A bond rule of thumb better than "age in bonds"

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David Jay
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Re: A bond rule of thumb better than "age in bonds"

Post by David Jay »

marcopolo wrote: Mon May 11, 2020 10:57 pmI am still trying to understand the distinction you are making. I am in the same situation as you (did not start at 100% stock), but reduced equity exposure leading up to retirement, and plan to let the equity portion start to glide (drift, rebound, etc.) back up to probably in the 65-70% range eventually. So, I am interested in your approach.

I am not sure what you mean when you seem to imply in your response above that what you are doing is not the same as rising equity percentages. Is that because you are differentiating a passive drift/glide approach from a more active (i.e., powered) approach of forcing the equity percentage to rise?
If anyone wants further discussion of the bond tent, I have created a new thread here: viewtopic.php?f=10&t=314679

This discussion has badly hijacked "vineviz" rule-of-thumb discussion.
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Re: A bond rule of thumb better than "age in bonds"

Post by NerveDoc »

KEotSK66 wrote: Sat May 09, 2020 8:12 am If I recall, Bogle advised not having less than 30% bonds or more than 70% stocks. So, a 70/30 portfolio would be considered the most aggressive and 30/70 the most conservative. Anywhere in-between will come down to someone's own risk tolerance. Pretty simple really.

Interestingly, Mr Bogle gifted his grandchildren VBIAX (Balanced Index) which is 60/40.


I think this recommendation comes from the long-term efficient frontier (SP+ABI), which plots return vs volatility/SD

in the vicinity of 35% stocks you get the minimum variance portfolio, best efficiency in terms of unit return per unit risk

in the vicinity of 65% stocks the unit return per unit risk begins to flatten out so the efficiency begins to drop off rapidly as you assume additional SD, of course the thinking out here is the extra return is worth the extra risk

as your investment period shortens you become more susceptible to "random events" so your efficiency experience may vary considerably

i would just go about 35/65 or 65/35 depending on your needs, 30/70-40/60 or 60/40-70/30 are close enough. vg offers about half a dozen funds with these AAs

i think this glidepath stuff is overcomplicating things unnecessarily
There's a 2018 interview with Bogle where he says "I’ve come to conclude that a 60/40 portfolio is probably the best option, rather than going from 80/20 to 20/80 in a target retirement plan." That's good enough for me.
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Re: A bond rule of thumb better than "age in bonds"

Post by LeslieSmiley »

120 minus age for stock allocation is what i have been using. the rest is not just "bond" but "fixed income" which is comprised with bond index fund, treasury i-bond, online CD ladder and cold hard cash.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
Doesn't this contradict the rule in OP? In OP, you have 50% bonds at the age of retirement. With wealth rule you'll have 30% bonds (assuming 30x savings). And somewhere in thread you said 25% bonds is better at the age of 60 with 25x savings. How about age 50 or 40? Even less bonds?
Last edited by klaus14 on Wed Dec 30, 2020 8:24 pm, edited 1 time in total.
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Re: A bond rule of thumb better than "age in bonds"

Post by abuss368 »

Generally speaking the allocation to bonds should probably increase with age. Our glide path and timeframe short ends. Our capitalized human capital decreases. While this may not be true for everyone as facts and circumstances can be unique it is probably true for most.

The best approach may simple be the allocation that allows one to sleep well at night.

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Re: A bond rule of thumb better than "age in bonds"

Post by vineviz »

klaus14 wrote: Wed Dec 30, 2020 8:11 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
Doesn't this contradict the rule in OP? In OP, you have 50% bonds at the age of retirement. With wealth rule you'll have 30% bonds (assuming 30x savings). And somewhere in thread you said 25% bonds is better at the age of 60 with 25x savings. How about age 50 or 40? Even less bonds?
I'm not sure it's a contradiction, per se, but the two rules would produce slightly different glide paths. Any "rule of thumb" is likely to be problematic, and the wealth-based "rule of thumb" is a bit less conservative than the modified "age-base rule of thumb" from the OP (which itself is like too conservative after age 60 or so).

The main thrust, I think, is that most investors should probably have equity allocations over 80% during most of their 40s. The "age in bonds" rule of thumb is FAR too conservative for people in this age group.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

vineviz wrote: Wed Dec 30, 2020 8:47 pm
klaus14 wrote: Wed Dec 30, 2020 8:11 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
Doesn't this contradict the rule in OP? In OP, you have 50% bonds at the age of retirement. With wealth rule you'll have 30% bonds (assuming 30x savings). And somewhere in thread you said 25% bonds is better at the age of 60 with 25x savings. How about age 50 or 40? Even less bonds?
I'm not sure it's a contradiction, per se, but the two rules would produce slightly different glide paths. Any "rule of thumb" is likely to be problematic, and the wealth-based "rule of thumb" is a bit less conservative than the modified "age-base rule of thumb" from the OP (which itself is like too conservative after age 60 or so).

