using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

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ponderosa
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using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028) I'm considering using the iShares iBonds ETF series and/or the Invesco Bulletshares series to create term-certain bond ladders from a lump sum of capital, with each rung to be funded later this year.

The iBonds products are described at https://www.ishares.com/us/strategies/b ... nd-ladders; the Bulletshares products are described at https://www.invesco.com/us/financial-pr ... 3-products (you'll have to indicate to Invesco that you're an Individual Investor if prompted). The basic idea is that each ETF holds bonds maturing in a particular year, with a final payout in December of that year. I'd be using those payouts to fund a portion of my living expenses during the following calendar year.

In my particular scenario, in case it matters, I'll need approximately $51k, $48k, $46k, $43k, and $40k in each of 2024, 2025, 2026, 2027, and 2028 (with all values in 2020 dollars).

I've been planning on 50% Treasury, 30% Muni, and 20% Corporate for each rung but don't have any real reason for those percentages, other than that I thought since this will be "needed" income I should have roughly half of each rung in Treasuries.

What's a good way to think about appropriate allocations? Should high yield bonds be part of the mix? The higher expense ratios for the high-yield ETFs do give me pause, but maybe that's penny-wise and pound-foolish. Invesco even offers emerging market bonds (currently limited to ETFs paying out in 2021-2024) but I figure the volatility and risk associated with that asset class isn't a good fit for needed income. Maybe I should think otherwise.

I'll be assembling each year's set as a pie with M1 Finance so I'm perfectly happy to have a more-complex mix, including ETFs from both iShares and Invesco. For example:
  • iShares Treasury 40%
  • iShares Muni 10%
  • Invesco Muni 10%
  • iShares Corporate 10%
  • Invesco Corporate 10%
  • iShares High Yield 10%
  • Invesco High Yield 10%
(and maybe the auto-reinvestment of dividends by M1 into underweight securities will even offer some added return over time).

Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

Clearly there is, as with all investment decisions, a need to balance risk with reward, and I know I'm the only one who can make that determination, but I'd love to hear perspectives on how to pick the right allocation, for these types of ETFs, for term-certain spending needs. Thanks.
Last edited by ponderosa on Sat Oct 17, 2020 5:43 pm, edited 1 time in total.
hackingdragon
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by hackingdragon »

ponderosa wrote: Sat Oct 17, 2020 4:55 pm Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028)
Are these needs real or nominal?
Topic Author
ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

hackingdragon wrote: Sat Oct 17, 2020 5:12 pm
ponderosa wrote: Sat Oct 17, 2020 4:55 pm Knowing that I'll have specific income needs in each of five future years (in this case, 2024-2028)
Are these needs real or nominal?
Real. All values in 2020 dollars.
hackingdragon
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by hackingdragon »

If they are real needs wouldn’t it be a good idea to incorporate real assets like I bonds and TIPS? I bonds are currently returning 1.06%
000
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by 000 »

I think it's a good idea, but the prospect of high inflation (which could plausibly happen over even just a few years) gives me pause.

With duration matching, the only issue with corporates and high yield bonds is bankruptcy risk, not liquidity risk of needing to sell before maturity on the secondary market.

So, do you feel lucky?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

hackingdragon wrote: Sat Oct 17, 2020 5:43 pm If they are real needs wouldn’t it be a good idea to incorporate real assets like I bonds and TIPS? I bonds are currently returning 1.06%
Yes, and I'm currently contributing as much as possible to Series I Bonds, but the interest and principal from those assets, including contributions to be made in future years, is earmarked for spending needs from 2029-2035. At this time, the real returns available from auctioned TIPS are uncompelling. And since I'm building an allocation to inflation-indexed securities (the I Bonds) I figured it might be wise to go with traditional bonds for my 2024-2028 spending needs.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by spdoublebass »

I’m no expert, so please know that when you read my suggestion.

These are large dollar amounts. Your first amount is 51K by 2024. I mean if you get 1%, it’s not that much difference, it would mean you could save a few bucks less per month.

