Long Bonds in retirement - curiosity...

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daacrusher2001
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Long Bonds in retirement - curiosity...

Post by daacrusher2001 »

Hey All...I'm entering retirement soon, and I've been looking at my fixed income quite a bit lately.

I have been planning to do the following:

Cash - 4 years worth of expenses to get me to FRA for SS
Bonds - Total Bond Fund (or ETF)

I'm wondering if I should consider using part of the money allocated to Total Bond to something like Vanguard Long Term Treasury. If I'm lucky, I'll get 30 years in retirement...hoping for at least 20.

I've read so many discussions here on the pros/cons of long term treasuries. Some of it is way too technical for me. I'm really just wondering if it's appropriate in my scenario? I've been intrigued by the idea that some part of my bonds should be long term.

What do y'all think?

I'm 62 btw...
typical.investor
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Re: Long Bonds in retirement - curiosity...

Post by typical.investor »

daacrusher2001 wrote: Sat May 15, 2021 7:30 pm I'm wondering if I should consider using part of the money allocated to Total Bond to something like Vanguard Long Term Treasury. If I'm lucky, I'll get 30 years in retirement...hoping for at least 20.
You can but know that the duration of the Vanguard Long Term Treasury is about 18 years. That means it will recover loss from a rate hike today in 18 years. So yeah it seems to fit your time line.

But also know that this is true tomorrow and 20 and 30 years from today as well. So if there is a rate hike in 10 years, you will need 18 years from that point to recover with an expected 10 - 20 years (confident you are going to make it to the longish side) in your horizon remaining.

Of course, 30 years is a pretty long time and I suspect there will be a typical recession sometime where rates drop to stimulate the economy and long bonds in particular do well. If you are holding long bonds and well into your retirement, that might be a good time to rebalance out of any you are holding.

Or go with intermediate and not worry about the timing.
slicendice
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Re: Long Bonds in retirement - curiosity...

Post by slicendice »

I thought the following thread from last year was excellent and will answer most of your questions:

viewtopic.php?t=318412

I have heard for retirement investing horizon take the duration of the planned retirement and divide by 2. Keep your bond portfolio total average duration a year or so shorter than this number. Some of this also depends on how equity-heavy your portfolio is.
venkman
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Re: Long Bonds in retirement - curiosity...

Post by venkman »

It's hard to recommend LT Treasuries when they currently yield less than a 5-year MYGA.

I'd max out I-bonds each year before adding to LTT. Same expected real return with no duration risk.
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retired@50
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Re: Long Bonds in retirement - curiosity...

Post by retired@50 »

daacrusher2001 wrote: Sat May 15, 2021 7:30 pm I'm wondering if I should consider using part of the money allocated to Total Bond to something like Vanguard Long Term Treasury.
...
What do y'all think?

I'm 62 btw...
Personally, I'd stay away. A duration of nearly 18 years doesn't appeal to me.

From the Vanguard description of the fund VLGSX
Investors who are looking for a fund that seeks to provide interest income and are able to tolerate significant interest rate risk may wish to consider this fund.
Regards,
This is one person's opinion. Nothing more.
SpideyIndexer
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Re: Long Bonds in retirement - curiosity...

Post by SpideyIndexer »

A couple questions:

There are good arguments to be found that a good portion of one's portfolio should be in bonds with duration equal to the expected duration of the portfolio. This minimizes reinvestment risk. (Actually the duration calculation gets complicated. If one expect to live x years, some of the portfolio will need to be withdrawn annually up to x years.)

Many bogleheads are staying away from long duration bonds due to the interest rate risk with interest rates at an all-time low. Isn't this market timing, which we advised not to do?
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Re: Long Bonds in retirement - curiosity...

Post by rossington »

daacrusher2001 wrote: Sat May 15, 2021 7:30 pm I've been intrigued by the idea that some part of my bonds should be long term.
OP, Total Bond gives you plenty of exposure to LTT. Why don't you just leave it at that?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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daacrusher2001
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Re: Long Bonds in retirement - curiosity...

Post by daacrusher2001 »

rossington wrote: Sun May 16, 2021 5:12 am
daacrusher2001 wrote: Sat May 15, 2021 7:30 pm I've been intrigued by the idea that some part of my bonds should be long term.
OP, Total Bond gives you plenty of exposure to LTT. Why don't you just leave it at that?
That's been the plan. I will probably just stick with it. I wasn't sure if I was missing something important, or maybe just not understanding the role of a long term fund.
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Re: Long Bonds in retirement - curiosity...

