What % bonds for early retirement

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abs9986
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What % bonds for early retirement

Post by abs9986 » Fri Apr 12, 2019 9:00 am

Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.

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goingup
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Re: What % bonds for early retirement

Post by goingup » Fri Apr 12, 2019 9:15 am

Vanguard's Target Retirement 2030 fund is 75/25. The TR2035 fund is 80/20. Those could be appropriate asset allocations for you. Some people your age are comfortable with 100% equity along with holding a robust emergency fund.

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abs9986
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Re: What % bonds for early retirement

Post by abs9986 » Fri Apr 12, 2019 9:19 am

what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.

KlangFool
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Re: What % bonds for early retirement

Post by KlangFool » Fri Apr 12, 2019 9:21 am

OP,

10 years of expense in the fixed income when you retired. This applies regardless of when you retire (early, late, or whenever). You take this number and translate into your AA depending on your portfolio size.

KlangFool

dbr
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Re: What % bonds for early retirement

Post by dbr » Fri Apr 12, 2019 9:21 am

To project both accumulation of money and withdrawal in retirement you have to use a probabilistic model such as FireCalc or any of the many other models that project the possibility of a very wide variability in investment returns and inflation. Those models allow a person to enter various asset allocations to observe the trade-offs of higher overall return of high stock allocations with increased uncertainty of outcome in investing.

I wouldn't dispute that one probably wants to be around 70/30 at this point. If you assume that you need 7% return from now on you may need to be more stocks than that and be prepared for significant chances you won't get there along with significant chances you will have more wealth than you need by age 50.

You should always remember that you can't expect to get the expected return. It will actually be more or less, possibly by a lot.

dbr
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Re: What % bonds for early retirement

Post by dbr » Fri Apr 12, 2019 9:22 am

abs9986 wrote:
Fri Apr 12, 2019 9:19 am
what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.
None of the above.

livesoft
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Re: What % bonds for early retirement

Post by livesoft » Fri Apr 12, 2019 9:22 am

One won't know what percentage of bonds to target for early retirement until after the future is over. So 22% sounds about right to me, but I don't know the future either.
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KlangFool
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Re: What % bonds for early retirement

Post by KlangFool » Fri Apr 12, 2019 9:25 am

abs9986 wrote:
Fri Apr 12, 2019 9:19 am
what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.
abs9986,

Your AA should be based on your portfolio size as a multiple of your annual expense. It has nothing to do with your age. Your plan will change depending on your return.

<<if because I'm looking to retire sooner I should be more quickly switching to bonds.>>

This is market timing. Could you count on being lucky? I don't. What if the market drop before your switch?

KlangFool

dbr
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Re: What % bonds for early retirement

Post by dbr » Fri Apr 12, 2019 9:26 am

KlangFool wrote:
Fri Apr 12, 2019 9:25 am
abs9986 wrote:
Fri Apr 12, 2019 9:19 am
what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.
abs9986,

Your AA should be based on your portfolio size as a multiple of your annual expense. It has nothing to do with your age. Your plan will change depending on your return.

<<if because I'm looking to retire sooner I should be more quickly switching to bonds.>>

This is market timing. Could you count on being lucky? I don't. What if the market drop before your switch?

KlangFool
Indeed. Retirement is an exercise in successive approximation with many hills and valleys along the way. It could also be the largest effect you can impose now is to spend less and save more. This is a dynamic of how much you have already saved, etc. Also the whole plan is affected more by deciding how much you are happy spending in retirement than it is by debating variations in asset allocation. The decision could well be determined by you deciding when you reach age 50 that you are going to be happy with what you have, whatever that is.

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goingup
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Re: What % bonds for early retirement

Post by goingup » Fri Apr 12, 2019 9:32 am

abs9986 wrote:
Fri Apr 12, 2019 9:19 am
what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.
You're 20 years out from possible retirement so precision is impossible. All you can do is save a ton and stay equity-heavy.

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Re: What % bonds for early retirement

Post by KlangFool » Fri Apr 12, 2019 9:34 am

OP,

Assuming you retire with the portfolio size of 25 times your annual expense. And, you need 10 years of expense in fixed income. Then, your final AA would be 60/40.

