Bond fund duration(s) in retirement

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jefmafnl
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Bond fund duration(s) in retirement

Post by jefmafnl » Sat Nov 25, 2017 9:28 am

Let's assume that an investor approaching retirement, or in the first few years of retirement, uses bond funds for the bond portion of his or her asset allocation. Let's also assume, for the moment, that (s)he accepts the view that intermediate-term (IT) bonds (or bond funds) represent the best duration (in terms of risk-adjusted return) for bonds (or bonds funds) in a retirement account that needs to last 20+ years. And let's assume that the withdrawal strategy is designed merely to keep the account balance above zero, rather than to maximize final account value to provide for a legacy.

Some Bogleheads suggest keeping x years of expenses in a short-term (ST) bond fund. However, if the investor took withdrawals from this fund each year, presumably (s)he would need to replenish the ST bond fund from his or her IT bond fund. If the investor did that every year, then (s)he would still be selling shares of the IT bond fund each year (sometimes, perhaps, at a loss). If the investor replenished the ST fund from the IT fund at irregular intervals, then (s)he would have to develop a "system" for determining WHEN to make those transfers, while hoping to avoid the scarlet letters "MT" (for Market Timer) on the Boglehead board :happy . And this would not exactly fit under the "KISS" motto :confused

So wouldn't it be simpler, and almost as effective for total return, to simply have ONE (IT) bond fund in retirement?

Thanks!

J

dbr
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Re: Bond fund duration(s) in retirement

Post by dbr » Sat Nov 25, 2017 9:32 am

Wouldn't it be simpler. Of course! Pointless contortions are not helpful to anyone.

Ron Scott
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Re: Bond fund duration(s) in retirement

Post by Ron Scott » Sat Nov 25, 2017 9:41 am

30% short
40% intermediate
30% longish

Pretty simple.
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jefmafnl
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Re: Bond fund duration(s) in retirement

Post by jefmafnl » Sat Nov 25, 2017 9:55 am

Ron Scott,
with your 30/40/30, do you take withdrawals proportionately from all three?

J

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Sandtrap
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Re: Bond fund duration(s) in retirement

Post by Sandtrap » Sat Nov 25, 2017 10:05 am

Vanguard Total Bond. VBTLX
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Svensk Anga
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Re: Bond fund duration(s) in retirement

Post by Svensk Anga » Sat Nov 25, 2017 10:06 am

I pondered the OP's question as I approached retirement. I did not like the implications for funds. My solution was to ladder CDs and then TIPS to get to SS claiming age. (Planning on 70 for me.). After SS starts, my need for bonds will be small and irregular. Bond funds look OK then.

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WoodSpinner
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Re: Bond fund duration(s) in retirement

Post by WoodSpinner » Sat Nov 25, 2017 11:23 am

jefmafnl wrote:
Sat Nov 25, 2017 9:28 am
Let's assume that an investor approaching retirement, or in the first few years of retirement, uses bond funds for the bond portion of his or her asset allocation. Let's also assume, for the moment, that (s)he accepts the view that intermediate-term (IT) bonds (or bond funds) represent the best duration (in terms of risk-adjusted return) for bonds (or bonds funds) in a retirement account that needs to last 20+ years. And let's assume that the withdrawal strategy is designed merely to keep the account balance above zero, rather than to maximize final account value to provide for a legacy.

Some Bogleheads suggest keeping x years of expenses in a short-term (ST) bond fund. However, if the investor took withdrawals from this fund each year, presumably (s)he would need to replenish the ST bond fund from his or her IT bond fund. If the investor did that every year, then (s)he would still be selling shares of the IT bond fund each year (sometimes, perhaps, at a loss). If the investor replenished the ST fund from the IT fund at irregular intervals, then (s)he would have to develop a "system" for determining WHEN to make those transfers, while hoping to avoid the scarlet letters "MT" (for Market Timer) on the Boglehead board :happy . And this would not exactly fit under the "KISS" motto :confused

So wouldn't it be simpler, and almost as effective for total return, to simply have ONE (IT) bond fund in retirement?

Thanks!

J
I think about this as part of a rebalancing exercise. If equities are up, I can sell them rather than use the ST/IT bond funds. If they are down, I can choose to spend from either type of bonds based on which side is up.if everything is down ( bonds and stocks) than I would start spending from ST, then IT, then Equities and just skip rebalancing.

For me it’s all about flexibility for funding retirement expenses.

