How many years of fixed income for Sequence of Return Risk

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
antiqueman
Posts: 422
Joined: Thu Mar 12, 2009 5:22 pm

How many years of fixed income for Sequence of Return Risk

Post by antiqueman » Thu Jan 11, 2018 12:47 pm

I am 63. DW is 60. I have low stock allocation . In essence I have 20%Iequities and 80 % in fixed income. Lots of TIPS. I realize I need to increase stock percentage to probably at least 30% to 35%.

Will retire within next two years. I can fund living expenses with CDs, Tips, Short Term Bonds etc for at least 10 years and possibly more.

My question is "How many years of fixed income would you set aside for relative "safety" ( I realize that in theory nothing is totally safe) if you increased you equity to between 30 and 35 percent. Would the market likely rebound within 10 years? 15 years? 20 years? If anyone can refer me to studies on this issue or comments by other posters I would appreciate it.

Thanks !

User avatar
dwickenh
Posts: 981
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: How many years of fixed income for Sequence of Return Risk

Post by dwickenh » Thu Jan 11, 2018 12:52 pm

Some people actually build their equity allocation around this question. 3-5 years seems to be the suggested fixed income to get past a "bear market". I lean to the safe side of that with 10 years of fixed income. The rest is in equities, Part of the equation is determined by how much is the "rest" of your assets. It works for me due to the moderate size of assets. If the same formula only left me with 20% for equities, I would likely lower my fixed income years to 6 or 7 and raise my equities allocation to support a 30 year retirement.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

antiqueman
Posts: 422
Joined: Thu Mar 12, 2009 5:22 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by antiqueman » Thu Jan 11, 2018 12:57 pm

[quote=dwickenh post_id=3714641 time=1515693126 user_id=59826]
Some people actually build their equity allocation around this question. 3-5 years seems to be the suggested fixed income to get past a "bear market". I lean to the safe side of that with 10 years of fixed income. The rest is in equities, Part of the equation is determined by how much is the "rest" of your assets. It works for me due to the moderate size of assets. If the same formula only left me with 20% for equities, I would likely lower my fixed income years to 6 or 7 and raise my equities allocation to support a 30 year retirement.


Original poster here. The rest of our assets after the fixed income set aside is about 40% of our investments.

Thanks.

RadAudit
Posts: 2736
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: How many years of fixed income for Sequence of Return Risk

Post by RadAudit » Thu Jan 11, 2018 1:13 pm

Many different opinions on this one. The Trinity Study - or one of its offshoots - has some beautiful tables on SWRs, asset allocations and probability of success. One follow up had a set of tables with the same thing and a target if you wanted to estimate how much money you wanted to leave your heirs.

Of course, you'll hear a lot about a lot about low return environment and how Trinity doesn't apply in this case.

Bernstein recommends 25 (?) years in residual living expenses RLE.

No one knows for sure. Vanguard in Retirement Income goes as low as 30% stocks.

Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course.

remomnyc
Posts: 414
Joined: Mon Jan 04, 2016 4:27 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by remomnyc » Thu Jan 11, 2018 1:38 pm

In a typical 25x expenses, 60/40 retirement allocation, there would be 10 yrs of fixed income and 15 yrs of equity. Personally, I have ~13 yrs of fixed income and more than 25x expenses with a 55/45 allocation because I am retiring early. I believe Kitces said the first 10 years was the most dangerous for SRR, so I will retain a healthy chuck of fixed income for the first decade and let bonds drift down and equities glide up as I near SS age, although I haven't nailed down the details yet.

azanon
Posts: 1695
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: How many years of fixed income for Sequence of Return Risk

Post by azanon » Thu Jan 11, 2018 1:56 pm

When you mention having x years worth of cash setting around for safety, it sounds like you are describing a "bucket approach" to retirement income, but at the same time, you're asking advice about what asset allocation to use for a non-bucket type strategy.