You could just add up what you need to save per month to reach your goals and put it in VTINX or VASIX (target retirement funds) and just over fund it.

Otherwise I wouldn’t go crazy trying to have a lot of different etfs for little gain.

I mean ALLY savings account at .6% isn’t bad compared to the treasury ETFs you mention.
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UpperNwGuy
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by UpperNwGuy »

OP, your mix is so incredibly complicated. I could never do that.
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by UpperNwGuy »

ponderosa wrote: Sat Oct 17, 2020 6:44 pm
UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
Why do you duplicate all your iShares holdings with Invesco holdings?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

UpperNwGuy wrote: Sat Oct 17, 2020 6:48 pm
ponderosa wrote: Sat Oct 17, 2020 6:44 pm
UpperNwGuy wrote: Sat Oct 17, 2020 6:11 pm OP, your mix is so incredibly complicated. I could never do that.
You could if you used M1 Finance. It automates any allocation.
Why do you duplicate all your iShares holdings with Invesco holdings?
Same expense ratio, but probably not the same underlying assets. Since either option might outperform, and there’s no way I’d know that in advance, why not own both offerings to minimize regret should I have ended up choosing the wrong one?

M1 truly makes this no additional hassle, but I agree that I would be choosing simplicity (and not duplicating offerings) if I were with a traditional broker and placing manual orders.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by gjlynch17 »

Here are a few initial thoughts:

1. Generally, I like the idea of defined maturity ETFs from iShares or Invesco. I especially like the corporate ETFs because of their lower costs (0.10%) and much lower risk of default compared to the high yield defined maturity ETFs. Your proposal may be more complex than necessary and I am not sure you need more than the corporate ETFs.

2. I am not as high in the muni ETFs. Their expense ratio (0.18%) is high relative to their yields. On an after-tax basis, even at the highest tax bracket of 40.8% (37% + 3.8% NIIT), corporate defined maturity ETFs have a better SEC yield than munis, albeit with higher credit risk.

3. I would not use high yield defined maturity ETFs for liability matching purposes because of high expenses and the greater variance on the exact amounts received due to defaults.

4. Note that the high yield category is different for Invesco and iShares as iShares includes some BBB bonds.

5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

gjlynch17 wrote: Sat Oct 17, 2020 7:08 pm
5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by mega317 »

As long as you’re ok with complexity, treasuries don’t make a lot of sense right now. Use savings accounts or CDs. Or use the cash to open accounts for bonuses.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
ivgrivchuck
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ivgrivchuck »

My two cents.

1) I'm not sure if with the current yields building long bond ladders really makes sense. Especially with treasuries the yields are really close to zero.

2) Have you considered something like 85% CDs, 15% stocks? I'd expect that with this combination (just by adjusting percentages) you can build an investment with a higher expected return and similar volatility as your ladder.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by investor.saver1 »

vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

vineviz wrote: Mon Oct 19, 2020 8:34 am
ponderosa wrote: Sat Oct 17, 2020 4:55 pm
Would anybody be willing to offer a suggested allocation within a particular year's offerings? For example, an allocation for the 2026 rung. Having my "actual" income from these rungs be 10% less than planned wouldn't be of concern. 20% might be of concern. I'm not quite sure yet where the cutoff between acceptable and unacceptable might be; do feel free to steer me in a particular direction. I’d want a potential 10% reduction in available income to be offset by the possibility of at least 10% greater income were I to choose riskier ETFs.

I'm sorry I'm late to this discussion, but here are my thoughts.

1) I'd leave the municipal bonds out of the mix. The yield is lower than the investment-grade corporate yield for basically the same risk profile.

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Thanks for this reply. Advice like "leave municipal bonds out of the mix" is exactly what I was wanting to hear. I was particularly hoping that you, vineviz, would be one of the commenters here. I appreciate your help.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by vineviz »

investor.saver1 wrote: Mon Oct 19, 2020 11:31 am
vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?
I’m not familiar with all the mechanics of how M1 works, but I believe it would automatically reinvest proportionately across all the rings. If so, that’s what I’d suggest since if the pie was initially set up to produce equal real income for each rung you’d stay closest to that.

