“Safe” investment approaching retirement

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dave1054
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“Safe” investment approaching retirement

Post by dave1054 » Sat Aug 11, 2018 6:11 pm

Will retire in about a year. I am very well off financially and want to preserve what I have. I intend to keep about 50% in index funds but with the bond portion, I would be happy to get a few percent a year rather than risk it if stock market crashes and interest rates soar. Any suggestion for short term bond funds with maximum duration of 3-4 years or other safe short term investments. Thanks.

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Peter Foley
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Re: “Safe” investment approaching retirement

Post by Peter Foley » Sat Aug 11, 2018 6:18 pm

Vanguard's intermediate term bond fund is often recommended. I don't know anything more about the fund.

A good higher interest paying stable value fund is my approach. Our stable value funds pay more than the rate of inflation. We have stable value, total bond, TIPS, and I-bonds for our non equity mix.

where possible we only hold total stock and international for our equities. Otherwise S&P 500.

Liam Friend
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Re: “Safe” investment approaching retirement

Post by Liam Friend » Sat Aug 11, 2018 6:22 pm

I'm in a similar position but still have more questions than answers. Depending on amount of dollars, why not consider several CDs? FDIC protected and annual percentage levels within your parameters.

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iceport
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Re: “Safe” investment approaching retirement

Post by iceport » Sat Aug 11, 2018 6:35 pm

I was attracted by the yield (currently 3.37%) and short average duration (2.8 yrs.) to Vanguard Short-Term Corporate Bond Index Fund (VSCSX). There is some interest rate sensitivity, but it is limited. It's investment grade, not US bonds, and it wasn't around in 2008/2009, but you can see how it would have fared by looking at its actively managed twin, Vanguard Short-Term Investment-Grade Fund (VFSUX), during the crash. (They actually make an excellent TLH pair.)
"Discipline matters more than allocation.” ─William Bernstein

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KlingKlang
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Re: “Safe” investment approaching retirement

Post by KlingKlang » Sat Aug 11, 2018 6:53 pm

I did have a substantial portion of my retirement funds in Vanguard Short-Term Investment-Grade Fund (VFSUX) during the crash, and I bailed in October 2008 because I hadn't anticipated losing that much money in a short term bond fund. It recovered quickly after that of course.

You have to evaluate your own risk tolerance, but a ladder of CDs or US Treasury notes may be better for your sleep tight money than a bond fund.

sixty40
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Re: “Safe” investment approaching retirement

Post by sixty40 » Sat Aug 11, 2018 7:00 pm

If you are well off financially, I assume you will have a decent amount of income each year, so maybe consider a muni bond fund such as VG Limited Term Tax-Exempt fund, 2.5 yr avg duration, SEC yield 1.89%, fairly stable, exempt from federal tax. The intermediate term tax-exempt bond fund has a duration of 5.1 yrs, SEC yield of 2.33%, exempt from federal tax. If you live in CA, VG has an intermediate term muni bond fund although the duration is 5.2 yrs. 3-4 yrs may be just in between short term and intermediate term.

Dandy
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Re: “Safe” investment approaching retirement

Post by Dandy » Sun Aug 12, 2018 7:48 am

I roughly follow Dr. Wm Bernstein's approach of having 20 years worth of expected drawdown dollars in "safe" products. For me that is about 1/3 in "no loss of principal" products e.g. CDs, money market funds, on line savings accounts. Another 1/3 is in short term bond funds e.g. short term bond index and LTD term tax exempt. These 2/3 of my fixed income I refer to as my "safe" portfolio and it equals 20 years of drawdown.

My "risk" portfolio contains the other 1/3 of my fixed income which is invested in intermediate bond funds. It also contains my equity funds. That portfolio has a 67/33 allocation.

My overall allocation is 43/57.

I am 70 and took my first RMD this January. I took it proportionately from my TIRA investments which are a mixture of "safe" and "risk" products. (my TIRA is about 80% "safe") If the equity market plunges I will take more from my TIRA "safe" assets. If the equity market soars I will take more from my TIRA "risk" assets.