As others have said, if you go to a 30/70, then you have many years of fixed income already in place to handle market volatility. However, I think once you choose a final allocation, you still want to rebalance that regularly, so that will mean you'll be buying more stock when the market is down.

Retirement income funds typically range from having 15 to 45% equities. So if you decided on 30%, that would be about the median. I'll also mention Rick Ferri not too long ago wrote an article on that allocation being the center of gravity for retirees. But all-in-all, there's no real right answer here, but just be ready to commit to whatever you decide.

capjak
Posts: 5
Joined: Fri Sep 22, 2017 8:58 am

Re: How many years of fixed income for Sequence of Return Risk

Post by capjak » Thu Jan 11, 2018 2:12 pm

I have a 45/55 allocation right now, with DW retiring 6 months ago and I plan on retiring this year. For me that equates to 26 years of expenses in fixed income. Wonder if I should just build a 30 year TIPS ladder and be done with it.

antiqueman
Posts: 422
Joined: Thu Mar 12, 2009 5:22 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by antiqueman » Thu Jan 11, 2018 2:43 pm

I have a 45/55 allocation right now, with DW retiring 6 months ago and I plan on retiring this year. For me that equates to 26 years of expenses in fixed income. Wonder if I should just build a 30 year TIPS ladder and be done with it.

I am the original poster.

I thought about putting 30 years of fixed income in a TIPS ladder ( but you have to make some adjustments for some years because there you can establish a 30 year consecutive ladder). But if we do a 30 year TIPS ladder , what happens after 30 years if you are still alive? Or if you need more a particular year ( or more) and its all in TIPS.

Maybe the answer is to 70 percent in TIPS and 30 percent in equity. That would provide 25 years of "X".

User avatar
David Jay
Posts: 4425
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: How many years of fixed income for Sequence of Return Risk

Post by David Jay » Thu Jan 11, 2018 2:51 pm

As others have said, 10 years is a good starting point.

If you actually spend down some of that fixed income, you will automatically bring up the relative equity percentage. I am self-funding my retirement from age 62 to age 68 (at which time SS will cover all of our recurring expenses). I have ramped-down to about 40% equity, but as I spend some of the fixed income I project that I will quickly return to my preferred 60/40. In the event of a sustained bear market, I can live from bonds exclusively until age 68.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

itstoomuch
Posts: 5210
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: How many years of fixed income for Sequence of Return Risk

Post by itstoomuch » Thu Jan 11, 2018 3:05 pm

OP, your best guess is as good as it gets.
By moving from equity to bonds, you are essentially buying some portfolio insurance by giving up equity performance.
There are other methods to insure your retirement portfolio.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
B'Falls_JT
Posts: 50
Joined: Fri Aug 13, 2010 8:21 pm
Location: Beaver Falls, PA

Re: How many years of fixed income for Sequence of Return Risk

Post by B'Falls_JT » Thu Jan 11, 2018 3:23 pm

We are currently 5+ years into retirement. During the first 6 years, we are extracting all income from our portfolio and will begin collecting SS and pensions later in 2018. I would say that our risk tolerance and capacity are "moderately low", and therefore, we have maintained a fairly conservative asset allocation (AA). Our AA has been based on the idea of keeping 10 years of income in fixed income assets using the following breakdown: current year in cash accounts; years 2-5 in CDs and short-term bonds; years 6-10 in intermediate bonds and TIPS; and years 11+ in stocks. The high-level AA has been 44% stocks and 56% fixed income. Once we start collecting SS and pensions, we are looking to take a bit more risk at either a 48/52 or 50/50 AA.

Hope this helps.

Beehave
Posts: 137
Joined: Mon Jun 19, 2017 12:46 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by Beehave » Thu Jan 11, 2018 4:52 pm

I don't think any of the posts indicate whether and how Social Security and pensions play in your considerations. In general, if there are secure sources of income to pay the basic bills, you can increase your allocation to stocks.

