Zero bonds at 38 yo... and no plans to buy any

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MrNewEngland
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Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Mon Jul 04, 2016 2:33 pm

Just as the title says but I'll explain my thoughts. I want to know if you see any reasons to get away from my current strategy.

I have been working as a Civil Engineer for the city I live in since I was 25 (I did leave for a year and come back). Because of this I could retire at 56 with 30 years of service at about 60% of my final salary. There are cost of living increases in the pension.

I look at this as my "stable" investment so I keep the money I put into my 401k/IRA/457 in index funds that are 100% equities (mostly "total stock" funds or S&P 500 funds).

I consider myself further diversified by the fact that I own my house I live in and a rental property that I used to live in.

I'd love to hear BH's thoughts on this line of thinking and opinions if I should add some bonds. I figure I will buy some when I get very close to retirement (unless the market has just crashed).

I appreciate any posts on this matter.

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Phineas J. Whoopee
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Phineas J. Whoopee » Mon Jul 04, 2016 2:36 pm

What is your purpose, or purposes, for your portfolio? What objectives do you intend it to meet, or problems to solve? The first step in deciding what to do is to decide what one is trying to accomplish.

For really good answers you might post in our Asking Portfolio Questions format.

PJW

letsgobobby
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by letsgobobby » Mon Jul 04, 2016 2:43 pm

left tail risk would be your company pension exhausts its resources at the same time the stock market crashes 50% - and those two events are not totally independent variables. Less dramatically, the company could stop making contributions to the pension, grandfathering existing benefits but not adding new ones, in a time of particular stress - like when the stock market crashes 50% and you lose your job. Would you be comfortable with your situation if these events transpired?

In general, thinking of a secure pension that meets most or all of your income needs, especially if COLA, as your fixed income is not completely irrational. The devil is in the details.

I would probably not be comfortable at 100/0, but might live with 80/20.

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Watty
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Watty » Mon Jul 04, 2016 2:44 pm

Phineas J. Whoopee wrote:For really good answers you might post in our Asking Portfolio Questions format.

PJW


+1

You didn't even say how old you are now.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by qwertyjazz » Mon Jul 04, 2016 2:47 pm

You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by livesoft » Mon Jul 04, 2016 2:49 pm

I'm surprised by this thread. Usually such "no bonds for me" threads occur when bond funds have very minor losses and equities are doing great. But this thread appeared when bond funds are doing better than equity funds.

Bond funds are up more than 5% YTD which is better than the S&P 500. Plus at least one person exchanged from bond funds to equity funds on Monday and gained another 5% in a few days, so up 10% already this year for that money.

So bond funds are useful if you use them as they were meant to be used for rebalancing purposes. That's one reason why some portfolios with a little bit of bonds do better than 100% equity portfolios. I think the OP should do the research on this kind of rebalancing.
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MrNewEngland
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Mon Jul 04, 2016 2:55 pm

Fair enough, I'll give some more details but it won't be perfect as I am posting from my phone.

I am 38 years old and in the 25% bracket and I think NC is 5%.

I do have six months worth of emergency funds saved up.

I have no consumer debt, no car loans, and no student loans anymore. I just have the two mortgages on the real estate mentioned above.

When I left the city for that year I rolled all my retirement money into IRAs. Most my money is in either VTI or VOO, although I am about 10-15% in international funds. I should also note that about 75% of my retirement money (besides the pension fund) is in Roth money. All the money I'm now putting in my 401k/IRA/457 is in Roth, besides the city's match of 3%.

As for what my "goal" is for this money it's to be able to retire at 56 with financial independence, and to me that's to retire with 100% of my salary replaced. That'll actually put me ahead of where I am now. If there's a downturn in the market and I have to work a few extra years I am ok with that (or I should say that I am right now).