A possible glide path AA could be

1) 20 to 25 times annual expense = 60/40

2) 15 to 20 times annual expense = 65/35

3) 10 to 15 times annual expense = 70/30

4) less than 10 times annual expense = 75/25

KlangFool

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Clever_Username
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Re: What % bonds for early retirement

Post by Clever_Username » Fri Apr 12, 2019 9:35 am

I'm on path to be FI before 50 as well, TA, and I'm sticking with age in bonds. If your plans involve not only FI, but having a long retirement, you need the ballast.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

RetireBy55
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Re: What % bonds for early retirement

Post by RetireBy55 » Fri Apr 12, 2019 10:17 am

Just did early retirement at 55 in January, and am at ~57% Fixed Income, which includes CDs and traditional bond funds.

Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many. We're 10+ years into the current bull market, and expectations are pretty broad that markets are not likely to perform over the next decade as they have over this most recent one..

So, if you are looking for 7%+ - you're probably going to be taking on more equity risk than you otherwise would (and have less bonds/FI)..and have a lot more volatility along the way..

One suggestion - I waited too long to build up my bonds and FI position. Really didn't do that until 5 or so years ago, and experienced much more volatility than I was personally comfortable with as a result of not doing it sooner (ie: I had too much in equities for my age). YMMV, but you have a good opportunity being only 32 to start building up a more 'age appropriate' bond/FI allocation, and if it were me, I'd dial back my expectations of 7% average returns and build a more all-weather portfolio while you have the opportunity to do so..so, IN GENERAL, you'd want to be around 30+% in FI at this point but also need to take all other goals, volatility comfort, etc as considerations in putting together a broader overall plan..

aristotelian
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Re: What % bonds for early retirement

Post by aristotelian » Fri Apr 12, 2019 10:54 am

If the question is what % of bonds right now at age 32 for early retirement in 20 years, I would say 0-20%. The odds of stocks not outperforming bonds over 20 years is almost nil. If there is a massive crash, you will lose a lot short term, but you would have a great opportunity to buy back in over time. (However, Klangfool will rightly warn that this depends on remaining employed through the recovery).

If the question is what % of bonds you should aim for upon early retirement, you should look at the ERN blog. The longer your retirement and/or higher your withdrawal rate, the more you need stocks for long term returns (but the more stocks you have, the more you are exposed to sequence of returns risk). There is no single answer without knowing these variables. https://earlyretirementnow.com/2016/12/ ... t-1-intro/

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Re: What % bonds for early retirement

Post by aristotelian » Fri Apr 12, 2019 10:57 am

Clever_Username wrote:
Fri Apr 12, 2019 9:35 am
I'm on path to be FI before 50 as well, TA, and I'm sticking with age in bonds. If your plans involve not only FI, but having a long retirement, you need the ballast.
Actually, for the most part, you need a higher % of stock to stay ahead of inflation, unless you have a low withdrawal rate. Success rate pretty much increases with stock % if you have a long timeframe. There may be good reasons to hold a large bond allocation, but in general you are going to increase your failure rate.

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Re: What % bonds for early retirement

Post by Grt2bOutdoors » Fri Apr 12, 2019 11:01 am

abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.
7% nominal is truly an aspirational return.
What I like to do when planning is to run 3 or 4 scenarios: 3%, 2%, 1%, 0% real. Now, 0% real sounds drastic, but ask the Japanese how well the last 29 years have worked out for them in the equities markets. The best thing you can do to counteract low total returns is to save more, spend less in retirement or a combination of the two.

As for fixed income - you are at 22% now, it would not be unreasonable to increase your fixed income allocation by either 1% per year until retirement or to do it in 5% increments every 5 years so that by age 47, you'll be at 37% fixed income, at age 50 you'll be at 40% fixed income.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Nestegg_User
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Re: What % bonds for early retirement

Post by Nestegg_User » Fri Apr 12, 2019 11:14 am

Grt2bOutdoors wrote:
Fri Apr 12, 2019 11:01 am
abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.
7% nominal is truly an aspirational return.
What I like to do when planning is to run 3 or 4 scenarios: 3%, 2%, 1%, 0% real. Now, 0% real sounds drastic, but ask the Japanese how well the last 29 years have worked out for them in the equities markets. The best thing you can do to counteract low total returns is to save more, spend less in retirement or a combination of the two.