Note: I structured the portfolio much differently during the accumulation phase. Since I am about to FIRE in December, I shifted to a more defensive, expense funding structure since my goals have shifted.

Thoughts? :greedy

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Munir
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Re: Bond fund duration(s) in retirement

Post by Munir » Sat Nov 25, 2017 12:41 pm

I am a retiree in the distribution phase. I use intermediate bond fund(s) and cash (online savings account) for reserve. I tried some short-term bond fund holdings as a compromise for emergencies or for a severe drop in rates, but found it unnecessary -and in fact counter-productive.
Last edited by Munir on Sat Nov 25, 2017 2:38 pm, edited 1 time in total.

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Tyler Aspect
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Re: Bond fund duration(s) in retirement

Post by Tyler Aspect » Sat Nov 25, 2017 1:01 pm

jefmafnl wrote:
Sat Nov 25, 2017 9:28 am
Let's assume that an investor approaching retirement, or in the first few years of retirement, uses bond funds for the bond portion of his or her asset allocation. Let's also assume, for the moment, that (s)he accepts the view that intermediate-term (IT) bonds (or bond funds) represent the best duration (in terms of risk-adjusted return) for bonds (or bonds funds) in a retirement account that needs to last 20+ years. And let's assume that the withdrawal strategy is designed merely to keep the account balance above zero, rather than to maximize final account value to provide for a legacy.

Some Bogleheads suggest keeping x years of expenses in a short-term (ST) bond fund. However, if the investor took withdrawals from this fund each year, presumably (s)he would need to replenish the ST bond fund from his or her IT bond fund. If the investor did that every year, then (s)he would still be selling shares of the IT bond fund each year (sometimes, perhaps, at a loss). If the investor replenished the ST fund from the IT fund at irregular intervals, then (s)he would have to develop a "system" for determining WHEN to make those transfers, while hoping to avoid the scarlet letters "MT" (for Market Timer) on the Boglehead board :happy . And this would not exactly fit under the "KISS" motto :confused

So wouldn't it be simpler, and almost as effective for total return, to simply have ONE (IT) bond fund in retirement?

Thanks!

J
You mentioned some good points. The investment time horizon during our retirement remains surprisingly long. I think it is a valid case when we are withdrawing 4% of our portfolio per year then most of our bonds are staying put. If in fact we are holding our bond fund at more than twice of its stated duration, then we can take full advantage of the higher coupon rate when interest rate rises.

The duration of the intermediate term bond index and the total bond index are very similar currently. I am comfortable with either of these two indexes for retirement investing.
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Re: Bond fund duration(s) in retirement

Post by Call_Me_Op » Sat Nov 25, 2017 2:21 pm

jefmafnl wrote:
Sat Nov 25, 2017 9:55 am
Ron Scott,
with your 30/40/30, do you take withdrawals proportionately from all three?

J
I hope not, as that sort-of defeats the purpose.
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Re: Bond fund duration(s) in retirement

Post by pkcrafter » Sat Nov 25, 2017 2:24 pm

I'm not clear on what you are holding. The only time your strategy would apply is if there are no stocks at all. In a tax-advantaged account you have to rebalance and that can mean moving or withdrawing from stocks sometimes and bonds sometimes, so it's pretty easy to maintain a certain amount of ST bonds, but it isn't really necessary.
Some Bogleheads suggest keeping x years of expenses in a short-term (ST) bond fund
This idea might only matter in an emergency fund. In a taxable retirement account I would spend down the bonds and do the rebalancing in a tax-advantaged account.

Paul
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Re: Bond fund duration(s) in retirement

Post by jhfenton » Sat Nov 25, 2017 3:01 pm

jefmafnl wrote:
Sat Nov 25, 2017 9:28 am
So wouldn't it be simpler, and almost as effective for total return, to simply have ONE (IT) bond fund in retirement?
I'll probably keep the same fixed-income mix in retirement that I have now (minus the PIMCO Total Return in my 401(k)): munis, intermediate treasuries, intermediate corporates, short-term corporates, high-yield savings, CD's.

One potential change in retirement would be to increase the proportion of short-term corporates. Right now, I keep a relatively-fixed sum of short-term corporates (VSCSX) as our day-today rebalancing cash (since short-term bond funds are subject to frequent trading rules). In retirement they might be a source of withdrawals.