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whodidntante
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by whodidntante » Mon Jul 04, 2016 3:06 pm

Make sure you are actually as risk tolerant as you think you are. It's really something to lose half of a million dollars in an environment where you are constantly shelled by negative news. And someday, you might.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Ron Ronnerson » Mon Jul 04, 2016 5:41 pm

I think a factor to consider is how much you have in your portfolio. I'm a public school teacher and am expecting a pension at age 60 that is 70% of my highest year's income. I was at 100% equities until age 40. I'm approaching 42 and have gone to 20% bonds for a few reasons: I'm a bit closer to retirement, my portfolio has grown so a big drop in the stock market would be harder to deal with than when I had less invested, and I've also come to see that having some bonds increases diversification and reduces volatility without dramatically reducing returns so it makes sense to have some bonds. I'd reconsider the 0% bonds stance. Maybe start with 5% bonds and slowly raise it a bit. I've done it and can tell you it's really not so bad. I think in cases like yours and mine, being heavier in equities compared to those without pensions is fine. However, 100% is very aggressive and a big drop in equities could turn out to be something you come to regret.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by smitty1515 » Mon Jul 04, 2016 7:07 pm

I'm 34 and I have 0% allocation to bonds. I know that my portfolio (all equities with small cap tilt) has a higher standard deviation thus volatility but I also realize I am not retiring, nor will I be touching this money for 25-30 years. I'm aware 1 of 3 years can be a bear and the 37% drop in the S&P 500 in the fall 2008 is still on my mind. Having said that, I'm not changing my AA b/c I'm a believer that taking a little more risk will provide more reward.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Lafder » Mon Jul 04, 2016 7:50 pm

Bonds give you a place to rebalance from in stock market crashes and buy stocks on sale.

A 50% stock market crash requires a 100% gain to get back to where it started.

If 100% stocks beat any % bonds consistently, everyone would do it. The thing is some % of bonds beats 100% stocks, I just do not know the % since it depends on the market performance.

Look at tables of % stocks /bonds and returns over years. Bonds buffer drops more than they slow down gains.

But............if 100% stock feels best for you and you will be able to sleep well at night, do what feels right for you with your money :)

Most importantly, whatever % stocks you decide on, don't panic and sell stocks low during market drops. That is the best time to buy stocks, or just sit back and watch.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by obgraham » Mon Jul 04, 2016 8:43 pm

I don't have a big problem with low or zero bond allocation at age 38. Perhaps not so smart at 50.

If you're "all stock", you will likely, in the long run, do very well. But there's a very good chance you'll go through a sleepless time when things nosedive. It's all great to say now you can live with that, but when it really happens and your portfolio is significant, things will be different. As current things show, it can take many years to recoup market losses.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Lou354 » Mon Jul 04, 2016 8:53 pm

whodidntante wrote:Make sure you are actually as risk tolerant as you think you are. It's really something to lose half of a million dollars in an environment where you are constantly shelled by negative news. And someday, you might.

MrNewEngland,
Do you recall what your asset allocation was in 2007? How did you respond when the market crashed in 2008-2009?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Grogs » Mon Jul 04, 2016 9:05 pm

So, have you actually qualified for the pension? Meaning, if you left the job today, could you at some future point receive a pension based on your years of service so far. If so, I think it's reasonable to consider it when planning your AA. If not, then I believe you're counting your chickens before they hatch. Your job could be eliminated, they could decide to save money by replacing you with a 22 year old straight out of school, etc. If you somehow have a crystal ball and know you will be able to work until 56, then fine, but simply assuming you'll be able to and basing your financial decisions on that assumption seems irresponsible.

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siamond
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by siamond » Mon Jul 04, 2016 9:12 pm

Between the pension and the large emergency fund, you're probably far from 100% equities, if we count like John Bogle would.

Having no debt at 38 is impressive. Your plan is perfectly fine if you're able to hold steady... If you did in 2008, then kudos, this should give you the proper fortitude for the next dive.

Out of curiosity, what is your EF made of?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Dandy » Mon Jul 04, 2016 10:01 pm

You are in pretty good shape so pushing equities to a very high level even if you aren't in your early 20's makes some sense. You do have awhile to reach normal retirement age and a lot can happen. For example you life and work for the same city and maybe have the rental property there too. Something goes wrong and you may have a very concentrated but rare risk.

Pensions are under attack almost everywhere and state and city pensions used to be sacred -- not anymore. I believe Michigan had written into its state constitution that state pensions were somehow very protected as far as funding. Court said Fed bankruptcy laws override the state constitution. Many states have very, very large underfunded pensions as do many corporations. So don't count your chickens yet. I have 2 pensions from major corporations and fully expect not to have at least one if I live to age 85. Just too much pressure to reduce cost and once on company does it -- it becomes a race to the bottom to satisfy shareholders or shareholder activists.

