A " Bond Tent" During the "Retirement Red Zone?"

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David Jay
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by David Jay » Wed Dec 06, 2017 12:18 pm

ruralavalon wrote:
Wed Dec 06, 2017 12:10 pm
I want a hyper-simple portfolio my wife could manage, using just a single balanced fund like either Vanguard Balanced Index Fund Admiral Shares (VBIAX) or Vanguard LifeStrategy Moderate Growth (VSMGX).
My "after I am gone" letter to my wife suggests that she put everything in LifeStrategy Moderate (98% of the portfolio is in tax-deferred or tax-exempt).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

radiowave
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by radiowave » Wed Dec 06, 2017 12:56 pm

David Jay wrote:
Tue Dec 05, 2017 7:04 pm
radiowave wrote:
Mon Dec 04, 2017 10:28 pm
dbr wrote:
Mon Dec 04, 2017 7:59 pm
. . .
If there are no contributions or withdrawals there is no sequence of returns phenomenon at all. Also, like most risk, the phenomenon can result in a benefit to the investor as much as a hazard.
So if there is no anticipated withdrawal from retirement assets in early retirement, what asset allocation is recommended?
If you are not withdrawing, the highest stock allocation that you can "stand" - sleep well at night and not sell in a downturn.
Which is 50% bonds crossing the threshold into retirement (65-67). That's in my IPS and I've been gradually on my glidescope abt 43% bonds now. My concern is I have all equity (total US/international stock) in my taxable account which is about 1/3 of total portfolio so the dilemma is if we go into a bear market at retirement, I was planning on using the taxable funds to push back SS to 70. So there is an iteration to the discuss not only how much bond % for the "tent" but where the bonds are re tax deferred vs taxable. This could affect cash flow in early retirement and has tax implications, e.g. was counting on 15% marginal tax rate and 0 LTCG in early retirement.
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jalbert
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by jalbert » Wed Dec 06, 2017 5:34 pm

My concern is I have all equity (total US/international stock) in my taxable account which is about 1/3 of total portfolio so the dilemma is if we go into a bear market at retirement, I was planning on using the taxable funds to push back SS to 70.
If you hold different asset classes in different locations, you can take withdrawals from the location that makes sense from a tax perspective, and then adjust the allocation of tax-qualified account(s) to maintain asset allocation. Thus, if you liquidate equities in taxable space when equities are below allocation target, you would shift other classes into equities in a tax-qualified account to maintain asset allocation.

Also, withdrawing from a tax-deferred account may incur more taxes due today than withdrawing from a taxable account, but drawing down the tax-deferred account will reduce future RMDs, which may reduce overall taxes in the long run.
Risk is not a guarantor of return.

Barefootgirl
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by Barefootgirl » Fri Jan 12, 2018 11:08 am

Of all the info in the links, this comment stands out for me: (from the Wfau and Kitces article)

Accordingly, for those households looking to maximize their level of sustainable retirement income, and/or to reduce the potential magnitude of any shortfalls in adverse scenarios, portfolios that start off in the vicinity of 20 percent to 40 percent in equities and rise to the level of 60 percent to 80 percent in equities generally perform better than static rebalanced portfolios or declining equity glide paths.
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.

CnC
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by CnC » Fri Jan 12, 2018 2:48 pm

TheTimeLord wrote:
Sat Dec 02, 2017 9:42 pm
I started reading the article then hit this and wondered if this is really true for folks who are saving 35%-50% of their gross income now that the kids are gone. I wonder what percentage contributions would have to be for him to consider them meaningful? And they are also covering expenses for an additional year? If have 25X expenses wouldn't just merely working another year be like adding 4% or 1X expenses to your portfolio since you didn't have to withdraw the 4% to cover your expenses. Add 2 maxed 401k's, a year of covered expenses and some taxable savings on top of that and I am not seeing that amount being dwarfed by returns in an average year.
The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.
All that said the V shaped glide path makes sense to me and is basically what I have been implementing.
Well I am 32 and have a 5 and a 2 year old and we are saving and investing around 50% of our income. If I'm still working by the time my kids are moved out I can't imagine saving less than 50% per year.

CnC
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by CnC » Fri Jan 12, 2018 2:52 pm

What I don't understand is why people don't just keep 10 years expenses in bonds and withdrawal 100% from equities. Once a bear market hits start withdrawal 100% from bonds. I don't believe there has been a time in American history where the market is significantly lower than it was 10 year prior.



I'm just a young dumb kid so perhaps I'm missing something. So please enlighten me if I am.

visualguy
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by visualguy » Fri Jan 12, 2018 4:21 pm

CnC wrote:
Fri Jan 12, 2018 2:52 pm
What I don't understand is why people don't just keep 10 years expenses in bonds and withdrawal 100% from equities. Once a bear market hits start withdrawal 100% from bonds. I don't believe there has been a time in American history where the market is significantly lower than it was 10 year prior.



I'm just a young dumb kid so perhaps I'm missing something. So please enlighten me if I am.
There are definitely such cases. In fact, this happened not too long ago... Not sure how people forget such a recent harsh lesson in how awful the stock market can be... Here are a couple of example:

S&P500:

8/2000: 1485
8/2010: 1087

12/1964: 83.96
12/1974: 67.07

If you go back to the great depression - it took 25 years for the S&P500 to bounce back!

CnC
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by CnC » Fri Jan 12, 2018 4:58 pm

visualguy wrote:
Fri Jan 12, 2018 4:21 pm
CnC wrote:
Fri Jan 12, 2018 2:52 pm
What I don't understand is why people don't just keep 10 years expenses in bonds and withdrawal 100% from equities. Once a bear market hits start withdrawal 100% from bonds. I don't believe there has been a time in American history where the market is significantly lower than it was 10 year prior.