Post by Escapevelocity »

SpideyIndexer wrote: Sun May 16, 2021 12:48 am A couple questions:

There are good arguments to be found that a good portion of one's portfolio should be in bonds with duration equal to the expected duration of the portfolio. This minimizes reinvestment risk. (Actually the duration calculation gets complicated. If one expect to live x years, some of the portfolio will need to be withdrawn annually up to x years.)

Many bogleheads are staying away from long duration bonds due to the interest rate risk with interest rates at an all-time low. Isn't this market timing, which we advised not to do?
I'll admit it. I'm a market timer for sure when it comes to interest rates. Not defending it, just stating the facts. I market time constantly on rates.
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Re: Long Bonds in retirement - curiosity...

Post by Dude2 »

SpideyIndexer wrote: Sun May 16, 2021 12:48 am Many bogleheads are staying away from long duration bonds due to the interest rate risk with interest rates at an all-time low. Isn't this market timing, which we advised not to do?
Many Bogleheads are not cut out to be rodeo riders. Even though a plan may be sound, there could be a high probability of not sticking to it. Is getting on that bucking bronco even worth trying? That's how I see it being played out as opposed to market timing.

Vineviz had some interesting posts recently that spoke to the 30 year treasury as the risk-free asset. (More properly it is likely the 30 year TIPS.)
Most people would think that cash is the risk free asset. From the ideal portfolio framework, this gives credibility to holding these particular long term instruments because you can modulate the risk of your overall portfolio via some percentage of the risk free asset. In other words the value of a dollar is in reference to the 30 year treasury, so when the economy turns sour and investments are thought to be lower in value, ipso facto the 30 year treasury must therefore be considered worth more in value.

Personally, I'm one of those intermediate term bond investors. It's all I can stomach.
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seajay
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Re: Long Bonds in retirement - curiosity...

Post by seajay »

SpideyIndexer wrote: Sun May 16, 2021 12:48 am A couple questions:

There are good arguments to be found that a good portion of one's portfolio should be in bonds with duration equal to the expected duration of the portfolio. This minimizes reinvestment risk. (Actually the duration calculation gets complicated. If one expect to live x years, some of the portfolio will need to be withdrawn annually up to x years.)

Many bogleheads are staying away from long duration bonds due to the interest rate risk with interest rates at an all-time low. Isn't this market timing, which we advised not to do?
Re : the duration calculation gets complicated. If one expect to live x years, some of the portfolio will need to be withdrawn annually up to x years ... its not that difficult to calculate. If preparing a ladder of bonds to match $10K/year of inflation adjusted spending and rather than loading all-in at the one time they were buying one inflation bond rung each quarter, and in the first quarter it cost $9K to buy perhaps the $10K of 19th year inflation bond (real yields were positive), but then in the next quarter after large stock gains it cost $11K to buy the $10K of 18th year inflation bond, should they refrain from buying to perhaps take their chances of non-liability matched alternatives for that 18th year of $10K inflation adjusted spending? Many might say go ahead and continue buying, it will wash, some might say refrain and take your chances. The same for two investors, one loading all of their bonds at the first date with a lower portfolio value at that time, one at the second date after their portfolio had made good/great gains. If anything not buying bonds when present valuations were low has the better prospect of success than not buying when present valuations were high. Interest rates at all time lows is indicative of high-present-valuations/prior-good-gains.

Broadened and if previously you could buy 30 years of $10K/year inflation adjusted spending, $300K of total spending, for $250K of present day money when your portfolio value was $500K, or after good gains over a relatively short period your portfolio value had risen to $600K but where it cost $350K to buy the same $300K of inflation adjusted future spending, then either way the risk/reward might be much the same overall. If anything taking some of recent good gains off the table to buy bonds when valuations were high is perhaps the better choice.

Broadened yet further still and rather than a liability matched ladder of inflation bonds, some prefer to merge bonds into a central bond bullet, or even a bullet of a broader range of bonds, not just inflation bonds alone.