Your allocation should ideally be related to your need to take risk also. You may not want to have your very large portfolio at age 50 cut in half due to a 2008-9 type plunge and maybe not have such a quick and strong recovery. I worked for a large very successful firm who had its stock go from 120 to 8. last I looked it was in the mid 30's after 8 years. I saw several of my co workers that were riding high until then and saw their retirement dreams shattered. Some, like me, lost their job. But I was fortunate to have just started a pension from another firm and had a very balanced portfolio. So my retirement dreams have been realized.

Finally, not many investment guru's recommend 100% stocks, some may but you are pushing the envelope a bit. Do you have a retirement asset number you are trying to hit? If so, do you need to be that aggressive to hit it? If not, why take the maximum risk?

NMJack
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by NMJack » Mon Jul 04, 2016 10:55 pm

OP - I think you're in great shape and would not recommend you change anything. It is like a breath of fresh air here on the forum to see somebody who has invested in themselves (CE degree) and found a good job (working for the city) to be willing to actually COMMIT to a profitable long term investment (100% stocks).

Your situation is very familiar to me. In fact, I just might be your "future self." :sharebeer

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catdude
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by catdude » Tue Jul 05, 2016 12:34 am

I agree with Dandy, it's probably best not to rely too heavily on that pension. Pensions (particularly those that are COLA'd) are budget-busters for state and local governments. I get a pension from a municipal government that's AAA-rated and located in an affluent part of the country. So I'm probably safe. But I have to consider the possibility that I may have to take a pension haircut someday. My nest egg is insurance against that happening, so I'm not drawing it down at all... I'm basically living off my pension. And my asset allocation is fairly conservative -- 45% stocks/50% bonds/5% cash...
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EnjoyIt
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by EnjoyIt » Tue Jul 05, 2016 1:00 am

obgraham wrote:I don't have a big problem with low or zero bond allocation at age 38. Perhaps not so smart at 50.

If you're "all stock", you will likely, in the long run, do very well. But there's a very good chance you'll go through a sleepless time when things nosedive. It's all great to say now you can live with that, but when it really happens and your portfolio is significant, things will be different. As current things show, it can take many years to recoup market losses.


This right here. it is one thing to make $100k/yr, have a $100k portfolio and have it drop 50% by $50k while you have another 20 years to still keep working. It is completely something else if you are still making $100k, have $800k and it drops by 50% having you lose $400k with only 5 more years of work before retirement. The former I would shrug off and move on, the later would scare the crap out of me.

MrNewEngland
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 7:53 am

OP here, thank you for all the thoughtful replies. I have a lot of respect for this site and value the opinions of BHs. I will try to answer a few questions and provide clarity.


Lou354 wrote:
whodidntante wrote:Make sure you are actually as risk tolerant as you think you are. It's really something to lose half of a million dollars in an environment where you are constantly shelled by negative news. And someday, you might.

MrNewEngland,
Do you recall what your asset allocation was in 2007? How did you respond when the market crashed in 2008-2009?


I got my first fairly big promotion in 2007 so it was the first time I was making much more than "entry level" money. I had been contributing to my 401k but just a standard 10% and had the AA on what I considered autopilot. The crash in 2008 fascinated me and got me to really research and learn more about finances. As it was crashing I kept increasing my contributions and have kept it as high as possible ever since.

I think I am very risk tolerant but I haven't really been tested yet as I didn't have all that much to lose in 2008.


Grogs wrote:So, have you actually qualified for the pension? Meaning, if you left the job today, could you at some future point receive a pension based on your years of service so far. If so, I think it's reasonable to consider it when planning your AA. If not, then I believe you're counting your chickens before they hatch. Your job could be eliminated, they could decide to save money by replacing you with a 22 year old straight out of school, etc. If you somehow have a crystal ball and know you will be able to work until 56, then fine, but simply assuming you'll be able to and basing your financial decisions on that assumption seems irresponsible.


I am vested in the pension, so I could do one of two things if I was let go: I could collect a much smaller pension when I am 60 or I could roll my contributions out of it. Employees contribute 6% to the pension and it's tracked on a website. That 6% grows at an annual rate of 4% and if the money is withdrawn, forgoing the pension, that is what we're paid.


siamond wrote:Between the pension and the large emergency fund, you're probably far from 100% equities, if we count like John Bogle would.

Having no debt at 38 is impressive. Your plan is perfectly fine if you're able to hold steady... If you did in 2008, then kudos, this should give you the proper fortitude for the next dive.

Out of curiosity, what is your EF made of?