In your situation, such as I understand it, any rebalance upping stock allocation should be done slowly. If you had a big tolerance for stock market risk, you'd already have a high allocation. Don't make a radical change now.

My recommendation would be to pick a target allocation (someone above mentioned the Vanguard Retirement Income fund which is the most conservative of their target date funds) which is about 30% stock and includes tips and bonds. Slowly dollar cost average your way to your target allocation in stocks. If the market keeps going up, you'll be better off than if you'd done nothing. If the market tanks, you'll be buying at a discount and be rewarded for your prior prudence.

My opinion, best wishes and good luck!

randomguy
Posts: 5345
Joined: Wed Sep 17, 2014 9:00 am

Re: How many years of fixed income for Sequence of Return Risk

Post by randomguy » Thu Jan 11, 2018 5:34 pm

remomnyc wrote:
Thu Jan 11, 2018 1:38 pm
In a typical 25x expenses, 60/40 retirement allocation, there would be 10 yrs of fixed income and 15 yrs of equity. Personally, I have ~13 yrs of fixed income and more than 25x expenses with a 55/45 allocation because I am retiring early. I believe Kitces said the first 10 years was the most dangerous for SRR, so I will retain a healthy chuck of fixed income for the first decade and let bonds drift down and equities glide up as I near SS age, although I haven't nailed down the details yet.
That is a bit deceptive because when stocks fall 50%, you will be selling a bit of those bonds to rebalance.

There are sort of 2 issues with your sequence of returns

a)Market volatility: 3-5 years gets you 90%+ back almost every time. Granted a couple of times it fell right afterwards.
b)poor performance. Even with 0 volatility, a steady -1% real for 15 years is cause your portfolio to dwindle at an alarming rate.
'
A is somewhat easy to handle by buying bonds. B isn't. Things like trinity show that AA pretty much doesn't matter (30/70 and 70/30 have the same survival rate) if you can handle the volatility. Thats a big if.

10% AA shifts tend not to matter much. You are talking about .5% more return and 5% larger drops (roughly).

radiowave
Posts: 1455
Joined: Thu Apr 30, 2015 5:01 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by radiowave » Thu Jan 11, 2018 6:37 pm

Beehave wrote:
Thu Jan 11, 2018 4:52 pm
I don't think any of the posts indicate whether and how Social Security and pensions play in your considerations. In general, if there are secure sources of income to pay the basic bills, you can increase your allocation to stocks.

In your situation, such as I understand it, any rebalance upping stock allocation should be done slowly. If you had a big tolerance for stock market risk, you'd already have a high allocation. Don't make a radical change now.

My recommendation would be to pick a target allocation (someone above mentioned the Vanguard Retirement Income fund which is the most conservative of their target date funds) which is about 30% stock and includes tips and bonds. Slowly dollar cost average your way to your target allocation in stocks. If the market keeps going up, you'll be better off than if you'd done nothing. If the market tanks, you'll be buying at a discount and be rewarded for your prior prudence.

My opinion, best wishes and good luck!
The Vanguard Target Retirement Income Fund (VTINX) might be a good choice if you don't want to mess with individual mutual funds:

https://personal.vanguard.com/us/funds ... rue#tab=2
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

antiqueman
Posts: 422
Joined: Thu Mar 12, 2009 5:22 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by antiqueman » Thu Jan 11, 2018 7:00 pm

[quote=itstoomuch post_id=3714935 time=1515701104 user_id=58805
.
There are other methods to insure your retirement portfolio."