What might be the difference between one who opts for bond exposure via a short dated and long dated (20 year) barbell, to that of another who opts for a 10 year central bond bullet? Likely little difference overall.
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

daacrusher2001 wrote: Sat May 15, 2021 7:30 pm
I've read so many discussions here on the pros/cons of long term treasuries. Some of it is way too technical for me. I'm really just wondering if it's appropriate in my scenario? I've been intrigued by the idea that some part of my bonds should be long term.
The secret to understanding long-term bonds (especially long-term Treasuries, nominal or TIPS) are the safest possible asset you can buy lies in the name of the asset class: fixed income.

If you tell me how much annual income you want, I can tell you EXACTLY how much of which bonds to buy to guarantee that income.

So ultimately the retirement allocation decision usually boils down to figuring out how much year-to-year volatility in SPENDING you can tolerate and adjusting the stock/bond ratio to prosody earnings that.

Much of the investment industry and investment community fixate in the volatility of the PRICE (or present value) of their portfolio, but ultimately what matters to a long-term investor is the level and volatility of income the portfolio can produce.

If Social Security sent you a statement every month which reported the present value of your future benefits you’d see VERY high levels in month-month value.

Short term bonds and/or cash accounts proved EXACTLY the wrong kind of false assurances to retirees. They report stability in a dimension that is irrelevant (price) and conceal volatility in the thing that matters most (future consumption).
"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: Long Bonds in retirement - curiosity...

Post by dbr »

As with many investors, a distaste for overall portfolio volatility in returns (aka the price variation vineviz talks about) causes us to be shy of long bonds even given the rational suggestion to hold them. A compromise is total bond index investing or backing off and holding intermediate bond funds.

I agree holding cash or short bonds except for short term spending such as that Social Security bridge, seems not indicated for long term investors.

I have ended up in intermediate Treasuries and intermediate TIPS over last couple of decades and for the extended future.

Each investor, of course, pays their money and takes their choice.
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Re: Long Bonds in retirement - curiosity...

Post by NiceUnparticularMan »

My two cents is bonds are specialized tools designed to address specific needs, so you have to evaluate your needs when deciding on which bonds, if any, to buy.

Long term bonds provide unexpected deflation insurance, so that is one possible use.

Long term bonds also provide far future incoming cash flows, which can be used to provide for expected far future outgoing cash flows.

The immediate problem for personal investors is most of our far future outgoing cash flows are not very predictable in nominal terms, so it is pretty tricky using nominal long bonds for that purpose as to personal investors.

But of course there are inflation-adjusted long bonds. Even then, the inflation formula may not be quite right, and there is a significant cost to the inflation insurance, and you can get burned if you unexpectedly need more than you predicted earlier than predicted, and so on. At least in theory, though, they are a possible tool for at least providing for your more predictable far future outgoing cash flows.
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Re: Long Bonds in retirement - curiosity...

Post by Explorer »

I am no expert, but like you I am close to retirement.

I do not hold any long bonds and do not intend to at this time. The risk/reward is not in their favor.

I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.

Good luck.
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
"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: Long Bonds in retirement - curiosity...

Post by willthrill81 »

vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
While you're correct, this is potentially the most counter-intuitive effect in the realm of investing that I've come across.
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Re: Long Bonds in retirement - curiosity...

Post by DaufuskieNate »

While we can always ruminate about the CPI index, a laddered TIPs portfolio probably comes closest to locking in future consumption which was pointed out as the most important thing above. It's not about how much money you have in the future, it's about how many cheeseburgers you can buy with that money.
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

willthrill81 wrote: Sun May 16, 2021 10:06 am
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
While you're correct, this is potentially the most counter-intuitive effect in the realm of investing that I've come across.
It is definitely very high in the counter-intuitiveness scale.

Diversification is the only topic that routinely gives this one a run for its money .
"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: Long Bonds in retirement - curiosity...

Post by NiceUnparticularMan »

DaufuskieNate wrote: Sun May 16, 2021 10:16 am While we can always ruminate about the CPI index, a laddered TIPs portfolio probably comes closest to locking in future consumption which was pointed out as the most important thing above. It's not about how much money you have in the future, it's about how many cheeseburgers you can buy with that money.
Yeah, of the risks associated with such an approach to pre-funding future consumption, I'd say the far bigger risk is not the inflation measure, but getting the timing wrong. Cheeseburgers are pretty easy. Something like wanting to help a relative in sudden need? Including possibly even an unexpected move? That sort of thing could really throw off an anticipated consumption schedule.
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Re: Long Bonds in retirement - curiosity...