Two things: I do have debt, it's just the two mortgages though. I guess I worded that in a confusing way. My EF is in a brokerage account and is in index funds. I know this is risky and not recommended but I made a calculated choice by doing this. I may make this all bonds after reading these posts.


Dandy wrote:Finally, not many investment guru's recommend 100% stocks, some may but you are pushing the envelope a bit. Do you have a retirement asset number you are trying to hit? If so, do you need to be that aggressive to hit it? If not, why take the maximum risk?


I know a ballpark number I want to hit. Like I said above I want to retire at 100% of my income. Since the pension will cover 60% I will need to replace 40% of my income. If I retire at 56 that's fairly young so I calculate "the number" with a 3% withdrawal rate.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 7:58 am

NMJack wrote:OP - I think you're in great shape and would not recommend you change anything. It is like a breath of fresh air here on the forum to see somebody who has invested in themselves (CE degree) and found a good job (working for the city) to be willing to actually COMMIT to a profitable long term investment (100% stocks).

Your situation is very familiar to me. In fact, I just might be your "future self." :sharebeer


Are you retired yet or fairly close? Just curious how this plan worked out for you.


johnny wrote:I get a pension from a municipal government that's AAA-rated and located in an affluent part of the country. So I'm probably safe. But I have to consider the possibility that I may have to take a pension haircut someday. My nest egg is insurance against that happening, so I'm not drawing it down at all... I'm basically living off my pension. And my asset allocation is fairly conservative -- 45% stocks/50% bonds/5% cash...


If you don't mind my asking: what percentage of your ending pay does the pension cover? Have you found it hard to retire on that amount? Do you travel much on that pension (not drawing from your nest egg)?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 8:00 am

siamond wrote:Between the pension and the large emergency fund, you're probably far from 100% equities, if we count like John Bogle would.


This was kind of what I was getting at in terms of my original question. Having a percentage of money in bonds is usually to diversify and to keep your net worth from swaying too much... but my thought are that the pension and real estate do that for me.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 8:05 am

qwertyjazz wrote:You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.


This is actually a major concern of mine. I am in Charlotte, NC and even though I love it here and it's a fairly affluent city I do worry about what would happen if the banks left. My real estate values would crumble and my job would probably be a first to be cut if growth stopped. But I try not to live in fear, as I don't see options around it. I love working for the city and I believe in owning real estate as a way to develop wealth. I see the risk as justified.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by goingup » Tue Jul 05, 2016 8:16 am

smitty1515 wrote:I'm 34 and I have 0% allocation to bonds. I know that my portfolio (all equities with small cap tilt) has a higher standard deviation thus volatility but I also realize I am not retiring, nor will I be touching this money for 25-30 years. I'm aware 1 of 3 years can be a bear and the 37% drop in the S&P 500 in the fall 2008 is still on my mind. Having said that, I'm not changing my AA b/c I'm a believer that taking a little more risk will provide more reward.

smitty-
Overall that bear market was even more painful. According to Wikipedia, "The US bear market of 2007–2009 was a 17-month bear market that lasted from 9 October 2007 to 9 March 2009, during the financial crisis of 2007-2009. The S&P 500 lost approximately 50% of its value, but the duration of this bear market was just below average due to extraordinary interventions by governments and central banks to prop up the stock market." https://en.wikipedia.org/wiki/United_St ... et_of_2007–09

We are 60/40 largely because I don't want to go through another bear without adequate reserves. Jack Bogle warns to not, "fight the last war", but dang, I can't help it.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by NoVa Lurker » Tue Jul 05, 2016 8:38 am

What many people 'learned' from 2008-2012 was that equities can suffer dramatic fluctuations, including a massive downward spiral that can last a few years, but equities will eventually rebound, so you will be okay if you don't immediately need the money and if you just have the stomach not to sell for those down years.

Of course, this is what happened last time, but it is not what will always happen.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by alex_686 » Tue Jul 05, 2016 8:59 am

MrNewEngland wrote:
qwertyjazz wrote:You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.


This is actually a major concern of mine. I am in Charlotte, NC and even though I love it here and it's a fairly affluent city I do worry about what would happen if the banks left. My real estate values would crumble and my job would probably be a first to be cut if growth stopped. But I try not to live in fear, as I don't see options around it. I love working for the city and I believe in owning real estate as a way to develop wealth. I see the risk as justified.


I am one of those people who consider pension plans to be part of the bond allocation.