As for fixed income - you are at 22% now, it would not be unreasonable to increase your fixed income allocation by either 1% per year until retirement or to do it in 5% increments every 5 years so that by age 47, you'll be at 37% fixed income, at age 50 you'll be at 40% fixed income.
before retirement, when doing planning, I used 4% (aspirational), 2%, 0%, and -2% (not exactly fatalistic, but used as worse case) for the ten years before retirement ( I didn't bother for that twenty years out... way too much variation), when I was already lower equities (~70%).

I agree with Klangfool, at retirement you want a serious bridge of (at least) ten to twelve years in fixed income, since that period is most significantly at risk for sequence of returns issues.

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Re: What % bonds for early retirement

Post by Wiggums » Fri Apr 12, 2019 11:30 am

Grt2bOutdoors wrote:
Fri Apr 12, 2019 11:01 am

The best thing you can do to counteract low total returns is to save more, spend less in retirement or a combination of the two.
I agree.

If you are serious about achieving this goal, this is really good advice. If you don’t do so already, I’d track your expenses so you can accurately project your retirement needs. Enjoy life, of course, but spend money wisely too. You need $$$ to get from early retirement to social security and Medicare.

Staying employed is not a given these days. Hopefully, you will not be affected by unemployment or a reduced salary.

Good luck to you.

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Re: What % bonds for early retirement

Post by Dottie57 » Fri Apr 12, 2019 12:01 pm

Wiggums wrote:
Fri Apr 12, 2019 11:30 am
Grt2bOutdoors wrote:
Fri Apr 12, 2019 11:01 am

The best thing you can do to counteract low total returns is to save more, spend less in retirement or a combination of the two.
I agree.

If you are serious about achieving this goal, this is really good advice. If you don’t do so already, I’d track your expenses so you can accurately project your retirement needs. Enjoy life, of course, but spend money wisely too. You need $$$ to get from early retirement to social security and Medicare.

Staying employed is not a given these days. Hopefully, you will not be affected by unemployment or a reduced salary.

Good luck to you.
+2

Thesaints
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Re: What % bonds for early retirement

Post by Thesaints » Fri Apr 12, 2019 12:20 pm

abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time?
How did you estimate that 7% return ? You obviously assumed a certain allocation to get to that number and that is your allocation figure for the next 18 years.
After retirement, you certainly calculated an expected rate of return that provides for your desired lifestyle. What is the assumed AA in that calculation ? That’s your answer about how much bonds you want after retirement.
Transitioning from one AA to the other is not really something worth losing sleep on.

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abs9986
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Re: What % bonds for early retirement

Post by abs9986 » Fri Apr 12, 2019 1:51 pm

The historical US stock return is something like 11% so I figured 7% was a safe figure. I guess I'm just looking for a rule of thumb for bond percentage allocation. From what I've read, a good start is age in bonds. My question is basically does that advice pertain to someone who is looking to retire earlier based on low expenses in high savings rates.

KlangFool
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Re: What % bonds for early retirement

Post by KlangFool » Fri Apr 12, 2019 1:57 pm

abs9986 wrote:
Fri Apr 12, 2019 1:51 pm
The historical US stock return is something like 11% so I figured 7% was a safe figure. I guess I'm just looking for a rule of thumb for bond percentage allocation. From what I've read, a good start is age in bonds. My question is basically does that advice pertain to someone who is looking to retire earlier based on low expenses in high savings rates.
abs9986,

If you are saving 1 year of expense every year, you can retire in 20+ years with 0% real return.

KlangFool

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Phineas J. Whoopee
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Re: What % bonds for early retirement

Post by Phineas J. Whoopee » Fri Apr 12, 2019 2:07 pm

This is what I did, and a couple of years later I answered some questions about it.

For the record, I think an age-based asset allocation will be far more practical for most investors to commit to and carry out.

PJW

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Re: What % bonds for early retirement

Post by willthrill81 » Fri Apr 12, 2019 2:17 pm

abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.
I strongly urge you to read "The Ultimate Guide to Safe Withdrawal Rates" series on Early Retirement Now.