Post by DaufuskieNate »

NiceUnparticularMan wrote: Sun May 16, 2021 10:31 am Yeah, of the risks associated with such an approach to pre-funding future consumption, I'd say the far bigger risk is not the inflation measure, but getting the timing wrong. Cheeseburgers are pretty easy. Something like wanting to help a relative in sudden need? Including possibly even an unexpected move? That sort of thing could really throw off an anticipated consumption schedule.
I would add divorce, which is becoming more common in retirement, to the list. Some risks can really only be handled with the emotional strength and mental acuity needed to switch to Plan B.
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Re: Long Bonds in retirement - curiosity...

Post by YRT70 »

vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
Why is that? I was indeed expecting the opposite.
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Re: Long Bonds in retirement - curiosity...

Post by NiceUnparticularMan »

DaufuskieNate wrote: Sun May 16, 2021 10:42 am
NiceUnparticularMan wrote: Sun May 16, 2021 10:31 am Yeah, of the risks associated with such an approach to pre-funding future consumption, I'd say the far bigger risk is not the inflation measure, but getting the timing wrong. Cheeseburgers are pretty easy. Something like wanting to help a relative in sudden need? Including possibly even an unexpected move? That sort of thing could really throw off an anticipated consumption schedule.
I would add divorce, which is becoming more common in retirement, to the list. Some risks can really only be handled with the emotional strength and mental acuity needed to switch to Plan B.
Yeah, life has a way of interfering with long term plans.

Just to be clear, though, I am not necessarily against some use of TIPS ladders and such. But I do think life is too unpredictable to make that the whole plan (subject to the normal caveat that if you are wealthy enough, then it just doesn't matter).
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Re: Long Bonds in retirement - curiosity...

Post by Explorer »

vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
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Beensabu
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Re: Long Bonds in retirement - curiosity...

Post by Beensabu »

Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
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Re: Long Bonds in retirement - curiosity...

Post by dbr »

Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
An example of reinvestment risk coming home to roost these days is the holder of a no duration risk CD finding that when the 5% CD renews the new interest rate is 1% with no sign on the horizon of that changing any time soon -- or not.
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Re: Long Bonds in retirement - curiosity...

Post by Explorer »

Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
Fair. But, shifting to short bond does NOT increase interest rate risk.
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Re: Long Bonds in retirement - curiosity...

Post by Beensabu »

Explorer wrote: Sun May 16, 2021 8:35 pm
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
Fair. But, shifting to short bond does NOT increase interest rate risk.
¯\_(ツ)_/¯

Here is what vineviz has said about it before:

viewtopic.php?p=5493632#p5493632
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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willthrill81
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Re: Long Bonds in retirement - curiosity...

Post by willthrill81 »

Explorer wrote: Sun May 16, 2021 8:35 pm
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
Fair. But, shifting to short bond does NOT increase interest rate risk.
Yes, it does. Interest rate risk is viewed by many as only being price risk (i.e., the risk that an increase in interest rates results in a reduction in the market value of your remaining bond principal), but there is another equal component to interest rate risk: reinvestment risk (i.e., the risk that an investor will not be able to reinvest cash flows at a rate at least equal to the current rate of return). These two risks are minimized when the investor's remaining time horizon is matched to the duration of their fixed income holdings. So unless your time horizon is very short, shifting to short term bonds, by definition, increases interest rate risk.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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vineviz
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

Explorer wrote: Sun May 16, 2021 8:35 pm
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
Fair. But, shifting to short bond does NOT increase interest rate risk.
It does, because of what dbr just explained. When you own short-term bonds but have a long-term investment goal, interest rate risk takes the form of reinvestment risk: if yields fall you'll be forced to reinvest the interest in lower yielding bonds, causing your total return to be less than expected. Getting less-than-expected returns as a result of a change in interest rates is the very definition of interest rate risk.
"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: Long Bonds in retirement - curiosity...