I would not consider direct holdings of real estate to be a substitution for bonds but it is a debatable point.

I do have concerns that your portfolio is not diversified. If Charlotte blows up like Detroit you lose both your pension and your real estate.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Chadnudj » Tue Jul 05, 2016 9:04 am

MrNewEngland wrote:I have been working as a Civil Engineer for the city I live in since I was 25 (I did leave for a year and come back). Because of this I could retire at 56 with 30 years of service at about 60% of my final salary. There are cost of living increases in the pension.

I look at this as my "stable" investment so I keep the money I put into my 401k/IRA/457 in index funds that are 100% equities (mostly "total stock" funds or S&P 500 funds).


One question: in addition to your pension did you pay into SS as well? (I know some state/local government jobs do not do so.) If so, that's even extra "relatively safe" money for retirement, that would make your "stocks only" plan even more palatable.

I will say, though, that there are historical periods when bonds out-gain stocks....given that, I think some small allocation to bonds might be advisable even in a case like yours where pension and/or maybe SS could provide much of the retirement income you need.

MrNewEngland
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 9:08 am

Chadnudj wrote:
MrNewEngland wrote:I have been working as a Civil Engineer for the city I live in since I was 25 (I did leave for a year and come back). Because of this I could retire at 56 with 30 years of service at about 60% of my final salary. There are cost of living increases in the pension.

I look at this as my "stable" investment so I keep the money I put into my 401k/IRA/457 in index funds that are 100% equities (mostly "total stock" funds or S&P 500 funds).


One question: in addition to your pension did you pay into SS as well? (I know some state/local government jobs do not do so.) If so, that's even extra "relatively safe" money for retirement, that would make your "stocks only" plan even more palatable.

I will say, though, that there are historical periods when bonds out-gain stocks....given that, I think some small allocation to bonds might be advisable even in a case like yours where pension and/or maybe SS could provide much of the retirement income you need.


I do pay into SS, but I try to use it at a very reduced rate when calculating for my retirement.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 9:09 am

alex_686 wrote: If Charlotte blows up like Detroit you lose both your pension and your real estate.


Sure, but what's the alternative? Quit a job I like? Don't own real estate?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Chadnudj » Tue Jul 05, 2016 9:20 am

MrNewEngland wrote:I do pay into SS, but I try to use it at a very reduced rate when calculating for my retirement.


If government does nothing, SS is still able to meet 70%+ of projected needs out past 2030 or so (and it's highly unlikely government will do nothing, given how central/popular SS is and the relatively easy ways it could be fixed). I'd say that given SS and your pension, you have a sizeable and relatively "safe" income stream in retirement.

But, that's not to say these are the same as "bonds" or that you should go 0% in bonds, for the reasons stated above (i.e. bonds do outgain stocks over certain periods, less volatility in portfolio, rebalancing, etc.), but also because the bonds in your portfolio (unlike your pension/SS for the most part) can be bequested to future generations/charity if that's something you're interested in doing.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by qwertyjazz » Tue Jul 05, 2016 9:26 am

MrNewEngland wrote:
qwertyjazz wrote:You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.


This is actually a major concern of mine. I am in Charlotte, NC and even though I love it here and it's a fairly affluent city I do worry about what would happen if the banks left. My real estate values would crumble and my job would probably be a first to be cut if growth stopped. But I try not to live in fear, as I don't see options around it. I love working for the city and I believe in owning real estate as a way to develop wealth. I see the risk as justified.


It is not about living in fear. This was in response to your comment about the pension and not having bonds. At some point you may want to consider the pension like a single municipality bond. It should just be considered as riskier than a diversified bond fund and should be considered when you are 100% equities in future and whether diversifying into other bond funds make sense. It is not about avoiding risk. It is about diversification and sensible risks given your personal circumstances. That does not necessarily mean bonds now, but it might mean not ruling them out in the future.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by JDCarpenter » Tue Jul 05, 2016 9:46 am

If you are risk tolerant, why not? But statistically, not many people are that risk tolerant.

Luckily, we were right about our tolerance. We didn't own bonds of any type until the past two years (beginning at ages 54/53)--the sole exception was cash reserves built up for our first house and for the proceeds of house 1 to buy house 2. Otherwise, from 1986 through 2014, we were 100% equities, with no pensions.