Itstomuch--what other methods are you referring to when you state " There are other methods to insure your retirement portfolio"? Do you mean an annuity?

itstoomuch
Posts: 5210
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: How many years of fixed income for Sequence of Return Risk

Post by itstoomuch » Thu Jan 11, 2018 7:17 pm

^reply: Multiple streams of Income and diversity of Risk Exposure are good.
viewtopic.php?f=1&t=236665 [Sequence of Returns (Risk management), SPoF]
viewtopic.php?f=1&t=236772 [GLWB annuities, surrendering]
Likely that we will transition out of GLWB annuities in the next couple of years as the guarantee period expires AND if the Equity/Bond Markets holds up. It is not to say annuities are good or bad. For us, their original purposes have essentially expired and we find that current RE can be an acceptable vehicle.
We are transitioning into rentals partly because of big capital gains in property we've held for 35 years, and partly because we don't want excessive exposure to the equity/bond markets.

Any one's guess for the future is valid.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

AlohaJoe
Posts: 2828
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: How many years of fixed income for Sequence of Return Risk

Post by AlohaJoe » Thu Jan 11, 2018 7:55 pm

antiqueman wrote:
Thu Jan 11, 2018 12:47 pm
My question is "How many years of fixed income would you set aside for relative "safety" ( I realize that in theory nothing is totally safe) if you increased you equity to between 30 and 35 percent. Would the market likely rebound within 10 years?
This is what it was like with 10 years of bonds....



Image



Answer: not protected.



Here is 15 years of bonds....



Image



Answer: not protected.



Here is 20 years of bonds...



Image



Answer: not protected.



Also: it depends a lot on your own personal definition of "relative safety".

DrGoogle2017
Posts: 1212
Joined: Mon Aug 14, 2017 12:31 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by DrGoogle2017 » Thu Jan 11, 2018 8:24 pm

Have you take into account that you will get SS at some point?

Sandi_k
Posts: 573
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: How many years of fixed income for Sequence of Return Risk

Post by Sandi_k » Fri Jan 12, 2018 3:26 pm

Our plan is to have $50k of income from our investment portfolio in retirement. So we want 10 years in cash/CDs and bonds/Fixed income - that's $500k

We have chosen to move towards two buckets (and yes, I've read about bucket problems; we're more concerned with SoRR).

We have one bucket named "the withdrawal account" and another bucket which is the portfolio.

Therefore, we plan on $250k in cash/CDs for the "withdrawal account" and then the portfolio would hold $250k in bonds/FI. The portfolio's remaining positions would be stocks. Assuming our totals have reached $1.3M by then, it would be $250k cash, $250k bonds, $800k stocks. That's essentially a 60/40 AA for the total amount, or 80/20 for the investment account. It gives us 10 years of available, non-invested funds, that won't require selling anything.

This construct will allow us to sleep well at night. So our "glide path" is adding an additional $50k annually to the cash/CD bucket between now and retirement - also known as "selling high" from the stock portion we currently own. ;)

Search for the threads on Sequence of Return, Safe Withdrawal Rates, and Customizing Glide path - really helpful threads.

Stonebr
Posts: 1458
Joined: Wed Jan 21, 2009 11:19 am
Location: Maine

Re: How many years of fixed income for Sequence of Return Risk

Post by Stonebr » Fri Jan 12, 2018 5:24 pm

I went through calculations and modeling for months trying to answer this question a few years ago. Ended up at age in bonds. :sharebeer
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

heyyou
Posts: 2865
Joined: Tue Feb 20, 2007 4:58 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by heyyou » Sat Jan 13, 2018 12:27 am

Sequence risk does not suddenly appear. For a decade or longer, you have to be blindly overspending from what your annual portfolio size will support for the long term.

We expect to annually adapt our spending to what our 60/40 portfolio will support, first spending from only the bonds to let the equities go up or down longer. Our necessary expenses are kept somewhat low (maybe 3-3+ %) so the adjustment is more on our discretionary spending.

Looking for certainty for the next thirty years? There isn't any, but you already do have 30 years of experience at living within your means, so just continue that in retirement.

johnz1001
Posts: 145
Joined: Tue Jan 01, 2013 7:41 am

Re: How many years of fixed income for Sequence of Return Risk

Post by johnz1001 » Sat Jan 13, 2018 6:26 am

I have 8 years of fixed income set aside to get me to social security and then 50/50 for the remaining portion of the portfolio with 5 percent rebalancing bands.