Post by rossington »

vineviz wrote: Sun May 16, 2021 9:19 pm
It does, because of what dbr just explained. When you own short-term bonds but have a long-term investment goal, interest rate risk takes the form of reinvestment risk: if yields fall you'll be forced to reinvest the interest in lower yielding bonds, causing your total return to be less than expected. Getting less-than-expected returns as a result of a change in interest rates is the very definition of interest rate risk.
For a long term investment stock index funds are what should be advocated here for growth unless one has at least 200k - 300k invested in bonds otherwise the total return argument is moot. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors. Interest rate and reinvestment risk are mitigated as the fund's assets are adjusted over it's average duration.
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

rossington wrote: Mon May 17, 2021 5:41 am. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors.
Bonds (usually) have that EFFECT in a portfolio but that is not their PURPOSE in a portfolio.

Total bond market funds might be an okay choice for most investors but it is far from an ideal choice.
"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: Long Bonds in retirement - curiosity...

Post by climber2020 »

How do people here accurately determine when they will need to withdraw from their bond allocation?
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Re: Long Bonds in retirement - curiosity...

Post by grok87 »

DaufuskieNate wrote: Sun May 16, 2021 10:16 am While we can always ruminate about the CPI index, a laddered TIPs portfolio probably comes closest to locking in future consumption which was pointed out as the most important thing above. It's not about how much money you have in the future, it's about how many cheeseburgers you can buy with that money.
Agree
RIP Mr. Bogle.
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

climber2020 wrote: Mon May 17, 2021 6:06 am How do people here accurately determine when they will need to withdraw from their bond allocation?
Usually the thing you want to determine is the average time it will be until you make your future portfolio withdrawals. For retirement planning, this might be as simple as finding the mid-point between your retirement date and the date you'll turn 95.

This thread might be useful as well: A very basic explanation of "investment horizon"
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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daacrusher2001
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Re: Long Bonds in retirement - curiosity...

Post by daacrusher2001 »

vineviz wrote: Mon May 17, 2021 5:52 am
rossington wrote: Mon May 17, 2021 5:41 am. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors.
Total bond market funds might be an okay choice for most investors but it is far from an ideal choice.
This is sort of why I was asking about LTT - and I should be clear, I'm talking about a LTT fund, not individual bonds. When you say BND is far from ideal, can you elaborate? Keep in mind that very soon I will retire, at 62, and I'm planning for 30 years [optimistically]. Would I be better off using something other than BND and why?
Explorer
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Re: Long Bonds in retirement - curiosity...

Post by Explorer »

Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
NO. I am not betting on anything. I am controlling NAV loss in a TBM or LT bonds if the current narrative of higher interest rates in fact comes true. If the narrative doesn't come true and the rates go lower (meaning economy is not as strong as assumed), the stocks will have a bad day/month/year.

There is an implicit assumption you are making that the bond fund is a buy-and-hold. Am I correct? I am not making that assumption. I want my portfolio to react to expected market conditions... call it tactical allocation.
UpperNwGuy
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Re: Long Bonds in retirement - curiosity...

Post by UpperNwGuy »

Explorer wrote: Mon May 17, 2021 7:46 am
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
NO. I am not betting on anything. I am controlling NAV loss in a TBM or LT bonds if the current narrative of higher interest rates in fact comes true. If the narrative doesn't come true and the rates go lower (meaning economy is not as strong as assumed), the stocks will have a bad day/month/year.

There is an implicit assumption you are making that the bond fund is a buy-and-hold. Am I correct? I am not making that assumption. I want my portfolio to react to expected market conditions... call it tactical allocation.
Why are you focusing on NAV instead of on total return?
Explorer
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Re: Long Bonds in retirement - curiosity...

Post by Explorer »

UpperNwGuy wrote: Mon May 17, 2021 8:01 am
Explorer wrote: Mon May 17, 2021 7:46 am
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am

This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
NO. I am not betting on anything. I am controlling NAV loss in a TBM or LT bonds if the current narrative of higher interest rates in fact comes true. If the narrative doesn't come true and the rates go lower (meaning economy is not as strong as assumed), the stocks will have a bad day/month/year.

There is an implicit assumption you are making that the bond fund is a buy-and-hold. Am I correct? I am not making that assumption. I want my portfolio to react to expected market conditions... call it tactical allocation.
Why are you focusing on NAV instead of on total return?
Again, I think you are assuming buy-and-hold for liability matching? I am not... so I focus on how I control risk in bond funds if in fact the interest rates rise. I know I am giving up upside if rates go down but that is fine. Sorry.. not trying to argue.
NiceUnparticularMan
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Re: Long Bonds in retirement - curiosity...