The main thrust, I think, is that most investors should probably have equity allocations over 80% during most of their 40s. The "age in bonds" rule of thumb is FAR too conservative for people in this age group.
How much bond do you think is reasonable for someone entering a hopefully long (50+ years) of retirement with adequate savings (~30x annual expenses) ?
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: A bond rule of thumb better than "age in bonds"

Post by abc132 »

These results are very close to what I have gotten in my own simulations. Well done!

I really like the graph with the optimal path.

I'm at 70/25/5 stock/bond/cash at 35x needed/current expenses, but 23x desired retirement expenses, which puts me right in the 23% to 35% range you would suggest. I'm young enough I can work as many years as is needed, so the portfolio value method is more appropriate for me than picking a retirement age. I was also over 40 before getting any bonds, based on my own simulations.

It might be worthwhile to repeat the simulation with 3% less than historical for both stock and bond returns and show that optimal path, just to address the complaint about low expected stock/bond returns.
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Re: A bond rule of thumb better than "age in bonds"

Post by abc132 »

JBTX wrote: Mon May 11, 2020 11:40 pm I read the OP and some posts after but not the entire thread, so sorry if I'm repeating anything.

The issue I have with this, from a life cycle perspective, is you are buying only stocks for 10-20 years, depending when you start working and saving, and then after 40 you on average are buying mostly bonds. If stocks go up more than bonds, you get to the point where you buy only bonds to keep a target allocation. Now we are saying we go to 100% stocks to 60% in only 20 years. A 10-15 year buy in period is a fairly concentrated buy in period, increasing you risk of buying high and eventually selling low. Then after 40 you will have to more aggressively sell stocks from time to time, and to extent you have stocks in taxable it leads to more capital gains management.
I'm in this situation, and you should have plenty of tax sheltered stocks to convert into bonds. You should not plan on changing AA much within a taxable account, because of the large capital gains. You don't need to worry too much about selling stocks low, because low stocks values boosts your bond percentage of your portfolio. Plan ahead for what you need in your taxable accounts so that you don't have to buy or sell there before retiring.

Let's say you have 10x expenses at 40. You need to add 2% bonds per year, which is 0.2x expenses. That's doable with a 20% investment-to-annual-expenses ratio, so less than 16% of your income. The next year the market drops 25%. Now you have 7.5x expenses in stocks and 0.2x expenses in bonds, and you want 4% bonds. You only need 0.04*(7.7)x or .308x expense in bonds, so you buy .108x expenses in bonds and you have 0.092x expenses left to buy some more stocks.

Let's say you have 20x expenses at 50 and the recommended 20% in bonds, for a total of 16x earnings in stocks and 4x earnings in bonds. You need to add 2% bonds per year, which is 0.4x expenses. That's doable with a 40% investment-to-annual-expenses ratio, which is less than 28% of your income. The next year the market drops 25%. Now you have 12x expenses in stocks and 4x expenses in bonds, and you want 22% bonds. You only need 0.22*(16)x or 3.52x expense in bonds, so you can buy all stocks with your investments for the year and you would sell some bonds to purchase more stocks and get back to 78% stocks and 22% bonds.

What you see from these two examples is that it is easier to meet your bond goals when the market is down, and we are more likely to have to sell stocks when they are up. You can buy stocks when they are down, and even rebalance bonds into stocks.
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Re: A bond rule of thumb better than "age in bonds"

Post by vineviz »

klaus14 wrote: Thu Dec 31, 2020 12:50 am How much bond do you think is reasonable for someone entering a hopefully long (50+ years) of retirement with adequate savings (~30x annual expenses) ?
“Reasonable” covers a lot of ground in that scenario, but IMHO the less allocated to bonds the better. Ideally? No bonds.

Fifty years is a long time to cover with 30x expenses, and portfolio returns become the limiting factor, not volatility.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

vineviz wrote: Thu Dec 31, 2020 6:54 am
klaus14 wrote: Thu Dec 31, 2020 12:50 am How much bond do you think is reasonable for someone entering a hopefully long (50+ years) of retirement with adequate savings (~30x annual expenses) ?
“Reasonable” covers a lot of ground in that scenario, but IMHO the less allocated to bonds the better. Ideally? No bonds.

Fifty years is a long time to cover with 30x expenses, and portfolio returns become the limiting factor, not volatility.
Thanks. Let me revert the question then. What kind of asset allocation + savings should you aim to enter a long retirement given today's market conditions?