Still feels strange to be accumulating bond funds, but retirement is looming and we will no longer have the positive cash flow from our two unrelated jobs--and we don't know how we'd react to a 20% plus one-day drop (Oct. 1987), or the slower torture of the tech drop or 2008 in the absence of a paycheck...
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by HomerJ » Tue Jul 05, 2016 10:26 am

MrNewEngland wrote:
alex_686 wrote: If Charlotte blows up like Detroit you lose both your pension and your real estate.


Sure, but what's the alternative? Quit a job I like? Don't own real estate?


The alternative is to not bet everything on Charlotte. Which is what you are doing... Extremely good chance it works out fine, though... but that's not 100%.

Are you vested in your pension yet? What happens if you get laid off 3 years from now?

Do you need huge returns from stocks to retire at 56? Would you likely hit your numbers at 56 even if you had some bonds?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by HomerJ » Tue Jul 05, 2016 10:36 am

NoVa Lurker wrote:What many people 'learned' from 2008-2012 was that equities can suffer dramatic fluctuations, including a massive downward spiral that can last a few years, but equities will eventually rebound, so you will be okay if you don't immediately need the money and if you just have the stomach not to sell for those down years.

Of course, this is what happened last time, but it is not what will always happen.


This.

Every young person I know thinks that markets always bounce back, and always bounce back fast.

There's absolutely no rule of physics that states this. It's definitely possible that the market could crash 50%, and stay down for 5-10 years. Maybe not likely, but certainly possible. And during such a time, one will be more likely to lose one's job.

So I like having a paid-off house, and a bunch of money in CDs and bonds.

I will still make my goal of retiring around 55... I don't NEED to take the extra risk by going 100% stocks, and it lets me sleep at night knowing that even if the Great Depression II happens, and I lose my job, my family will still be warm and fed for many years.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by alex_686 » Tue Jul 05, 2016 10:48 am

MrNewEngland wrote:
alex_686 wrote: If Charlotte blows up like Detroit you lose both your pension and your real estate.


Sure, but what's the alternative? Quit a job I like? Don't own real estate?


Bonds :wink:

That response was a bit facetious but not entirely so. Investment theory suggest that we can actually get higher long term returns by including low return assets if those assets are uncorrelated with each other. You are eschewing the classic low risk diversifier, bonds, for a different set. Pensions are a good substitute for bonds, direct real estate is a interesting substitute. I think it is a poor choice but there is scope for debate.

The issue here is that the pension and the direct real estate are correlated so your portfolio is probably more risky then you think. The obvious answer is to increase your bond allocation. There are other, more esoteric, options out there. Direct holdings of real estate outside of S.C. is the obvious choice from a theoretical perspective. Implementation is another matter. Or just be aware of and accept the risk.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by nedsaid » Tue Jul 05, 2016 10:53 am

You are a brave man.

First, I would check how well funded your pension is. Some public pensions are in trouble. People who have pensions available should be grateful but you need to understand that there is still risk involved. Just imagine being retired and getting a letter that your monthly pension payments are getting cut. Could happen.

I would be more conservative than a 100% stock portfolio. I was over 90% in stocks before the 2000-2002 crash. Fortunately, I went to an 80/20 allocation before the market crashed. I grew to appreciate the virtues of bonds. By the time the 2008-2009 financial crisis and bear market hit, I was down to 72% stocks. Again, the bonds cushioned my losses. 2000-2002 saw losses of about 32% and 2008-2009 saw losses of 35% in my retirement portfolio. Bonds help make the two bear markets barely tolerable.

The losses in dollars was a lot too. My losses in the 2008-2009 bear market were about two years of take home pay. That smarted. I used to joke that I worked two years for free!

Also remember that our risk tolerance is always high during a bull market. Bear markets turn us into cowards. From hero to zero.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by jay22 » Tue Jul 05, 2016 11:04 am

OP, if you do not like bonds, maybe you can allocate some portion of your portfolio in a Wellesley like balanced fund? It will provide you with decent growth while protecting you from significant loses in a down market.

I do not do that (my FI portion is in intermediate index and cash), but I know a few people who do. They have been pleased with the results.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Fallible » Tue Jul 05, 2016 12:06 pm

MrNewEngland wrote:
qwertyjazz wrote:You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.


This is actually a major concern of mine. I am in Charlotte, NC and even though I love it here and it's a fairly affluent city I do worry about what would happen if the banks left. My real estate values would crumble and my job would probably be a first to be cut if growth stopped. But I try not to live in fear, as I don't see options around it. I love working for the city and I believe in owning real estate as a way to develop wealth. I see the risk as justified.


