatar
David Jay
Posts: 4067
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by David Jay » Mon Dec 04, 2017 3:36 pm

LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
...wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?
I intend to have 100% of my living expenses from retirement (age 62) to SS in bonds prior to retiring within the next 12-16 months. I will spend down a good portion of the bonds, increasing the stock allocation in the process.

Conceptually more LMP than bond tent, but the effect is the same.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

ResearchMed
Posts: 5477
Joined: Fri Dec 26, 2008 11:25 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by ResearchMed » Mon Dec 04, 2017 4:13 pm

FIREchief wrote:
Mon Dec 04, 2017 1:58 pm
ResearchMed wrote:
Sat Dec 02, 2017 10:48 pm
How/why does it matter if there have already been one or several years of retirement, or just one day?

RM
The difference is that when you are five years into retirement, you will live exactly five less years going forward. That reduces the risk of failure.
But some people are discussing retiring at 55 or 65 or 75 or even 80/85.
And all of them are supposed to deal with this special "at/around retirement age special situation".

Assuming they are relatively similar in health/life expectancy, the number of years going forward explanation for any single person doesn't quite work, at least not in terms of how to handle the specific "retirement year, regardless of age."

There is a different concern about how to handle a very *late* retirement, which will be our situation.
Most discussions here have been about early retirements.
But I think we should have that as a separate topic, not as an inherent part of the "retirement red zone", which would affect retirees of any age, according to these discussions.

RM
This signature is a placebo. You are in the control group.

gluskap
Posts: 9
Joined: Mon Nov 13, 2017 2:07 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by gluskap » Mon Dec 04, 2017 4:14 pm

I plan on utilizing a bond tent. Right now I am still in the accumulation phase so I am very aggressive with my allocation 95/5. The 5 percent is in tax exempt bond funds that is really just part of my laddered emergency fund. Otherwise I would probably be 100% stocks now. As I approach retirement, say 5 years before I will start to rebalance a year's worth of expenses into bonds each year. This will be done in my 401k to minimize capital gains taxes. This will also keep the 401k from growing too much and keeping my RMD from getting too out of control later. I will then have 5 years of expenses in bonds when I retire. Hopefully at this stage I will be 75% stocks and 25% bonds assuming 1 years expenses is 4% withdrawal rate. Now when I retire, if the stock market is up I will sell stocks to get my 4% withdrawal rate. If stocks are down I will sell 4% from my bonds. This will allow me to withstand 5 years of a bear market without touching stocks. If the bear market lasts longer than 5 years then I will probably look at reducing my withdrawal rate to 3-3.5%. Most of the bear markets recently haven't lasted very long so 5 years seems like it will be enough. Once the bear market ends then I can rebalance back to my 75/25 allocation in preparation for the next bear market.

ResearchMed
Posts: 5477
Joined: Fri Dec 26, 2008 11:25 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by ResearchMed » Mon Dec 04, 2017 4:16 pm

ResearchMed wrote:
Mon Dec 04, 2017 4:13 pm
FIREchief wrote:
Mon Dec 04, 2017 1:58 pm
ResearchMed wrote:
Sat Dec 02, 2017 10:48 pm
How/why does it matter if there have already been one or several years of retirement, or just one day?

RM
The difference is that when you are five years into retirement, you will live exactly five less years going forward. That reduces the risk of failure.
But some people are discussing retiring at 55 or 65 or 75 or even 80/85.
And all of them are supposed to deal with this special "at/around retirement age special situation".

Assuming they are relatively similar in health/life expectancy, the number of years going forward explanation for any single person doesn't quite work, at least not in terms of how to handle the specific "retirement year, regardless of age."

There is a different concern about how to handle a very *late* retirement, which will be our situation.
Most discussions here have been about early retirements.
But I think we should have that as a separate topic, not as an inherent part of the "retirement red zone", which would affect retirees of any age, according to these discussions.

RM
LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
...wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?
This question seems to get at the same underlying issue.

RM
This signature is a placebo. You are in the control group.

User avatar
CaliJim
Posts: 2739
Joined: Sun Feb 28, 2010 8:47 pm
Location: San Fran Bay Area

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by CaliJim » Mon Dec 04, 2017 4:40 pm

How can one simulate this tent strategy vs some other strategy without pulling teeth.

Is there a monte carlo simulator that will allow one to vary the asset allocation year by year?

It would be interesting to experiment. My concern is .... now...a decade into early retirement.... I'm just not that comfortable decreasing my bond allocation..... emotionally .... I feel the sequence of returns risk is always in front of me.
-calijim- | | For more info, click this

BigJohn
Posts: 1416
Joined: Wed Apr 02, 2014 11:27 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by BigJohn » Mon Dec 04, 2017 5:05 pm

CaliJim wrote:
Mon Dec 04, 2017 4:40 pm
My concern is .... now...a decade into early retirement.... I'm just not that comfortable decreasing my bond allocation..... emotionally .... I feel the sequence of returns risk is always in front of me.
If you take an LMP approach to your bond allocation it will slowly drift down over time. Of course, if you plan for 95 and live to 110, all bets are off :beer

jalbert
Posts: 2282
Joined: Fri Apr 10, 2015 12:29 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jalbert » Mon Dec 04, 2017 7:41 pm

David Jay wrote:
Mon Dec 04, 2017 2:10 pm
radiowave wrote:
Sun Dec 03, 2017 9:56 am
There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?
I would say "no". If one is not making regular withdrawals then there is no sequence-of-risk problem.
I would agree. I think a better way to deal with sequence of return risk is to establish an income floor sufficient to meet liabilities with SS, pensions, COLA’d income annuities, and TIPs. Any remaining assets would be invested with allocation per emotional risk tolerance.
Risk is not a guarantor of return.

dbr
Posts: 24132
Joined: Sun Mar 04, 2007 9:50 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by dbr » Mon Dec 04, 2017 7:59 pm

jalbert wrote:
Mon Dec 04, 2017 7:41 pm
David Jay wrote:
Mon Dec 04, 2017 2:10 pm
radiowave wrote:
Sun Dec 03, 2017 9:56 am
There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?
I would say "no". If one is not making regular withdrawals then there is no sequence-of-risk problem.
I would agree. I think a better way to deal with sequence of return risk is to establish an income floor sufficient to meet liabilities with SS, pensions, COLA’d income annuities, and TIPs. Any remaining assets would be invested with allocation per emotional risk tolerance.
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all. Also, like most risk, the phenomenon can result in a benefit to the investor as much as a hazard.