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dwickenh
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Re: Bond fund duration(s) in retirement

Post by dwickenh » Sat Nov 25, 2017 3:19 pm

WoodSpinner wrote:
Sat Nov 25, 2017 11:23 am
jefmafnl wrote:
Sat Nov 25, 2017 9:28 am
Let's assume that an investor approaching retirement, or in the first few years of retirement, uses bond funds for the bond portion of his or her asset allocation. Let's also assume, for the moment, that (s)he accepts the view that intermediate-term (IT) bonds (or bond funds) represent the best duration (in terms of risk-adjusted return) for bonds (or bonds funds) in a retirement account that needs to last 20+ years. And let's assume that the withdrawal strategy is designed merely to keep the account balance above zero, rather than to maximize final account value to provide for a legacy.

Some Bogleheads suggest keeping x years of expenses in a short-term (ST) bond fund. However, if the investor took withdrawals from this fund each year, presumably (s)he would need to replenish the ST bond fund from his or her IT bond fund. If the investor did that every year, then (s)he would still be selling shares of the IT bond fund each year (sometimes, perhaps, at a loss). If the investor replenished the ST fund from the IT fund at irregular intervals, then (s)he would have to develop a "system" for determining WHEN to make those transfers, while hoping to avoid the scarlet letters "MT" (for Market Timer) on the Boglehead board :happy . And this would not exactly fit under the "KISS" motto :confused

So wouldn't it be simpler, and almost as effective for total return, to simply have ONE (IT) bond fund in retirement?

Thanks!

J
I think about this as part of a rebalancing exercise. If equities are up, I can sell them rather than use the ST/IT bond funds. If they are down, I can choose to spend from either type of bonds based on which side is up.if everything is down ( bonds and stocks) than I would start spending from ST, then IT, then Equities and just skip rebalancing.

For me it’s all about flexibility for funding retirement expenses.

Note: I structured the portfolio much differently during the accumulation phase. Since I am about to FIRE in December, I shifted to a more defensive, expense funding structure since my goals have shifted.

Thoughts? :greedy
I am in agreement with your way of handling the withdrawals. Some people call this bucketing. I call it flexibility to access the best Asset class and duration when withdrawing funds.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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CWRadio
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Re: Bond fund duration(s) in retirement

Post by CWRadio » Sat Nov 25, 2017 3:38 pm

If I have a fund one in retirement (example Vanguard Lifestrategy Conservative Gr Fd VSCG) compared to the 4 fund equivalent and I do RMD once a year or 4 times a year (I rebalance the 4 fund equivalent once a year).

Does it matter which type of fund I do the RMD from (VSCG or it 4 fund equivalent) for maximum gain? Thanks Paul

Dandy
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Re: Bond fund duration(s) in retirement

Post by Dandy » Sat Nov 25, 2017 6:09 pm

A few comments:

1.If simple is the goal than one product-- any product would fit the bill.
2.The need to have great diversity on the fixed income side is much less than on the equity side.
3. How you spend your assets is up to you. If you want to use intermediate bonds to replenish short term that is ok but not the only option. If your equities have done well you can use some or all of them to fund withdrawals/replace short term bonds. Since equities usually grow faster than your fixed income that is likely to happen often.
4. If the goal of your fixed income is to provide stability so the risk is taken on the equity side then there are many ways to
reach that goal.

I am retired almost 70 with a 43/57 allocation. I have decided to diversify my fixed income especially in a likely rising rate environment. About 17% in FDIC products, 19% in short term bonds and about 21% in intermediate bonds ( including TIPS fund)
I don't over fuss about sub allocations. It won't matter much if they change a few percentages. I will withdraw some or all from my equities when they do well and likely all from by FDIC/short term bonds when equities don't do well.

As I age I see the FDIC category dropping and the others increasing but I will always have a decent allocation to the FDIC category.

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BlueEars
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Re: Bond fund duration(s) in retirement

Post by BlueEars » Sat Nov 25, 2017 9:36 pm

.....
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Dottie57
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Re: Bond fund duration(s) in retirement

Post by Dottie57 » Sat Nov 25, 2017 9:43 pm

Svensk Anga wrote:
Sat Nov 25, 2017 10:06 am
I pondered the OP's question as I approached retirement. I did not like the implications for funds. My solution was to ladder CDs and then TIPS to get to SS claiming age. (Planning on 70 for me.). After SS starts, my need for bonds will be small and irregular. Bond funds look OK then.
I have laddered cds, savings and stable value funds until SS. Also have intermediate bond funds.

Right now fixed income is 50% of my Assets. When SS has ccurs I will be much lower". Probably rebalnce at some point.

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