I guess 50x expenses with 40% bonds should work. But 50x is too difficult and you are working lots of extra years to achieve that. I am curious what your intuition says about the sweet spot here.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

andrew99999 wrote: Thu May 07, 2020 9:26 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
Trying to look at how this works in practice.
If I assume the 4% rule is being used, then it seems to be using a rule of

(Percent of way to goal) divided by 4

So if 20k/yr is required, and therefore target goal = 500k:

(100k / 500k) / 4 = 20% / 4 = 5% bonds
(200k / 500k) / 4 = 40% / 4 = 10% bonds
(300k / 500k) / 4 = 60% / 4 = 15% bonds
(400k / 500k) / 4 = 80% / 4 = 20% bonds
(500k / 500k) / 4 = 100% / 4 = 25% bonds

Have I got that right?

The reason I'm asking is that in your example, you only get to 40% and 50% bonds when you have an 800k and 1m portfolio, so with plans to withdraw 20k/yr it looks like you're basing the numbers on an idea of a 2 - 2.5% withdrawal rate?
I think you are correct except that this method doesn't assume anything about withdrawal rate. Even with less savings and high WR, you have a better chance with high equity allocation. Especially with today's low yields. And if you have high savings multiple then you can "afford" higher bond alloc. This feature is not present in any age based method.

I think this is a better method for people targeting early retirement.

I adopted this method for myself. I add a small tilt on top of it based on valuations.
Method suggests 28% bonds to me but I do 32% because i think stocks are overvalued (i estimate a fair value for SP500 and tilt according to distance).
I have SWR as 2.80% (weighted average of CAPE Yield and 3%)
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: A bond rule of thumb better than "age in bonds"

Post by BHawks87 »

andrew99999 wrote: Thu May 07, 2020 9:26 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
Trying to look at how this works in practice.
If I assume the 4% rule is being used, then it seems to be using a rule of

(Percent of way to goal) divided by 4

So if 20k/yr is required, and therefore target goal = 500k:

(100k / 500k) / 4 = 20% / 4 = 5% bonds
(200k / 500k) / 4 = 40% / 4 = 10% bonds
(300k / 500k) / 4 = 60% / 4 = 15% bonds
(400k / 500k) / 4 = 80% / 4 = 20% bonds
(500k / 500k) / 4 = 100% / 4 = 25% bonds

Have I got that right?

The reason I'm asking is that in your example, you only get to 40% and 50% bonds when you have an 800k and 1m portfolio, so with plans to withdraw 20k/yr it looks like you're basing the numbers on an idea of a 2 - 2.5% withdrawal rate?
Looks like this formula assumes you will be 75/25 at retirement. Another way to write it to change your desired bond allocation at retirement:

Current Portfolio / Retired Portfolio Goal * Desired Bond Allocation When Retired
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Re: A bond rule of thumb better than "age in bonds"

Post by hoops777 »

When one considers how totally different most people’s scenarios are from one another, I find it puzzling why people are always trying to come up with some “brilliant “ option that works for most people.
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Re: A bond rule of thumb better than "age in bonds"

Post by UpperNwGuy »

hoops777 wrote: Tue May 04, 2021 7:55 pm When one considers how totally different most people’s scenarios are from one another, I find it puzzling why people are always trying to come up with some “brilliant “ option that works for most people.
Why do you find that to be puzzling? There are plenty of investors, many of whom are members of this forum, who want general guidance.
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Re: A bond rule of thumb better than "age in bonds"

Post by UpperNwGuy »

I agree with vineviz that an investor doesn't need bonds before age 40, and I like the results of his formula from age 40 to 65. I think the formula needs some refinement for the post-65 years, as it starts to produce very conservative results.
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Re: A bond rule of thumb better than "age in bonds"

Post by hoops777 »

UpperNwGuy wrote: Tue May 04, 2021 8:12 pm
hoops777 wrote: Tue May 04, 2021 7:55 pm When one considers how totally different most people’s scenarios are from one another, I find it puzzling why people are always trying to come up with some “brilliant “ option that works for most people.
Why do you find that to be puzzling? There are plenty of investors, many of whom are members of this forum, who want general guidance.
Just my opinion.
K.I.S.S........so easy to say so difficult to do.
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Re: A bond rule of thumb better than "age in bonds"

Post by Bridgebumbob »

When I was younger and in the accumulation phase, I did find the “age in bonds” advice useful. Now that I am well into retirement (age 78), and hoping to leave an inheritance to kids, I focus on actual dollar amounts instead of rules of thumb. Therefore, I plan to keep enough in treasuries (short term now) and cash to last for projected lifespan and the remainder (@30%) in equities (shades of rising equity glidepath) and a $900k home to leave to kids.
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Re: A bond rule of thumb better than "age in bonds"

Post by abuss368 »

Bridgebumbob wrote: Tue May 04, 2021 11:25 pm When I was younger and in the accumulation phase, I did find the “age in bonds” advice useful. Now that I am well into retirement (age 78), and hoping to leave an inheritance to kids, I focus on actual dollar amounts instead of rules of thumb. Therefore, I plan to keep enough in treasuries (short term now) and cash to last for projected lifespan and the remainder (@30%) in equities (shades of rising equity glidepath) and a $900k home to leave to kids.
In my opinion that approach is very good. Taylor will often say that the money he can not afford to lose is in Total Bond and Cash.