User avatar
Sandtrap
Posts: 2741
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Sandtrap » Mon Dec 04, 2017 9:56 pm

OP: This is an excellent thread that addresses the "Retirement Red Zone".
Sequence of Returns Risk by "DonCamillo".
viewtopic.php?t=159107
"Nedsaid" and others had great input.
j :D

radiowave
Posts: 1298
Joined: Thu Apr 30, 2015 5:01 pm

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by radiowave » Mon Dec 04, 2017 10:28 pm

dbr wrote:
Mon Dec 04, 2017 7:59 pm
. . .
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all. Also, like most risk, the phenomenon can result in a benefit to the investor as much as a hazard.
So if there is no anticipated withdrawal from retirement assets in early retirement, what asset allocation is recommended?
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

jalbert
Posts: 2282
Joined: Fri Apr 10, 2015 12:29 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jalbert » Tue Dec 05, 2017 1:27 pm

dbr wrote:
Mon Dec 04, 2017 7:59 pm
jalbert wrote:
Mon Dec 04, 2017 7:41 pm
David Jay wrote:
Mon Dec 04, 2017 2:10 pm
radiowave wrote:
Sun Dec 03, 2017 9:56 am
There is an assumption in the Kitces article that funds are withdrawn in early retirement to maintain a certain living standard. If social security and pension funds will support that standard of living in retirement, does the bond tent strategy still make sense?
I would say "no". If one is not making regular withdrawals then there is no sequence-of-risk problem.
I would agree. I think a better way to deal with sequence of return risk is to establish an income floor sufficient to meet liabilities with SS, pensions, COLA’d income annuities, and TIPs. Any remaining assets would be invested with allocation per emotional risk tolerance.
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all.
Correct. That's why income flooring is more effective than a rising equity allocation as a way of dealing with sequence of return risk. There is still risk of expenses being higher than projected, which may translate into a sequence of return risk for any assets that are not part of the income floor.
Risk is not a guarantor of return.

User avatar
David Jay
Posts: 4067
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by David Jay » Tue Dec 05, 2017 7:04 pm

radiowave wrote:
Mon Dec 04, 2017 10:28 pm
dbr wrote:
Mon Dec 04, 2017 7:59 pm
. . .
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all. Also, like most risk, the phenomenon can result in a benefit to the investor as much as a hazard.
So if there is no anticipated withdrawal from retirement assets in early retirement, what asset allocation is recommended?
If you are not withdrawing, the highest stock allocation that you can "stand" - sleep well at night and not sell in a downturn.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

dbr
Posts: 24132
Joined: Sun Mar 04, 2007 9:50 am

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by dbr » Wed Dec 06, 2017 10:10 am

David Jay wrote:
Tue Dec 05, 2017 7:04 pm
radiowave wrote:
Mon Dec 04, 2017 10:28 pm
dbr wrote:
Mon Dec 04, 2017 7:59 pm
. . .
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all. Also, like most risk, the phenomenon can result in a benefit to the investor as much as a hazard.
So if there is no anticipated withdrawal from retirement assets in early retirement, what asset allocation is recommended?
If you are not withdrawing, the highest stock allocation that you can "stand" - sleep well at night and not sell in a downturn.
I would expand on that to say it is the allocation that estimates the return you need to meet your objectives, such that you have the ability to cope with the worse outcomes that might actually occur, and that you can see fall a lot without panicking and selling out at the bottom. That is need, ability, and willingness in a nutshell. If you don't know what you are trying to do, if you haven't contemplated what your Plan B is going to be if things don't go as expected, and if you haven't searched your soul to understand what you would do as your portfolio crashes to less than half its value, then those are the things to be considered and related to proportions in stocks and bonds.

User avatar
ruralavalon
Posts: 11864
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by ruralavalon » Wed Dec 06, 2017 12:10 pm

LuigiLikesPizza wrote:
Sat Dec 02, 2017 6:40 pm
I'm 18 months from retirement and I've been gradually moving my allocation in favor of bonds - currently standing at 60%. Watching market movements lately and holding back on any personal reaction.

I came across this Michael Kitces article and wondered whether others close to or in the early years of retirement have taken similar measures during the "Retirement Red Zone"?

Any comments or thoughts on this subject are greatly appreciated.

https://www.kitces.com/blog/managing-po ... -red-zone/
Thank you for the link, that is definitely an interesting article. It makes sense to me.

I have done that in part.

Since I was planning to retire in early 2011 the events of 2008 terrified me, so I increased our bond allocation from 35% to 50% where it remains. (By the way, I was able to retire on schedule as planned.)

Now 7 years into retirement I have been considering moving to a 60/40 asset allocation, though not for the reasons stated in the article. I have been considering 60/40 because I want a hyper-simple portfolio my wife could manage, using just a single balanced fund like either Vanguard Balanced Index Fund Admiral Shares (VBIAX) or Vanguard LifeStrategy Moderate Growth (VSMGX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Post Reply