A 78/22 allocation seems perfectly reasonable for an early retiree.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

miket29
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Re: What % bonds for early retirement

Post by miket29 » Fri Apr 12, 2019 3:00 pm

abs9986 wrote:
Fri Apr 12, 2019 1:51 pm
The historical US stock return is something like 11% so I figured 7% was a safe figure. I guess I'm just looking for a rule of thumb for bond percentage allocation.
The first sentence seems to imply that your equity holdings are in the S&P500. I hope you are diversified across asset classes (small cap, mid cap, international, etc).

As for expected returns, its kinda like reading tea leaves. You can look up what the CAPE ratio predicts for the US market, then find plenty of people willing to explain why the CAPE is wrong.

sawdust60
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Re: What % bonds for early retirement

Post by sawdust60 » Fri Apr 12, 2019 3:43 pm

Sometimes the discussion on AA omits the other significant components of your financial picture.

1. Mortgage. Paid off home eliminates a future expense.
2. Pension can be viewed as bond equivalent.
3. Include other plans, such as college funding.

No issue with scaling into a desired AA over time, but some folks can be 0% bonds in their 401k/IRA/other accounts during their working years -- and yet they are building a significant position in bond equivalents. It has a lot to do with how you measure your risk, and your strategy to compensate for the potential loss.

Remember, a large part of FI is low expenses...

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Re: What % bonds for early retirement

Post by CnC » Fri Apr 12, 2019 6:44 pm

RetireBy55 wrote:
Fri Apr 12, 2019 10:17 am
Just did early retirement at 55 in January, and am at ~57% Fixed Income, which includes CDs and traditional bond funds.

Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many. We're 10+ years into the current bull market, and expectations are pretty broad that markets are not likely to perform over the next decade as they have over this most recent one..

So, if you are looking for 7%+ - you're probably going to be taking on more equity risk than you otherwise would (and have less bonds/FI)..and have a lot more volatility along the way..

One suggestion - I waited too long to build up my bonds and FI position. Really didn't do that until 5 or so years ago, and experienced much more volatility than I was personally comfortable with as a result of not doing it sooner (ie: I had too much in equities for my age). YMMV, but you have a good opportunity being only 32 to start building up a more 'age appropriate' bond/FI allocation, and if it were me, I'd dial back my expectations of 7% average returns and build a more all-weather portfolio while you have the opportunity to do so..so, IN GENERAL, you'd want to be around 30+% in FI at this point but also need to take all other goals, volatility comfort, etc as considerations in putting together a broader overall plan..
"Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many."
5 Years ago the same thing was said and we have had a great last 5 years. Sure it will go down, but its silly to assume to have any idea what the next 10 years hold.


In my opinion age in bonds is the best way to assure yourself that you do not achieve an early retirement. You are sacrificing so much potential growth for safety when you want to retire early. Its one thing when your job skills are going downhill and you can not work longer to wait out the recession. But, when you are retiring in your prime losses are easily made up by choosing to work longer.

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Re: What % bonds for early retirement

Post by RetireBy55 » Fri Apr 12, 2019 6:56 pm

CnC wrote:
Fri Apr 12, 2019 6:44 pm
"Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many."
5 Years ago the same thing was said and we have had a great last 5 years. Sure it will go down, but its silly to assume to have any idea what the next 10 years hold.
Jack Bogle himself said in October, 2018 to expect no more than 4% return from equities over the next decade..

https://www.financial-planning.com/opin ... nd-returns

There's little debate aside from among the most optimistic that the next decade is not likely to be a repeat of the last.

IMHO, setting more appropriate expectations would be prudent.
Last edited by RetireBy55 on Fri Apr 12, 2019 7:03 pm, edited 2 times in total.

staythecourse
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Re: What % bonds for early retirement

Post by staythecourse » Fri Apr 12, 2019 6:58 pm

KlangFool wrote:
Fri Apr 12, 2019 9:21 am
OP,

10 years of expense in the fixed income when you retired. This applies regardless of when you retire (early, late, or whenever). You take this number and translate into your AA depending on your portfolio size.