I'm just a young dumb kid so perhaps I'm missing something. So please enlighten me if I am.
There are definitely such cases. In fact, this happened not too long ago... Not sure how people forget such a recent harsh lesson in how awful the stock market can be... Here are a couple of example:

S&P500:

8/2000: 1485
8/2010: 1087

12/1964: 83.96
12/1974: 67.07

If you go back to the great depression - it took 25 years for the S&P500 to bounce back!


We had 2 separate bear markets. If you were to sell your stocks and buy another 10 years worth of bonds once the market went back to flat you would still be fine.

8/2000 the peak prior to the .com crash stocks went back up to higher than pre crash.

Your 1964 to 1974 example doesn't make any sense either. Yes the market dropped in 1974 but just because at 1 time it dropped below what it was 10 years ago doesn't matter. That's where the bonds would come in.

I am honestly confused by your examples, because even under your examples 10 years of bonds for down years replinished once the stock market hits at retirement levels works just fine.

I could understand if it didn't work but why use examples that show it does work?
Edit:
Ahh you were zeroing in on the stock market has not been down 10 years later. That is my fault for not being clear, I meant other than perhaps the great depression the stock market has not stayed down for 10 years.

Looking at the entire history of the Dow Jones industry average dating back to pre 1900 there has only been a single 3-4 year period that the stock market did not at least pass it's original self within a 10 year period. (The 3-4 years prior to the great depression)

visualguy
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by visualguy » Fri Jan 12, 2018 6:06 pm

After the 2000 crash, the S&P500 took 7 years to bounce back, and it did so only briefly. If you missed those couple of months, you had to wait over 6 more years.

In January, 1973, the S&P500 was at $118. It didn't reach that level again until July, 1980, so over 7 years.

The great depression was a lot worse, with 25 years for the S&P500 to bounce back.

If you look at the international stock market index, it hasn't bounced back to what it was just before the last crash, and it has been over a decade!

10 years in bonds doesn't necessarily bail you out for two reasons. One is that the assumption in figuring out safe withdrawal rates is typically that you re-balance into stocks to maintain your asset allocation when the stock market drops significantly, and in general that you maintain your asset allocation. The other reason is that there's no reason to believe that it won't take more than 10 years for the market to bounce back, especially after the market reaches extreme valuation levels. What if it takes 15 years? What if it takes 25 years again?

randomguy
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Re: A " Bond Tent" During the "Retirement Red Zone?"

Post by randomguy » Fri Jan 12, 2018 8:17 pm

CnC wrote:
Fri Jan 12, 2018 4:58 pm
visualguy wrote:
Fri Jan 12, 2018 4:21 pm
CnC wrote:
Fri Jan 12, 2018 2:52 pm
What I don't understand is why people don't just keep 10 years expenses in bonds and withdrawal 100% from equities. Once a bear market hits start withdrawal 100% from bonds. I don't believe there has been a time in American history where the market is significantly lower than it was 10 year prior.



I'm just a young dumb kid so perhaps I'm missing something. So please enlighten me if I am.
There are definitely such cases. In fact, this happened not too long ago... Not sure how people forget such a recent harsh lesson in how awful the stock market can be... Here are a couple of example:

S&P500:

8/2000: 1485
8/2010: 1087

12/1964: 83.96
12/1974: 67.07

If you go back to the great depression - it took 25 years for the S&P500 to bounce back!


We had 2 separate bear markets. If you were to sell your stocks and buy another 10 years worth of bonds once the market went back to flat you would still be fine.

8/2000 the peak prior to the .com crash stocks went back up to higher than pre crash.

Your 1964 to 1974 example doesn't make any sense either. Yes the market dropped in 1974 but just because at 1 time it dropped below what it was 10 years ago doesn't matter. That's where the bonds would come in.

I am honestly confused by your examples, because even under your examples 10 years of bonds for down years replinished once the stock market hits at retirement levels works just fine.

I could understand if it didn't work but why use examples that show it does work?
Edit:
Ahh you were zeroing in on the stock market has not been down 10 years later. That is my fault for not being clear, I meant other than perhaps the great depression the stock market has not stayed down for 10 years.

Looking at the entire history of the Dow Jones industry average dating back to pre 1900 there has only been a single 3-4 year period that the stock market did not at least pass it's original self within a 10 year period. (The 3-4 years prior to the great depression)
Ok lets look at your scheme. Retire with 10 years in bonds and 15 years in stocks. And lets look at an approximation of the 2000 case.
a) stocks fall and stay down for 7 years. You sell 7 years of bonds
b) stocks get back to 0. So you have 15 years of money in stocks and 3 in bonds. You sell 7 to replenish your fund
c) So you are sitting at 10 years of bonds and 8 years of stocks when the next bear market happens. It takes 4 years to get back to zero
d) you sell 4 years of stocks to replensh your bonds. You are now sitting at 10 years of bonds and 4 years of stocks.
So you are basically 11 years in and you are down to 14x of savings. Now the good news is stocks are about to continue on their tear. But how much money do you make? You are at say 280k (out of your initial million) and your taking 40k/year out of the fund (i.e your 4%). Does that seem fine to you?:)

You can tweak your schme (7 years in bonds, only replenish 1 year,...) but in the end it will not make a difference.

Taking money out of bonds is a red herring. If you look at something like a 60/40 AA, during crashes you will be selling bonds also. The difference is that you then buy low as you exchange bonds to stocks to maintain your AA.

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