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Re: A bond rule of thumb better than "age in bonds"

Post by Munir »

UpperNwGuy wrote: Tue May 04, 2021 8:16 pm I agree with vineviz that an investor doesn't need bonds before age 40, and I like the results of his formula from age 40 to 65. I think the formula needs some refinement for the post-65 years, as it starts to produce very conservative results.
Post age 65 means approaching mortality and a shorter life span. One needs to be conservative because there aren't as many years available to recover from a downturn- unless the assets are being invested for the benefit of one's heirs.
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Re: A bond rule of thumb better than "age in bonds"

Post by Marseille07 »

Munir wrote: Sat May 08, 2021 11:43 am
UpperNwGuy wrote: Tue May 04, 2021 8:16 pm I agree with vineviz that an investor doesn't need bonds before age 40, and I like the results of his formula from age 40 to 65. I think the formula needs some refinement for the post-65 years, as it starts to produce very conservative results.
Post age 65 means approaching mortality and a shorter life span. One needs to be conservative because there aren't as many years available to recover from a downturn- unless the assets are being invested for the benefit of one's heirs.
If you simply do age - 40 in bonds, at 65 you'd be 75/25. Seems ok-ish to me.
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Re: A bond rule of thumb better than "age in bonds"

Post by Munir »

Marseille07 wrote: Sat May 08, 2021 11:46 am
Munir wrote: Sat May 08, 2021 11:43 am
UpperNwGuy wrote: Tue May 04, 2021 8:16 pm I agree with vineviz that an investor doesn't need bonds before age 40, and I like the results of his formula from age 40 to 65. I think the formula needs some refinement for the post-65 years, as it starts to produce very conservative results.
Post age 65 means approaching mortality and a shorter life span. One needs to be conservative because there aren't as many years available to recover from a downturn- unless the assets are being invested for the benefit of one's heirs.
If you simply do age - 40 in bonds, at 65 you'd be 75/25. Seems ok-ish to me.
It also means that at age 85 one will be in only 40% bonds (fixed income). That may seem too low to many. Maybe the age in bonds can be modified by age in years with different percentages for each five-year segment depending on one's health and expected survival rate- after checking with one's physician !
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Re: A bond rule of thumb better than "age in bonds"

Post by Tipro »

vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.
I've been thinking about this as well (bond allocation based on wealth and not age) as part of FIRE planning. I hope to retire at 55 with $2.5MM, and discounted at 5% that's roughly $850k in today's money. My AA will likely be 60/40, and my plan is to continue buying only equities until my portfolio hits 60% of the discounted value (which of course grows every day, but hopefully by less than my portfolio does), and then start gliding into bonds. Seems like a more flexible approach that helps adhere to advice you, Vineviz, gave elsewhere, to "buy all your stocks, pay off your mortgage, then buy all your bonds."
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Re: A bond rule of thumb better than "age in bonds"

Post by vineviz »

Tipro wrote: Sat May 08, 2021 12:13 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.
I've been thinking about this as well (bond allocation based on wealth and not age) as part of FIRE planning. I hope to retire at 55 with $2.5MM, and discounted at 5% that's roughly $850k in today's money. My AA will likely be 60/40, and my plan is to continue buying only equities until my portfolio hits 60% of the discounted value (which of course grows every day, but hopefully by less than my portfolio does), and then start gliding into bonds. Seems like a more flexible approach that helps adhere to advice you, Vineviz, gave elsewhere, to "buy all your stocks, pay off your mortgage, then buy all your bonds."
The approach you describe is pretty close to the classic lifecycle approach for calculating your own specific glide path.

Instead of discounting the expected retirement wealth by a risky discount rate (i.e. 5%), I usually suggest discounting your expected future contributions using a risk-free rate. Using this approach you'd invest 100% in stocks until your current portfolio equals 60% of the SUM of the currently portfolio value and the PV of your future contributions.

This avoids having to make an explicit assumption about future portfolio returns, but of course such an assumption is still implicit in the estimation for the PV of future contributions. As a result, both approaches should probably give roughly the same result.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

vineviz wrote: Sat May 08, 2021 1:03 pm
Tipro wrote: Sat May 08, 2021 12:13 pm
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.
I've been thinking about this as well (bond allocation based on wealth and not age) as part of FIRE planning. I hope to retire at 55 with $2.5MM, and discounted at 5% that's roughly $850k in today's money. My AA will likely be 60/40, and my plan is to continue buying only equities until my portfolio hits 60% of the discounted value (which of course grows every day, but hopefully by less than my portfolio does), and then start gliding into bonds. Seems like a more flexible approach that helps adhere to advice you, Vineviz, gave elsewhere, to "buy all your stocks, pay off your mortgage, then buy all your bonds."
The approach you describe is pretty close to the classic lifecycle approach for calculating your own specific glide path.