KlangFool
Agreed. This is how asset allocation should be done. It should be done backwards. The idea of fixed income is to mitigate the risk of equities. If you broadly diversified in equities the biggest risk is several years of low returns of equities the same time you need to sell them to live off. So keep 10 years of income needs in bonds/ cash and then the rest in equities. Then figure out how much is in each and that is how you should get your asset allocation.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

CnC
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Re: What % bonds for early retirement

Post by CnC » Fri Apr 12, 2019 8:59 pm

RetireBy55 wrote:
Fri Apr 12, 2019 6:56 pm
CnC wrote:
Fri Apr 12, 2019 6:44 pm
"Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many."
5 Years ago the same thing was said and we have had a great last 5 years. Sure it will go down, but its silly to assume to have any idea what the next 10 years hold.
Jack Bogle himself said in October, 2018 to expect no more than 4% return from equities over the next decade..

https://www.financial-planning.com/opin ... nd-returns

There's little debate aside from among the most optimistic that the next decade is not likely to be a repeat of the last.

IMHO, setting more appropriate expectations would be prudent.
So expecting on of the worst decades in history is what most people here believe? If so why on earth are you guys investing in something that you feel will be such a failure?

Predicting half the returns of the previous decade or assuming 60-70% historical returns over the next decade certainly is not unbridled optimism.

BTW that is a nice quote but in 2012 Bogle predicted a massive bond crash, over the last 10 years they have yielded 3.6 Yearly
https://www.nytimes.com/2012/08/12/busi ... -rest.html

He also predicted 2 crashes between 30% and up to 50% over the next decade in 2013.
https://www.businessinsider.com/jack-bo ... ars-2013-4


I am not picking on Mr Bogle, his concept of index investing is brilliant and helps normal people make money. But come on if you predict rain every day eventually you will be right.

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Re: What % bonds for early retirement

Post by EddyB » Fri Apr 12, 2019 11:16 pm

willthrill81 wrote:
Fri Apr 12, 2019 2:17 pm
abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.
I strongly urge you to read "The Ultimate Guide to Safe Withdrawal Rates" series on Early Retirement Now.

A 78/22 allocation seems perfectly reasonable for an early retiree.
I completely agree (because my own target allocation is 77/23 and intended to stay there).

Thesaints
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Re: What % bonds for early retirement

Post by Thesaints » Sat Apr 13, 2019 12:56 am

abs9986 wrote:
Fri Apr 12, 2019 1:51 pm
The historical US stock return is something like 11% so I figured 7% was a safe figure. I guess I'm just looking for a rule of thumb for bond percentage allocation. From what I've read, a good start is age in bonds. My question is basically does that advice pertain to someone who is looking to retire earlier based on low expenses in high savings rates.
But likely you won’t make 7% if your bond allocation is anything but small, and there are solid chances of not making that much even being 100% in stocks.
Your asset allocation is a function of the return you are trying to achieve, it does not depend on age or rules of thumb.

DonIce
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Re: What % bonds for early retirement

Post by DonIce » Sat Apr 13, 2019 1:03 am

Early retirement is optional. It's not like hitting 70 with not enough saved up. I'd go with 100% stocks. If stocks do well you can retire even earlier. If stocks do poorly, oh well, you might have to work a couple more years and still retire a decade or more younger than most other people.

CurlyDave
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Re: What % bonds for early retirement

Post by CurlyDave » Sat Apr 13, 2019 1:09 am

abs9986 wrote:
Fri Apr 12, 2019 9:19 am
what's confusing to me is those target funds probably assume that you have been investing for 10 years longer than I have. So I wasn't sure given the overall shorter investment window if I needed to have a higher percentage of stocks or if because I'm looking to retire sooner I should be more quickly switching to bonds.
My personal belief is that right up until you submit your retirement notification, you should be very aggressively tilted toward stocks. The reason is that it is always possible to delay your retirement if there is a market downturn. This would be disappointing, but not a disaster.

Once you have given notice of retirement and it is inevitable for a fixed date you can move to a more conservative AA.