I don't believe any retirement allocation or withdrawal plan is set it and forget it. I keep track of our overall spending to see if there is expense creep. It is early but so far I am pleased with this approach. I am cautiously giving early inheritance to our two daughters/son-in-laws rather than have them wait, hopefully for decades, to inherit a larger amount. They could use some help now and we would like to see them enjoy the gifts. This allocation and withdrawal approach has made me comfortable is doing this.

This bottom up approach allows me to sleep well and not be overly concerned about the stock market. I think for those who are in great financial shape in retirement should shift from growth to asset preservation in most cases.

livesoft
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Re: “Safe” investment approaching retirement

Post by livesoft » Sun Aug 12, 2018 7:50 am

I question the need for a "Safe" investment that won't drop in value. One should be completely satisfied with any ol' bond fund that won't drop more than 10% over a year or so.
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MikeG62
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Re: “Safe” investment approaching retirement

Post by MikeG62 » Sun Aug 12, 2018 8:00 am

dave1054 wrote:
Sat Aug 11, 2018 6:11 pm
Will retire in about a year. I am very well off financially and want to preserve what I have. I intend to keep about 50% in index funds but with the bond portion, I would be happy to get a few percent a year rather than risk it if stock market crashes and interest rates soar. Any suggestion for short term bond funds with maximum duration of 3-4 years or other safe short term investments. Thanks.
How about buying individual Treasury bonds? 2-year Treasuries currently yielding ~2.65% (and they are state income tax free).
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SimplicityNow
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Re: “Safe” investment approaching retirement

Post by SimplicityNow » Sun Aug 12, 2018 8:08 am

dave1054 wrote:
Sat Aug 11, 2018 6:11 pm
Will retire in about a year. I am very well off financially and want to preserve what I have. I intend to keep about 50% in index funds but with the bond portion, I would be happy to get a few percent a year rather than risk it if stock market crashes and interest rates soar. Any suggestion for short term bond funds with maximum duration of 3-4 years or other safe short term investments. Thanks.
First off, congratulations on the upcoming retirement.

You could use a mix of short term bond funds, 2 year CDs (currently between 2.5 - 3% and some 3 yr CD's are paying more) and 2 year US Treasuries.

Our strategy is similar to Peter's. We have a mix of good Stable Value Funds, CD's, high yield savings accounts, and Vanguard Total Bond Index.

Good luck.

UpperNwGuy
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Re: “Safe” investment approaching retirement

Post by UpperNwGuy » Sun Aug 12, 2018 8:17 am

livesoft wrote:
Sun Aug 12, 2018 7:50 am
I question the need for a "Safe" investment that won't drop in value. One should be completely satisfied with any ol' bond fund that won't drop more than 10% over a year or so.
+1

billfromct
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Re: “Safe” investment approaching retirement

Post by billfromct » Sun Aug 12, 2018 9:01 am

Just to give you an idea of my retirement stock/bond allocation as it my give you some ideas.

I will start RMDs & SS next year & my retirement account has about 10 years of my old salary in fixed income. This equates to about 38% fixed income/62% stocks with the fixed income allocation being about 12-14 years of RMDs.

My retirement fixed income is about 25% MM, 30% ST bonds & 45% intermediate bonds.

Since most (not all) stock market cycles last 5-7 years, I feel I can wait out any bear market so I will not need to rebalance out of stocks during any stock market downturn.

I will take my RMD each January from my ST bond fund to get them out of the way, put my RMD in my Vanguard MM fund & transfer some money into my checking account at the beginning of each month. When it appears the Fed is finished raising the Fed funds rate, I will just have ST & intermediate bond funds in my fixed income retirement account. My goal is to have my retirement fixed income allocation to be about 40% of my total retirement assets & it will be about 40% ST bonds & 60% intermediate bonds.