Otherwise, I’d probably reinvest into the current rung.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

investor.saver1 wrote: Mon Oct 19, 2020 11:31 am
vineviz wrote: Mon Oct 19, 2020 8:34 am

2) I'd split each rung between Treasuries, high yield, and investment grade at approximately 35%/40%/25%. This mix should provide a solid level of diversification and decent yields without moving beyond your risk threshold. By the time each rung is within a year of maturity, this mix should not produce a drawdown in excess of 5%.
Does it make more sense to reinvest the dividends into the current rung or to role them into the longest ladder rung?

Yeah, this is an interesting question. I'm planning on using M1 Finance to construct the rungs, so it'll automatically reinvest dividends to the most "underweight" securities within each rung, but of course I have control over the weightings of each individual rung.

With a lump-sum contribution later this year of approximately $215k, and estimating real growth of 1% per year, I'd been planning on the following percentages for each rung...

2024 - 23%
2025 - 22%
2026 - 20%
2027 - 18%
2028 - 17%

...which would reflect that my further-out rungs have additional time to grow. If the longer-dated bonds were, in a particular year, to significantly outperform the shorter-dated bonds, M1 would be applying dividends to the lower-performing assets to bring them back to target percentages.

Thinking about the future, when 2024 comes around and I withdraw that year's funds, I'd re-weight each rung depending on how much growth had actually occurred. So, for example...

2025 - 26%
2026 - 25%
2027 - 25%
2028 - 24%

...and I'd run a similar calculation yearly thereafter.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by CRTR »

gjlynch17 wrote: Sat Oct 17, 2020 7:08 pm Here are a few initial thoughts:

1. Generally, I like the idea of defined maturity ETFs from iShares or Invesco. I especially like the corporate ETFs because of their lower costs (0.10%) and much lower risk of default compared to the high yield defined maturity ETFs. Your proposal may be more complex than necessary and I am not sure you need more than the corporate ETFs.

2. I am not as high in the muni ETFs. Their expense ratio (0.18%) is high relative to their yields. On an after-tax basis, even at the highest tax bracket of 40.8% (37% + 3.8% NIIT), corporate defined maturity ETFs have a better SEC yield than munis, albeit with higher credit risk.

3. I would not use high yield defined maturity ETFs for liability matching purposes because of high expenses and the greater variance on the exact amounts received due to defaults.

4. Note that the high yield category is different for Invesco and iShares as iShares includes some BBB bonds.

5. Perhaps most importantly, Multi-Year Guaranteed Annuities (MYGA) are likely to be a better option than the defined maturity ETFs, assuming they are covered by your State Guaranty Association. The rates on MYGAs are much higher than defined maturity ETFs, although you would lose liquidity. I have been watching rates for MYGAs, defined maturity ETFs and CDs over the last year as I am building a similar ladder to yours and MYGAs are currently the best option by a wide margin.
+1
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ponderosa
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Re: using iShares iBonds & Invesco Bulletshares to build bond ladders for term-certain income

Post by ponderosa »

CRTR wrote: Mon Oct 19, 2020 5:55 pm
ponderosa wrote: Sat Oct 17, 2020 7:28 pm

Thanks for the awesome reply. A response to just the quoted portion above: I’ll be younger than 59.5, even at the end of the ladder in 2028, so MYGAs aren’t an option for my particular case (unless there’s a workaround, which I’d love to learn about).
+1
I agree with gjlynch17. Not sure why your age matters. You can purchase MYGAs in a taxable account. The other nice feature of them is that the earnings are tax deferred until the annuity matures. You then have the option of performing a 1035 exchange into another MYGA or SPIA, etc. or cashing it out.
Many websites note that withdrawals made prior to age 59.5 are subject to 10% penalty. You’re saying it’s worth it to accept that penalty? I will absolutely need these funds to cover spending needs, so a 1035 exchange isn’t going to be an option.
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