More stocks gives you a higher probability of a larger portfolio at the end of any given period, but bonds prevents low probability disasters.

msk
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Re: What % bonds for early retirement

Post by msk » Sat Apr 13, 2019 1:36 am

abs9986 wrote:
Fri Apr 12, 2019 9:00 am
Current age 32. Current percent bonds = 22%. We max all of our retirement investments and want to retire as early as possible. We are currently projected to retire at around age 50 assuming a 7% (4% real) average return.

My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario. My risk tolerance is moderately aggressive, but I would like to have a well-diversified portfolio with the proper amount of bonds.
Your investment/accumulation horizon is your target retirement age (20 years away at age 52) + half of your retirement life, say, ages 52 to 92, or 20 years. You have an investing/accumulating stage of around 40 years ahead of you! Unless you are very nervous you have to ask yourself why any bonds at all? Stay 100% in equity and re-evaluate when you retire. The more nervous your disposition, the less likely you are to get rich. A sense of "security" against the yoyos of the stock market as regards your portfolio costs real $.

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abs9986
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Re: What % bonds for early retirement

Post by abs9986 » Sat Apr 13, 2019 9:17 am

Thank you all for the feedback. I thought I remember reading that it's a good idea to have both stocks and bonds because it forces you to buy low and sell high. for example as stocks continue to do better you would sell some of the games and buy the lower performing bonds or vice versa. Also, as you get closer to retirement aren't you supposed to switch to more and more bonds as you are focusing on wealth preservation as opposed to wealth accumulation?

KlangFool
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Re: What % bonds for early retirement

Post by KlangFool » Sat Apr 13, 2019 9:35 am

abs9986 wrote:
Sat Apr 13, 2019 9:17 am
Thank you all for the feedback. I thought I remember reading that it's a good idea to have both stocks and bonds because it forces you to buy low and sell high. for example as stocks continue to do better you would sell some of the games and buy the lower performing bonds or vice versa. Also, as you get closer to retirement aren't you supposed to switch to more and more bonds as you are focusing on wealth preservation as opposed to wealth accumulation?
abs9986,

<<I thought I remember reading that it's a good idea to have both stocks and bonds because it forces you to buy low and sell high. for example as stocks continue to do better you would sell some of the games and buy the lower performing bonds or vice versa. >>

This has to do with having a fixed AA.

You are closer to retirement as your portfolio getting bigger. It has nothing to do with age. Your portfolio may get bigger faster or slower. And, at retirement, you need to have X years of expense in fixed income. For most people, X is 10 years. This is the glide path AA adjustment. And, I had provided you with a sample glide path.

The AA needs to be adjusted if and when it is very big. The adjustment should be at a multiple of your annual expense. Usually, it is done every few years.

Meanwhile, the rebalancing back to fixed AA is done every year.

They are two separate things.

KlangFool

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willthrill81
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Re: What % bonds for early retirement

Post by willthrill81 » Sat Apr 13, 2019 9:43 am

abs9986 wrote:
Sat Apr 13, 2019 9:17 am
Thank you all for the feedback. I thought I remember reading that it's a good idea to have both stocks and bonds because it forces you to buy low and sell high. for example as stocks continue to do better you would sell some of the games and buy the lower performing bonds or vice versa. Also, as you get closer to retirement aren't you supposed to switch to more and more bonds as you are focusing on wealth preservation as opposed to wealth accumulation?
There are several potential reasons to hold stocks and bonds (or other forms of fixed income like CDs, high-yield savings accounts, MMs, etc.). One is to provide ballast to stabilize your portfolio when stocks are doing poorly as they do from time to time; short-term bonds are preferred for this. Another is for the bonds to potentially act as a counterweight when stocks are going down; long-term bonds are preferred for this.

But there hasn't really been a 'rebalancing bonus' (i.e. rebalancing has not consistently improved returns). Rebalancing is meant to help maintain a certain risk profile. The more you have in bonds and less in stocks, the lower the expected return of the portfolio.

80/20 is a reasonable AA for an early retiree because they need the long-term growth and protection from inflation that stocks have historically provided. I wouldn't recommend anything more conservative than 50/50 for an early retiree, and even that might be too conservative.