Post by NiceUnparticularMan »

vineviz wrote: Mon May 17, 2021 5:52 am
rossington wrote: Mon May 17, 2021 5:41 am. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors.
Bonds (usually) have that EFFECT in a portfolio but that is not their PURPOSE in a portfolio.

Total bond market funds might be an okay choice for most investors but it is far from an ideal choice.
Yeah, my feeling is bonds, and contracts for payment in general (of which bonds are a type), are all special-purpose tools, used by different types of entities for different purposes.

And so if your particular financial plan would benefit from you specifically buying a sledge hammer and a coping saw (meaning specific types of instruments that fit your specific purposes), but you buy Total Bond instead, it is sort of like going to the hardware store and just asking them to give you a piece of every tool they have sold to every buyer that day. Even though many are very different buyers from you, buying tools for different purposes.

That said, Total Bond may work well enough for many personal investors anyway. But that is a sort of happy coincidence based on what Total Bond ends up looking like in practice. And in extreme scenarios, the gap between Total Bond and the contracts for payment you might have optimally bought could expand.
Last edited by NiceUnparticularMan on Mon May 17, 2021 10:19 am, edited 1 time in total.
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vineviz
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

Explorer wrote: Mon May 17, 2021 8:32 am I know I am giving up upside if rates go down but that is fine. Sorry.. not trying to argue.
And this is the bet you're making. Which is fine: that's your decision to make.

Whether we call it "market timing", "gambling", or "tactical allocation" doesn't change the underlying nature of the decision.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
NiceUnparticularMan
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Re: Long Bonds in retirement - curiosity...

Post by NiceUnparticularMan »

climber2020 wrote: Mon May 17, 2021 6:06 am How do people here accurately determine when they will need to withdraw from their bond allocation?
They can't. Not as stated.

I mean if you have a fixed obligation like a mortgage or something like that, you can figure out what bonds would match your mortgage payments. Even then, though, a mortgage typically allows for prepayment at will. And in practice, people often end up using that option, including in cases when they unexpectedly move.

So accurately determining future cash flows isn't really possible. But what people can do is try to estimate at least some of their future cash flow needs, and then put together bonds and other contracts for payment that will match those estimates. But, those estimates could prove wrong, and often do in fact, because life is like that.

Personally, this is the sort of issue that pushes me toward not really having much interest in nominal bonds. In fact, in terms of providing for my inherently uncertain future cash flow needs, I prefer to maintain a lot of flexibility, which points toward instruments which in one way or another have a stable liquidation value.

The problem is marketable securities, funds, accounts, and so on like that predictably have poor returns that will probably not keep up with inflation in the long run. However, there are sometimes non-marketable instruments available to personal investors which have better inflation characteristics AND stable values (subject to some qualifications). And so generally I prefer those to bonds for the purpose of providing against my uncertain future cash flow needs, to the extent possible.
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Re: Long Bonds in retirement - curiosity...

Post by grok87 »

daacrusher2001 wrote: Mon May 17, 2021 7:19 am
vineviz wrote: Mon May 17, 2021 5:52 am
rossington wrote: Mon May 17, 2021 5:41 am. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors.
Total bond market funds might be an okay choice for most investors but it is far from an ideal choice.
This is sort of why I was asking about LTT - and I should be clear, I'm talking about a LTT fund, not individual bonds. When you say BND is far from ideal, can you elaborate? Keep in mind that very soon I will retire, at 62, and I'm planning for 30 years [optimistically]. Would I be better off using something other than BND and why?
what about long term tips? because it is a closer match to the the spending needs you might have in retirement. Most people's spending needs are inflation sensitive.
RIP Mr. Bogle.
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vineviz
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

daacrusher2001 wrote: Mon May 17, 2021 7:19 am
vineviz wrote: Mon May 17, 2021 5:52 am
rossington wrote: Mon May 17, 2021 5:41 am. Bonds act as a cushion for falling stock values thus a TBM fund gives a well diversified option for this to all investors.
Total bond market funds might be an okay choice for most investors but it is far from an ideal choice.
This is sort of why I was asking about LTT - and I should be clear, I'm talking about a LTT fund, not individual bonds. When you say BND is far from ideal, can you elaborate? Keep in mind that very soon I will retire, at 62, and I'm planning for 30 years [optimistically]. Would I be better off using something other than BND and why?
Your goal should be to approximately match the duration of your bonds to your investment horizon. It sounds like your investment horizon is roughly 15 years, so that tells you that your bonds should have a duration of roughly that length of time. Most long-term bond funds will have a duration of around 15 years, so that leaves lots of choices.