Instead of discounting the expected retirement wealth by a risky discount rate (i.e. 5%), I usually suggest discounting your expected future contributions using a risk-free rate. Using this approach you'd invest 100% in stocks until your current portfolio equals 60% of the SUM of the currently portfolio value and the PV of your future contributions.

This avoids having to make an explicit assumption about future portfolio returns, but of course such an assumption is still implicit in the estimation for the PV of future contributions. As a result, both approaches should probably give roughly the same result.
both approaches meaning annual-expenses-saved-in-bonds vs lifecycle?

the former seems smoother, especially late in the game. i like the "you can afford to have more bonds if you have more savings" intuition.

Which one do you personally follow?
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: A bond rule of thumb better than "age in bonds"

Post by vineviz »

klaus14 wrote: Sat May 08, 2021 2:57 pm
both approaches meaning annual-expenses-saved-in-bonds vs lifecycle?

the former seems smoother, especially late in the game. i like the "you can afford to have more bonds if you have more savings" intuition.

Which one do you personally follow?
I was referring to what I think are two slightly different ways of doing the lifecycle calculation.

The “years of expenses in bonds” isn’t an approach I use or suggest.
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Re: A bond rule of thumb better than "age in bonds"

Post by klaus14 »

vineviz wrote: Sat May 08, 2021 3:53 pm
klaus14 wrote: Sat May 08, 2021 2:57 pm
both approaches meaning annual-expenses-saved-in-bonds vs lifecycle?

the former seems smoother, especially late in the game. i like the "you can afford to have more bonds if you have more savings" intuition.

Which one do you personally follow?
I was referring to what I think are two slightly different ways of doing the lifecycle calculation.

The “years of expenses in bonds” isn’t an approach I use or suggest.
i was referring to your below suggestion
vineviz wrote: Thu May 07, 2020 9:58 am For those who prefer to think in terms of wealth, rather than age, there's a roughly equivalent wealth-based rule of thumb.

Compute your expected retirement withdrawals (in current dollars) as a multiple of your current retirement savings: this is (in percentage terms) your bond allocation.

So, for example, imagine that your current retirement savaging are $200,000 and you expect your annual portfolio withdrawals in retirement will be $20,000. 200,000 divided by 20,000 is 10. Your bond allocation is 10%.

If your current retirement savaging are $800,000 and you expect your annual portfolio withdrawals in retirement will be $20,000 then your bond allocation is 40% ( 800,000 divided by 20,000 is 40).

This will produce a slightly different glide path than the age-based rule, but the shape of the glide path will be roughly similar for most investors.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: A bond rule of thumb better than "age in bonds"

Post by Eagle33 »

I did not read all the previous posts, so may be redundant.

Determine what portion of your portfolio you can lose when the market goes down 50% and still sleep at night. Be sure to factor in the number of years (risk capacity only, not your risk tolerance) before you need your retirement money when determining this stock loss number (double digit years allow more risk taking). Double the stock loss number to get the amount of total stocks and subtract that from your portfolio balance to determine your bonds portion. If this AA is somewhere between 70/30 and 30/70 you have found your AA.
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Re: A bond rule of thumb better than "age in bonds"

Post by willthrill81 »

Eagle33 wrote: Sat May 08, 2021 9:05 pm I did not read all the previous posts, so may be redundant.

Determine what portion of your portfolio you can lose when the market goes down 50% and still sleep at night. Be sure to factor in the number of years (risk capacity only, not your risk tolerance) before you need your retirement money when determining this stock loss number (double digit years allow more risk taking). Double the stock loss number to get the amount of total stocks and subtract that from your portfolio balance to determine your bonds portion. If this AA is somewhere between 70/30 and 30/70 you have found your AA.
That's a reasonable approach, but a potentially big problem with it is that it might not result in an AA likely to enable you to reach your goals. Not having enough to meet your goals is arguably just as bad, maybe worse, than taking on more risk than you are comfortable with. There's something to be said for sleeping well at night, but there's a lot to be said for meeting your goals.

I don't think that any investor really likes to see their stock holdings fall precipitously. But many hold stocks anyway because they need to in order to have a good chance of satisfying their long-term goals.