Call_Me_Op
Posts: 6705
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: How many years of fixed income for Sequence of Return Risk

Post by Call_Me_Op » Sat Jan 13, 2018 7:37 am

antiqueman wrote:
Thu Jan 11, 2018 12:47 pm
I realize I need to increase stock percentage to probably at least 30% to 35%.
"Need" is a strong word. Why do you "need" to do that?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Dandy
Posts: 4932
Joined: Sun Apr 25, 2010 7:42 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by Dandy » Sat Jan 13, 2018 8:00 am

I am pretty risk averse but if all you want is to likely bridge to when the equity market recovers then 5 years is probably a good idea. I like your focus on CD, TIPS and short term bond funds for this portion of your portfolio - I think that is where this type of funding should be kept.

I also agree that getting equity allocation to at least 30% would be a good idea. Of course now is a pretty pricey time to ramp up equities. It seems that the sequence of return risk is at its highest a few years before and after retirement. My understanding is those years might be your lowest allocation to equities.

A lot of how to structure your investments in or just prior to retirement depends on the size of your nest egg, your retirement income floor vs retirement living expenses, when you and your spouse plan to take Social Security, etc. It may be beneficial to post your financial position as outlined in the beginning of this section to get better feedback -- if you need it.

Dottie57
Posts: 2785
Joined: Thu May 19, 2016 5:43 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by Dottie57 » Sat Jan 13, 2018 8:02 am

I have a 50/50 allocation. I'll have to fund 8 years before SS. Years of fixed income in portfolio is around 14 years. When SS income starts it will cover 1/2 to 2/3 of expenses.

The Wizard
Posts: 11352
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: How many years of fixed income for Sequence of Return Risk

Post by The Wizard » Sat Jan 13, 2018 8:30 am

Dottie57 wrote:
Sat Jan 13, 2018 8:02 am
I have a 50/50 allocation. I'll have to fund 8 years before SS. Years of fixed income in portfolio is around 14 years. When SS income starts it will cover 1/2 to 2/3 of expenses.
Similar to my case with seven years from retirement in 2013 to full SS in 2020.
While I kept my AA steady for the first several years, I did have income from Immediate Annuities covering my basic expenses from the start.

I've been withdrawing monthly amounts from my portfolio in lieu of SS, but "pro rata" across the mix of investments.
I've also done a few incremental rebalancing moves from stocks into bonds (TIAA Traditional) to keep my AA from getting too stock heavy the past few years.

But I've never bothered to figure how many years of fixed income I have related to SoR risk.
Nor have I set aside separate "safe" funds to deal with my seven year bridge period until SS.

Main reason for this approach is that my withdrawal rate from portfolio was around 4% to start, less now. And I had/have strong confidence in that scheme surviving the seven year period...
Attempted new signature...

Small Law Survivor
Posts: 379
Joined: Tue Nov 17, 2015 5:36 pm

Re: How many years of fixed income for Sequence of Return Risk

Post by Small Law Survivor » Sat Jan 13, 2018 9:31 am

I'm 67 this year. Have a 50/50 allocation. However, this is spread over taxable, tIRA, rIRA.

Planning to take SS at 70.

Am shooting for 4% withdrawal, but when SS kicks in withdrawal rate will fall to around 3-3.5%.

If market tanked I would withdraw bond $$ from taxable from 2019-2021 (already have 2018 spending money in cash).

In 2021, I would withdraw from bonds in taxable and tIRA, and benefit from SS.

Once you start blending RMDs and SS, the bond money in taxable and in the tIRA gives me additional money to weather a downturn. With bonds in taxable and RMDs from tIRA, plus SS, I have more than 7 years (maybe 8) to weather a catastrophic bear market. My rule of thumb is never to have money you need in next 5 years in stocks.

Post Reply