In most cases, the natural choice would be some combination of long-term nominal Treasury bonds and long-term TIPS. However, it really depends on the overall composition of the portfolio, your withdrawal rate, how much of your spending is covered by Social Security and/or pensions with a cost-of-living increase, etc.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
abc132
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Re: Long Bonds in retirement - curiosity...

Post by abc132 »

Some food for thought...

I would be careful of the advice that you get here, and think about what it actually means when someone recommends matching duration with expected use. At age 62, your average life expectancy is 82 (male) or 85 (female). If you hop fully into a long term fund with 18 year duration, that could mean needing to start reducing your long term bond exposure within a few years. Matching duration is done by selling some of the asset when you get within that 18 years, so that the amount that remains still has 18 years before it is needed. Think about whether having to start selling an 18 year duration asset in the next few years increases or reduces risk.

Please take the time to think about your personal physical health, and if you have an above or below average life expectancy. Think about 15 years from now, and if you are likely to have the mental ability to continually reduce your long term bond exposure.

I don't think we have the information to actually give you good advice, so I would be cautious about the advice that has been given to you. I suspect that while having some long term bonds might make sense for you, replacing ALL midterm with long term is unlikely to be the best decision. The additional caveat is that if you will sell something when its price is down, or look at volatility of the individual asset rather than the portfolio, long term bonds may not be for you. It's okay to invest in a bit suboptimal manner if it increases your quality of life. A "good enough" plan is good enough for many. Intermediate bonds classify as "good enough" for many here.
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Beensabu
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Re: Long Bonds in retirement - curiosity...

Post by Beensabu »

Explorer wrote: Mon May 17, 2021 7:46 am
Beensabu wrote: Sun May 16, 2021 8:25 pm
Explorer wrote: Sun May 16, 2021 7:51 pm
vineviz wrote: Sun May 16, 2021 10:03 am
Explorer wrote: Sun May 16, 2021 9:51 am I am actually substituting some of my total bond funds with short-term bond funds.. this is to reduce the duration risk of my bond portion.
This actually has the effect of INCREASING the interest rate risk of the portfolio, which is the opposite of what most investors think they are achieving.
I am not buying your assertion.. unless you explain in simple terms.
It's reinvestment risk. You're betting that short-term rates will go up enough soon enough (and stay that way) that rolling over short-term bonds will have you better off than accepting the long-term rate that you know will give you $X at Y date.
NO. I am not betting on anything. I am controlling NAV loss in a TBM or LT bonds if the current narrative of higher interest rates in fact comes true. If the narrative doesn't come true and the rates go lower (meaning economy is not as strong as assumed), the stocks will have a bad day/month/year.
I understand. This is why many people have done what you have done.
There is an implicit assumption you are making that the bond fund is a buy-and-hold. Am I correct?
Yes.
I am not making that assumption. I want my portfolio to react to expected market conditions... call it tactical allocation.
The expected market conditions being rising mid- to long-term rates over the next 1-3 years or so, yes?

You are making a bet based on expected market conditions. That is what tactical asset allocation is. It's okay. You do what you want to do.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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vineviz
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Re: Long Bonds in retirement - curiosity...

Post by vineviz »

abc132 wrote: Mon May 17, 2021 2:19 pm Think about whether having to start selling an 18 year duration asset in the next few years increases or reduces risk.
Hint: the correct answer is b) reduces risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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daacrusher2001
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Re: Long Bonds in retirement - curiosity...

Post by daacrusher2001 »

abc132 wrote: Mon May 17, 2021 2:19 pm Some food for thought...

I would be careful of the advice that you get here, and think about what it actually means when someone recommends matching duration with expected use. At age 62, your average life expectancy is 82 (male) or 85 (female). If you hop fully into a long term fund with 18 year duration, that could mean needing to start reducing your long term bond exposure within a few years. Matching duration is done by selling some of the asset when you get within that 18 years, so that the amount that remains still has 18 years before it is needed. Think about whether having to start selling an 18 year duration asset in the next few years increases or reduces risk.