All too often, I think that we treat risk tolerance as a static variable that cannot be changed and must simply be accepted and managed as best we can, but I don't think that is necessarily true.
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Re: A bond rule of thumb better than "age in bonds"

Post by Orthodoc1. »

I just finished reading an asset allocation book by William Bernstein. He recommends that anyone over 50 (from what I remember) have 25 years of anticipated need during retirement in safe investments like short term bonds, tips or I bonds . In other words, figure out in today's dollars what you expect to add to Social Security, pension, other sources of income annually, then multiply that by 25 years, and invest that amount in non stock, safer investments. Interesting need based formula for establishing asset allocation. Of course there will be many future variables but seems nice for sleeping well.
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Re: A bond rule of thumb better than "age in bonds"

Post by vineviz »

Orthodoc1. wrote: Mon May 10, 2021 4:43 pm I just finished reading an asset allocation book by William Bernstein. He recommends that anyone over 50 (from what I remember) have 25 years of anticipated need during retirement in safe investments like short term bonds, tips or I bonds . In other words, figure out in today's dollars what you expect to add to Social Security, pension, other sources of income annually, then multiply that by 25 years, and invest that amount in non stock, safer investments. Interesting need based formula for establishing asset allocation. Of course there will be many future variables but seems nice for sleeping well.
That strategy might allow you to sleep well for about 20 years. After that, you might be sleeping under a bridge or on your child’s couch.

I joke.

But not really.

Unless you’ve got another 20 years worth of expenses in stocks on top of the 25 years in low risk bonds, it probably pays to take a more rigorous approach than it sounds like Bernstein is advocating.
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Re: A bond rule of thumb better than "age in bonds"

Post by willthrill81 »

vineviz wrote: Mon May 10, 2021 5:05 pm
Orthodoc1. wrote: Mon May 10, 2021 4:43 pm I just finished reading an asset allocation book by William Bernstein. He recommends that anyone over 50 (from what I remember) have 25 years of anticipated need during retirement in safe investments like short term bonds, tips or I bonds . In other words, figure out in today's dollars what you expect to add to Social Security, pension, other sources of income annually, then multiply that by 25 years, and invest that amount in non stock, safer investments. Interesting need based formula for establishing asset allocation. Of course there will be many future variables but seems nice for sleeping well.
That strategy might allow you to sleep well for about 20 years. After that, you might be sleeping under a bridge or on your child’s couch.

I joke.

But not really.

Unless you’ve got another 20 years worth of expenses in stocks on top of the 25 years in low risk bonds, it probably pays to take a more rigorous approach than it sounds like Bernstein is advocating.
Why Bernstein is still recommending this drivel is beyond me. It's reasonable for those who have accumulated far more than they need to fund their retirement (e.g., 50x expected annual living expenses), but not for those that have 25-30x, who should probably have at least 30% of their portfolio in stocks and preferably more.
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Re: A bond rule of thumb better than "age in bonds"

Post by drk »

Orthodoc1. wrote: Mon May 10, 2021 4:43 pm I just finished reading an asset allocation book by William Bernstein.
What's the publication date of the book?
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Re: A bond rule of thumb better than "age in bonds"

Post by Hamster1959 »

Long time lurker. I am within two months of retiring and turning age 62. I have a military pension. I’m about to get a modest civil-service pension. I have some rental property that generally, but not always, throws off some income. Because of limited familial longevity, I will be getting Social Security immediately once I retire. Divorced. Two adult children. I have—just—won the game, with 25 years of 4% withdrawals at Vanguard and in the TSP, most in Roth assets. For now, I’m renting. I anticipate a modest, comfortable retirement. I am at 2/3 bonds and cash, and 1/3 equities. Is that “too conservative”? Might I miss out on some spectacular market gains? Yes and yes. But I can sleep very soundly at night. And that is what’s most important to me. In the accumulation phase, for decades, I was at 100% stocks. I have seen significant market declines that nobody expected. Nobody ever does. I am no longer willing to take that risk on the very cusp of retirement. But I am content with my very conservative asset allocation, which has, like all AAs, both pros and cons. Good luck to you!

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Re: A bond rule of thumb better than "age in bonds"

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2015. Rational Expectations: Asset Allocation for Investing Adults
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Re: A bond rule of thumb better than "age in bonds"

Post by abuss368 »

vineviz wrote: Mon May 10, 2021 5:05 pm
Orthodoc1. wrote: Mon May 10, 2021 4:43 pm I just finished reading an asset allocation book by William Bernstein. He recommends that anyone over 50 (from what I remember) have 25 years of anticipated need during retirement in safe investments like short term bonds, tips or I bonds . In other words, figure out in today's dollars what you expect to add to Social Security, pension, other sources of income annually, then multiply that by 25 years, and invest that amount in non stock, safer investments. Interesting need based formula for establishing asset allocation. Of course there will be many future variables but seems nice for sleeping well.
That strategy might allow you to sleep well for about 20 years. After that, you might be sleeping under a bridge or on your child’s couch.

I joke.

But not really.

Unless you’ve got another 20 years worth of expenses in stocks on top of the 25 years in low risk bonds, it probably pays to take a more rigorous approach than it sounds like Bernstein is advocating.
Vince -

Do you draw this conclusion as a result of the low interest rate environment?

There is an old saying that sometimes it is more important to protect what we have than to take risks to get more.