Regarding the real estate: do you consider the house you now live in an investment? It sounds as if you do.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Fallible » Tue Jul 05, 2016 12:33 pm

NoVa Lurker wrote:What many people 'learned' from 2008-2012 was that equities can suffer dramatic fluctuations, including a massive downward spiral that can last a few years, but equities will eventually rebound, so you will be okay if you don't immediately need the money and if you just have the stomach not to sell for those down years.

Of course, this is what happened last time, but it is not what will always happen.

And people also learned from 2008-2012 (and beyond) that real estate can also crash spectacularly. :shock:

OP, you have said your risk tolerance has not yet been fully tested. The question to ask yourself now is how much can you afford to lose in a downturn or crash, how long you can go before needing that money. And "afford" refers not just to the money, but to your emotional health, i.e., whether you can sleep nights in bear territory. Check out the wiki on asset allocation and risk tolerance, in particular need, ability, and willingness to take risk:
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Risk_tolerance
Last edited by Fallible on Tue Jul 05, 2016 12:45 pm, edited 1 time in total.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 12:43 pm

HomerJ wrote:
MrNewEngland wrote:
alex_686 wrote: If Charlotte blows up like Detroit you lose both your pension and your real estate.


Sure, but what's the alternative? Quit a job I like? Don't own real estate?


The alternative is to not bet everything on Charlotte. Which is what you are doing... Extremely good chance it works out fine, though... but that's not 100%.


But what is the alternative? Like I said above I really enjoy working for the city, I find it rewarding and satisfying. So that's part of the "bet". The other is real estate... should I just rent an apartment bc of the chance the city sinks into financial implosion?

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 12:47 pm

jay22 wrote:OP, if you do not like bonds, maybe you can allocate some portion of your portfolio in a Wellesley like balanced fund? It will provide you with decent growth while protecting you from significant loses in a down market.

I do not do that (my FI portion is in intermediate index and cash), but I know a few people who do. They have been pleased with the results.


It's not that I don't "like" bonds, I was just looking for opinions on if I needed them or not. It seems like the answer is yes, but not as much as most.

I really like the advice I have gotten so far. BHs seem to have a good way of looking at things, I am glad I found this site.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by livesoft » Tue Jul 05, 2016 12:47 pm

MrNewEngland wrote:But what is the alternative?

The alternative appears to be to own some bond funds.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 12:51 pm

Fallible wrote:
MrNewEngland wrote:
qwertyjazz wrote:You are assuming the stability of the pension for your city for the next 40 years. Remember Detroit was a center of intellect and science 50 years ago.People moved there to be part of the most exciting part of the country. 40 years is a long time for any city.


This is actually a major concern of mine. I am in Charlotte, NC and even though I love it here and it's a fairly affluent city I do worry about what would happen if the banks left. My real estate values would crumble and my job would probably be a first to be cut if growth stopped. But I try not to live in fear, as I don't see options around it. I love working for the city and I believe in owning real estate as a way to develop wealth. I see the risk as justified.


Regarding the real estate: do you consider the house you now live in an investment? It sounds as if you do.


I guess I sort of do. Maybe not like buying stocks but I have to live somewhere and I see owning the house as a better bet to develop wealth than renting an apartment. The point I was making above is that as long as I am working for the city and living here (obviously) I am putting a lot of concentrated emphasis on the city, but there's no way around that.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by gunn_show » Tue Jul 05, 2016 12:52 pm

MrNewEngland wrote: I'd love to hear BH's thoughts on this line of thinking and opinions if I should add some bonds. I figure I will buy some when I get very close to retirement (unless the market has just crashed).

I appreciate any posts on this matter.


This is my strategy and plan as well. Pretty much all-in on VTSAX (I have various accounts/companies due to 401ks etc, but in general..) or similar. I have one VG target fund I am about to move to VTSAX to simplify. Couple bucks here and there in Wellington or Fidelity Contra Fund, but overall I am mostly all stocks. Also right about your age. Also no debt and only large asset is house/mortgage. High income, but I have no pension potential, only 401k and taxable. I save about 50% after tax.

I'm half way through Jim Collin's (jlcollinsnh.com) new book The Simple Path to Wealth.. and this is his exactly strategy - all VTSAX until nearing or at retirement, then smooth out a bit with bonds and 5% cash.