Please take the time to think about your personal physical health, and if you have an above or below average life expectancy. Think about 15 years from now, and if you are likely to have the mental ability to continually reduce your long term bond exposure.

I don't think we have the information to actually give you good advice, so I would be cautious about the advice that has been given to you. I suspect that while having some long term bonds might make sense for you, replacing ALL midterm with long term is unlikely to be the best decision. The additional caveat is that if you will sell something when its price is down, or look at volatility of the individual asset rather than the portfolio, long term bonds may not be for you. It's okay to invest in a bit suboptimal manner if it increases your quality of life. A "good enough" plan is good enough for many. Intermediate bonds classify as "good enough" for many here.
Thanks for the feedback...I'm a 62yr old male, in very good health - of course, that's right now, who knows how things will go. Honestly, I'm more concerned with doing anything too complex for two reasons - cognitive ability down the road, and my wife's ability to manage things should she outlive me. In fact, I've been considering just cash and a balanced fund so there is really nothing for my wife to manage. Investing is just not her thing - so simpler is better.

Perhaps just luck, but total bond has been a good investment for me over time. I wouldn't do a wholesale swap of total bond for LTT. I was mainly wondering if it's recommended to have a portion of my fixed income assets in long term treasuries and why.

I appreciate all the feedback from everyone.
abc132
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Re: Long Bonds in retirement - curiosity...

Post by abc132 »

daacrusher2001 wrote: Mon May 17, 2021 3:00 pm
abc132 wrote: Mon May 17, 2021 2:19 pm Some food for thought...

I would be careful of the advice that you get here, and think about what it actually means when someone recommends matching duration with expected use. At age 62, your average life expectancy is 82 (male) or 85 (female). If you hop fully into a long term fund with 18 year duration, that could mean needing to start reducing your long term bond exposure within a few years. Matching duration is done by selling some of the asset when you get within that 18 years, so that the amount that remains still has 18 years before it is needed. Think about whether having to start selling an 18 year duration asset in the next few years increases or reduces risk.

Please take the time to think about your personal physical health, and if you have an above or below average life expectancy. Think about 15 years from now, and if you are likely to have the mental ability to continually reduce your long term bond exposure.

I don't think we have the information to actually give you good advice, so I would be cautious about the advice that has been given to you. I suspect that while having some long term bonds might make sense for you, replacing ALL midterm with long term is unlikely to be the best decision. The additional caveat is that if you will sell something when its price is down, or look at volatility of the individual asset rather than the portfolio, long term bonds may not be for you. It's okay to invest in a bit suboptimal manner if it increases your quality of life. A "good enough" plan is good enough for many. Intermediate bonds classify as "good enough" for many here.
Thanks for the feedback...I'm a 62yr old male, in very good health - of course, that's right now, who knows how things will go. Honestly, I'm more concerned with doing anything too complex for two reasons - cognitive ability down the road, and my wife's ability to manage things should she outlive me. In fact, I've been considering just cash and a balanced fund so there is really nothing for my wife to manage. Investing is just not her thing - so simpler is better.

Perhaps just luck, but total bond has been a good investment for me over time. I wouldn't do a wholesale swap of total bond for LTT. I was mainly wondering if it's recommended to have a portion of my fixed income assets in long term treasuries and why.

I appreciate all the feedback from everyone.

One of the great things here is all of the informed investors, but there simply is not one correct answer to personal finance. The correct answer depends on you and how you value these alternatives. Is the additional complexity worth the benefit?

Good luck!
abc132
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Re: Long Bonds in retirement - curiosity...

Post by abc132 »

vineviz wrote: Mon May 17, 2021 2:51 pm
abc132 wrote: Mon May 17, 2021 2:19 pm Think about whether having to start selling an 18 year duration asset in the next few years increases or reduces risk.
Hint: the correct answer is b) reduces risk.
If what you suggest was true, duration matching would always be detrimental.

If what I suggest is true, any plan that requires buying and selling long term bonds before their duration has to consider the desirable vs undesirable effect on the portfolio. How early this happens would be crucial to the best decision.
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