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Re: A bond rule of thumb better than "age in bonds"

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abuss368 wrote: Mon May 10, 2021 6:39 pm There is an old saying that sometimes it is more important to protect what we have than to take risks to get more.
Another old saying is “We lose money on every sale, but we make it up in volume.”
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Re: A bond rule of thumb better than "age in bonds"

Post by abuss368 »

vineviz wrote: Mon May 10, 2021 6:48 pm
abuss368 wrote: Mon May 10, 2021 6:39 pm There is an old saying that sometimes it is more important to protect what we have than to take risks to get more.
Another old saying is “We lose money on every sale, but we make it up in volume.”
Hi Vince -

Confused how that relates to individual portfolios and and specifically retired folks.

Please explain.
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Re: A bond rule of thumb better than "age in bonds"

Post by guppyguy »

I’m just confused as to when a liability matching portfolio (such as the one Bernstein suggests) is considered outdated drivel??
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Re: A bond rule of thumb better than "age in bonds"

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guppyguy wrote: Mon May 10, 2021 8:43 pm I’m just confused as to when a liability matching portfolio (such as the one Bernstein suggests) is considered outdated drivel??
I can’t speak for others, but it’s not the concept of liability matching that bothers me. In fact I like the approach and often recommend it.

It’s the specificity of “25x expenses in bonds” which is problematic.
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Re: A bond rule of thumb better than "age in bonds"

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So is it the multiple? I believe he states 25x as a minimum and is not opposed to an annuity at the tail end for longevity insurance.
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Re: A bond rule of thumb better than "age in bonds"

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guppyguy wrote: Tue May 11, 2021 7:15 am So is it the multiple? I believe he states 25x as a minimum and is not opposed to an annuity at the tail end for longevity insurance.
To be fair to Bill, I haven't read everything he's written.

But 25x as a "minimum" presents some problems. For one thing, that's only enough to cover maybe 22 years of expenses with real yields being negative as they are. If you want to plan for the possibility of a 30 year retirement, you'd need "at least" 35x expenses either in a bond ladder or a combination ladder/annuity.

For an investor who is VERY wealthy and VERY loss averse I can see the merit of this approach, but few investors with even above-average wealth can afford such a radically conservative approach to retirement planning. Even fewer need to so so.
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Re: A bond rule of thumb better than "age in bonds"

Post by hudson »

Orthodoc1. wrote: Mon May 10, 2021 4:43 pm I just finished reading an asset allocation book by William Bernstein. He recommends that anyone over 50 (from what I remember) have 25 years of anticipated need during retirement in safe investments like short term bonds, tips or I bonds . In other words, figure out in today's dollars what you expect to add to Social Security, pension, other sources of income annually, then multiply that by 25 years, and invest that amount in non stock, safer investments. Interesting need based formula for establishing asset allocation. Of course there will be many future variables but seems nice for sleeping well.
On page 26 of Bernstein's Ages of the Investor (https://www.amazon.com/Ages-Investor-Cr ... B008CM2T2A) he suggests a 30 year TIPS ladder from age 70 to age 100. On pages 27-28, he suggests a combination TIPS ladder and SPIA that will last until age 105. He says that the TIPS ladder/SPIA combination "would constitute a liability matching Full Monty(or, perhaps a, ahem, "Full Bodie"). From memory, I think that Vineviz has suggested the TIPS ladder/fixed annuity solution.

Bottom line: At least in this 2012 book, Bernstein's suggestions take one to age 100 or 105.
Last edited by hudson on Tue May 11, 2021 7:51 am, edited 2 times in total.
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Re: A bond rule of thumb better than "age in bonds"

Post by Orthodoc1. »

It was my opinion that the 25 x was representative of being hopeful of a 25 year retirement. May be too conservative for many. I am not sure it is crazy though. I have 2 kids who are becoming doctors who had 11 years of educational expenses coming up past high school. I saved aggressively for that when they were younger but became much more conservative with the savings as they neared high school graduation since it was more important that the money was there for them rather than to be hopeful that it would grow much more. A little off topic but similar in that I locked in their anticipated need or as much as I could toward that need, the closer they got to incurring the educational expenses. The current cost of that 11 year period exceeds 1 million dollars each kid for 4 years of college, 4 years of graduate school , plus 3 years of specialty training so it is a significant period of time and amount of money, somewhat similar to retirement expenses.
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Re: A bond rule of thumb better than "age in bonds"

Post by willthrill81 »

vineviz wrote: Tue May 11, 2021 7:39 am
guppyguy wrote: Tue May 11, 2021 7:15 am So is it the multiple? I believe he states 25x as a minimum and is not opposed to an annuity at the tail end for longevity insurance.
To be fair to Bill, I haven't read everything he's written.

But 25x as a "minimum" presents some problems. For one thing, that's only enough to cover maybe 22 years of expenses with real yields being negative as they are. If you want to plan for the possibility of a 30 year retirement, you'd need "at least" 35x expenses either in a bond ladder or a combination ladder/annuity.