And the difference between wealth preservation and wealth accumulation are not as clear cut as you might think, especially if you're going to be in the withdrawal phase (i.e. retirement) for a long time. If you retire if your 40s, you might be making withdrawals for 50 years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MotoTrojan
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Re: What % bonds for early retirement

Post by MotoTrojan » Sat Apr 13, 2019 10:43 am

CnC wrote:
Fri Apr 12, 2019 8:59 pm
RetireBy55 wrote:
Fri Apr 12, 2019 6:56 pm
CnC wrote:
Fri Apr 12, 2019 6:44 pm
"Note that an expectation of 7% annual return over the next decade is probably going to be considered optimistic by many."
5 Years ago the same thing was said and we have had a great last 5 years. Sure it will go down, but its silly to assume to have any idea what the next 10 years hold.
Jack Bogle himself said in October, 2018 to expect no more than 4% return from equities over the next decade..

https://www.financial-planning.com/opin ... nd-returns

There's little debate aside from among the most optimistic that the next decade is not likely to be a repeat of the last.

IMHO, setting more appropriate expectations would be prudent.
So expecting on of the worst decades in history is what most people here believe? If so why on earth are you guys investing in something that you feel will be such a failure?

Predicting half the returns of the previous decade or assuming 60-70% historical returns over the next decade certainly is not unbridled optimism.

BTW that is a nice quote but in 2012 Bogle predicted a massive bond crash, over the last 10 years they have yielded 3.6 Yearly
https://www.nytimes.com/2012/08/12/busi ... -rest.html

He also predicted 2 crashes between 30% and up to 50% over the next decade in 2013.
https://www.businessinsider.com/jack-bo ... ars-2013-4


I am not picking on Mr Bogle, his concept of index investing is brilliant and helps normal people make money. But come on if you predict rain every day eventually you will be right.
Because even if 4% nominal is a crap return, nothing else out there looks better.

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vitaflo
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Re: What % bonds for early retirement

Post by vitaflo » Sat Apr 13, 2019 11:02 am

abs9986 wrote:
Fri Apr 12, 2019 9:00 am
My question is what percent bonds should I be targeting right now and how should I adjust that over time? I've seen several threads recommend doing age and bonds but I wasn't sure if that applied for an early retirement scenario.
Personally I don't think it applies, at least I don't use it since I'll be retiring early. Instead of an age-based glide path, I use a "percent to completion" one. IE, figure out how much money I need for retirement and what AA I want at retirement, and figure out how close I am to that goal with my current portfolio balance. Then calculate my AA based on that.

So, if I'm targeting 50% bonds when I retire (regardless of age), and I figure I need $2m to retire on (inflation adjusted), and I currently have $1m, then the amount of bonds I should currently have in my portfolio is 25% (1m is half of 2m, and 25% is half of 50%). This way when bull markets get hot, my AA becomes more conservative. It goes the other way when we have a crash. It allows me to glide to my desired AA at retirement regardless of what age I am.

Of course you'll need to figure out what AA (and thus risk) you want in retirement. Personally, I've settled on 60/40 for perpetuity.

Thesaints
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Re: What % bonds for early retirement

Post by Thesaints » Sat Apr 13, 2019 12:23 pm

abs9986 wrote:
Sat Apr 13, 2019 9:17 am
Also, as you get closer to retirement aren't you supposed to switch to more and more bonds as you are focusing on wealth preservation as opposed to wealth accumulation?
Yes, if you have enough money. No, otherwise. Increasing bonds is safer, but lowers your expected return going forward.

Triple digit golfer
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Re: What % bonds for early retirement

Post by Triple digit golfer » Sat Apr 13, 2019 1:19 pm

KlangFool wrote:
Fri Apr 12, 2019 9:34 am
OP,

Assuming you retire with the portfolio size of 25 times your annual expense. And, you need 10 years of expense in fixed income. Then, your final AA would be 60/40.

A possible glide path AA could be

1) 20 to 25 times annual expense = 60/40

2) 15 to 20 times annual expense = 65/35

3) 10 to 15 times annual expense = 70/30

4) less than 10 times annual expense = 75/25

KlangFool
I really like this a lot. It is practical and makes a lot of sense.

We're about 77/23 with close to 10x at age 34.

Essentially, you retire when you have 25x expense saved and are at 60/40, which translates to 10x fixed income. So simple and logical and as good or better than any other glide path I've seen.

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