For today and foreseeable future, that is the plan I am copying. The book is also a very fast smooth enjoyable read, I recommend it. I think it was 12 bucks on amazon.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by alex_686 » Tue Jul 05, 2016 12:55 pm

MrNewEngland wrote:
HomerJ wrote:
MrNewEngland wrote:
alex_686 wrote: If Charlotte blows up like Detroit you lose both your pension and your real estate.


Sure, but what's the alternative? Quit a job I like? Don't own real estate?


The alternative is to not bet everything on Charlotte. Which is what you are doing... Extremely good chance it works out fine, though... but that's not 100%.


But what is the alternative? Like I said above I really enjoy working for the city, I find it rewarding and satisfying. So that's part of the "bet". The other is real estate... should I just rent an apartment bc of the chance the city sinks into financial implosion?


Let me take one more crack at this.

One’s ability to take risk is partially based on the ability to meet minimum goals even if there is a bone crushing market collapse. Does your pension and real estate provided this minimum cushion? If so, yes 100% equity is a valid choice.

However, your pension and real estate are correlated, a disaster in one is going to affect your other. If your pension and real estate were to drop by 20% would your AA still be 100% equity? What about a 40% drop?

You state you already treat your SS in a very conservative fashion, why not your pension and real estate? Give each a 20% haircut then figure out your AA.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by MrNewEngland » Tue Jul 05, 2016 12:57 pm

livesoft wrote:
MrNewEngland wrote:But what is the alternative?

The alternative appears to be to own some bond funds.



I think you misunderstood my response. Saying that owning real estate in Charlotte and expecting the state to fund my pension put a concentrated risk on Charlotte staying affluent.

Bonds would be a part of my 401k and IRA, and not moving the concentration away from Charlotte.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by Engineer250 » Tue Jul 05, 2016 1:40 pm

Most people would suggest you don't consider social security as a substitute for bonds. Instead, as you are nearing retirement, you take it into consideration as part of your income needs.

The fact that your pension and current income are tied up with the city/state as are your property values, I would argue makes you more exposed to risk rather than less so. In the event of a local SHTF scenario, you are likely to lose your job and take a huge pension cut all at once. You can look up what happened to Detroit pensioners and Kansas City pensioners to get an idea of what's the worse that could happen to your pension, but consider in the worst case scenario your pension will lose value, you will be out of a job, and you won't be able to contribute to a 401k. You would have to move to find new employment, and need to sell at a point when property values aren't what they were, or even if you are willing to wait can't find renters.

I actually think you are fine 100% stock in your retirement accounts. But I am beginning to think you should get some tax exempt bonds or TIPs or something in a taxable account and beef up your emergency fund (cash) a lot more. Try to imagine a worst case scenario of your homes losing 30% value, losing your job, your pension being cut 50% (which you wouldn't have access to for another few decades anyways) and you now needing to rely on that emergency fund. Think about what steps you might take (do you have enough equity to sell your real estate and move? have you been building contacts in your field in other locations? are you aware of the job market? civil engineering is very marketable but leaving a city that just went bankrupt might make it challenging for you to find a similar position). None of this will probably happen. I think it's still a useful thought experiment to figure out where you might want your money though.
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Re: Zero bonds at 38 yo... and no plans to buy any

Post by miles monroe » Tue Jul 05, 2016 1:45 pm

at 38 i was 100-0 and didn't have a pension (other than social security) to fall back on.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by tainted-meat » Tue Jul 05, 2016 1:48 pm

I'm with you and would rather take the chance the stock market crashes than by bonds at these crummy yields.

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Re: Zero bonds at 38 yo... and no plans to buy any

Post by qwertyjazz » Tue Jul 05, 2016 1:55 pm

MrNewEngland wrote:
livesoft wrote:
MrNewEngland wrote:But what is the alternative?

The alternative appears to be to own some bond funds.



I think you misunderstood my response. Saying that owning real estate in Charlotte and expecting the state to fund my pension put a concentrated risk on Charlotte staying affluent.

Bonds would be a part of my 401k and IRA, and not moving the concentration away from Charlotte.


I am going to try too
Imagine You have 4 sources of returns in retirement for you
Stocks
Bonds
Real Estate
Pensions

You just realized that your real estate and pension are correlated. The question is do you change your stock to bond ratio to compensate for that change in risk profile. Or would you be 100% stocks even if your real estate and pension were to drop in half.

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