For an investor who is VERY wealthy and VERY loss averse I can see the merit of this approach, but few investors with even above-average wealth can afford such a radically conservative approach to retirement planning. Even fewer need to so so.
Well said.

Even from a volatility standpoint, there has been no meaningful advantage to a 100% bond allocation vs. a 25/75 AA, though the latter has had significantly better returns. So even very risk averse investors aren't historically likely to benefit from having less than 25% of their portfolio in stocks.

When creating the sort of TIPS/I bonds ladder Bernstein is advocating, one should also evaluate what one's resulting AA would be. Using the above referenced 25% minimum in stocks, that means that one needs at least 33.3x in order to implement the approach he's advocating. And one should also hope that one don't outlive one's money; historically, safe withdrawal rates have been significantly reduced with such low stock allocations.

Especially in this context, taking on less short-term volatility means taking on greater risk of premature portfolio depletion.

Realistically, I think that Bernstein's recommendation only begins to make reasonably good sense for those with about 50x at retirement or more.
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Re: A bond rule of thumb better than "age in bonds"

Post by GoneOnTilt »

vineviz wrote: Thu May 07, 2020 9:40 am Asset allocation experts generally agree that the classic "age in bonds" rule of thumb is pretty terrible investment guidance. It produces suggested asset allocations that bear virtually no resemblance to allocations constructed using more empirically and/or theoretically sound methods.

The main advantage it has, IMHO, is that it easy to remember and easy to calculate. Simple modifications like "age minus 20" produce much better results albeit ones that are still recklessly conservative for midde-aged retirement investors (e.g. ages 35 to 50).

I've been trying to come up with an easily computable rule that investors can use to set their own glide path, and I think this will do it.

Bonds = 2 * (age - 40)

Most investors will eschew leverage, so this basically amounts to 100/0 allocations until age 40. This is consistent with the glide paths of most target date funds. In the following graph you can see a comparison of the (terrible) "age in bonds" rule, the (less terrible) "age minus 20" rule, my (even less terrible) "2x(age-40)" rule, and the computed "optimal" age-based glide path.

Image
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Re: A bond rule of thumb better than "age in bonds"

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willthrill81 wrote: Tue May 11, 2021 10:03 am
vineviz wrote: Tue May 11, 2021 7:39 am
guppyguy wrote: Tue May 11, 2021 7:15 am So is it the multiple? I believe he states 25x as a minimum and is not opposed to an annuity at the tail end for longevity insurance.
To be fair to Bill, I haven't read everything he's written.

But 25x as a "minimum" presents some problems. For one thing, that's only enough to cover maybe 22 years of expenses with real yields being negative as they are. If you want to plan for the possibility of a 30 year retirement, you'd need "at least" 35x expenses either in a bond ladder or a combination ladder/annuity.

For an investor who is VERY wealthy and VERY loss averse I can see the merit of this approach, but few investors with even above-average wealth can afford such a radically conservative approach to retirement planning. Even fewer need to so so.

Realistically, I think that Bernstein's recommendation only begins to make reasonably good sense for those with about 50x at retirement or more.
I've read all his books several times and I don't see his recommendations for only the high x's. Its just a template and can be applied to any savings multiple but is meant only as a backstop to cover required minimum expenses that SS/pensions do not cover. I would argue that it actually MORE pertinent to the lower (25-30x) balances. With that, however, as Vineviz pointed out, with real yields where they are the liability matching is pretty expensive right now with a TIPS ladder.
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Re: A bond rule of thumb better than "age in bonds"

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willthrill81 wrote: Tue May 11, 2021 10:03 am Realistically, I think that Bernstein's recommendation only begins to make reasonably good sense for those with about 50x at retirement or more.
I'm sure that people who entered the workforce in the 1960s, 1970s, and 1980s (and even the late 1950s) had plenty of struggles.

However, with the benefit hindsight we can see that this was very fortunate time to be accumulating a retirement nest egg. People who entered the workforce in the 2000s are in a completely different game than the people in Bernstein's generation.
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Re: A bond rule of thumb better than "age in bonds"

Post by junior »

In the Bernstein books there's always this implied or stated concern that we could experience another great depression and your stocks would go down 90% (For example see Age of the Investor on page 35 "... U.S. equity market indexes have declined as much as nearly 90%."). I don't know if that premise makes his liability matching suggestions more rational or not, but that seems to be where he is coming from.
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Re: A bond rule of thumb better than "age in bonds"

Post by Nate7out »

I have listened to Bernstein on a few podcasts recently, and he often alludes to a 20% chance of the end of civilization, and/or a 10% chance of accidental nuclear war [during your investing time horizon]. I am sure he assigns an even higher probability than that to another great depression. I just filled in numbers, but the sentiment is accurate. Hence he is OK with the 4% rule or a < 90% chance of success in a drawdown strategy.
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