I will rebalance from my retirement stock fund each year if the stock market is high, like now or stable. I will not rebalance from my retirement stock fund in a bear market. I will watch the S&P 500 10 year performance graph to do this.

bill

Dandy
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Re: “Safe” investment approaching retirement

Post by Dandy » Sun Aug 12, 2018 9:21 am

One should be completely satisfied with any ol' bond fund that won't drop more than 10% over a year or so.
I think that is very much overstated. It implies everyone no matter their age, financial condition or risk tolerance or fixed income allocation should be comfortable with a possible 10% loss/dip in value over a year.

"safe" investments have risks e.g. inflation. bond funds have risks e.g. defaults, rising rates. For many the purpose of their fixed income is is safety/stability so the risk can be taken on the equity side.
Ytd total bond -1.15%, Prime M Mkt + 1.08% difference 2.23% (not an insignificant difference)

In a low inflation, rising rate environment, which we have been in for several years, there are advantages of having some portion of fixed income assets in "safe" products. Are the advantages huge? No. But they are positive and fit the goal of having fixed income providing safety and stability of the fixed income portion of your allocation.

A lot depends on age, risk tolerance, size of fixed income allocation, etc. Not many retirees would be comfortable with a 10% loss on their fixed income -- even if that were somewhat temporary. No more tail wind of a 3 decades bond bull market we are facing a slight headwind of rising rates for next year or so. That might mean looking at fixed income differently, at least for awhile, at least for some like the OP who is expressly looking for safety in retirement.

pkcrafter
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Re: “Safe” investment approaching retirement

Post by pkcrafter » Sun Aug 12, 2018 10:42 am

KlingKlang wrote:
Sat Aug 11, 2018 6:53 pm
I did have a substantial portion of my retirement funds in Vanguard Short-Term Investment-Grade Fund (VFSUX) during the crash, and I bailed in October 2008 because I hadn't anticipated losing that much money in a short term bond fund. It recovered quickly after that of course.
Well, that's interesting. VFSUX, credit quality A and duration of 2.6 lost 4.6% in 2008, while total bond index, duration of 6 and quality AA gained 5%.


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galeno
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Re: “Safe” investment approaching retirement

Post by galeno » Sun Aug 12, 2018 11:01 am

Be aware that higher risk bonds correlate to stocks. If you use higher risk bonds you should reduce your equities accordingly.

Wife and I retired for 5 years. We are 61. 4% SWR. We divide our portfolio like this:

40% Risky: 40% FTSE all world equities

20% Semi-risky: 20% Corporate bonds

35% Safe: 20% interm term US treasuries + 15% TIPS + 5% CASH
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

RIMDBogle
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Re: “Safe” investment approaching retirement

Post by RIMDBogle » Sun Aug 12, 2018 11:23 am

Peter Foley wrote:
Sat Aug 11, 2018 6:18 pm
A good higher interest paying stable value fund is my approach. Our stable value funds pay more than the rate of inflation. We have stable value, total bond, TIPS, and I-bonds for our non equity mix.
Good to see this thread. I learned that stable value fund offered only for corporate account plans.

Is there a way to build close equivalent of stable value fund within individual portfolio using various Bonds/Close funds?

Thanks for sharing.

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Peter Foley
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Re: “Safe” investment approaching retirement

Post by Peter Foley » Sun Aug 12, 2018 7:01 pm

RIMDBogle:

I'm not sure there is a way to do this. Many stable value funds include insurance contracts and those would be hard to replicate. In addition, many have withdrawal limitations. While I was employed I could only move 20% of the stable value per year to something else with the exception of when I turned 62 or 65 (I don't remember which) and I could move any amount. It was explained to me that to be able to provide a higher interest rate the provider had to limit investors ability to use the stable value fund like a money market fund. They had to guard against large distributions based, in part, on participants reactions to the stock market.

That is only what I was told by an account rep. I do not know if that is necessarily the reasoning behind the withdrawal limitations.

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galeno
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Re: “Safe” investment approaching retirement

Post by galeno » Sun Aug 12, 2018 8:00 pm

"Is there a way to build close equivalent of stable value fund within individual portfolio using various Bonds/Close funds?"

If you don't have access to a SVF you should follow the Boglehead advise for bonds: any short to intermediate term investment grade bond fund is OK.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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