Transitioning from bond funds as retirement approaches?...

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Johnsson
Posts: 99
Joined: Mon Jul 17, 2017 2:28 pm

Transitioning from bond funds as retirement approaches?...

Post by Johnsson » Mon Jul 09, 2018 8:02 am

Hi folks.

For better or worse over the last 3 years we transitioned from 100% equities, working towards 60E/40B with the bonds split evenly between VBTLX (Vanguard total bond market) and VFIDX (Vanguard Intermediate investment grade). We plan to transition with this equity ratio into retirement at the end of 2021.

Our plan is to spend taxable equities (thank you Livesoft) for the first 10 years of retirement (while selling bond funds and buying equities in pre-tax to replace what was sold in taxable). [All bonds/cash are in pre-tax, but may need some in after-tax as we run out of space in pre-tax.]

Thinking about the long-term I was happy in the bond funds (even with the short-term losses)... EXCEPT I really didn't have a good spending plan. Now, thinking about the need to begin retirement spending in 3+ years, it may make sense to have money split between the bond funds we have, VMMXX (Vanguard Prime MM), and a brokered CD ladder (or a short-term fund), all still in pre-tax.

My thoughts have been evolving as I have ready many posts on this subject.

We will end up spending 50-60% of our bond/cash holdings to get through the 10 pre-SS years.

I am current putting new savings into VMMXX... probably to use buying CDs valued at a years worth of spending.

I assume when we get to retirement we'd want immediate needs in VMMXX, medium term needs in 3-5 year CDs/ladder, long-term in the bond funds.

Questions...

1. Does this plan sound reasonable/as optimal as possible is this changing environment? If not, what should change?

2. If the plan is reasonable, how do I determine the best amounts/transition plan to have in each vehicle over time?

I have my own thoughts but am looking for input from those who are MUCH better informed.

Thanks in advance!!!

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patrick013
Posts: 2253
Joined: Mon Jul 13, 2015 7:49 pm

Re: Transitioning from bond funds as retirement approaches?...

Post by patrick013 » Mon Jul 09, 2018 1:46 pm

Here's some old thoughts.

If you were to spend your bond funds first, your portfolio would
be less diversified and at the mercy of bear markets in stocks.

If you spend your stock funds first, your bond fund income may not
keep up with your needs or provide returns over inflation.

Withdrawing investments from your portfolio in a balanced manner
will maintain portfolio diversification. Excessive returns in
bonds or stocks should be withdrawn. Also a 3 to 5 year CD ladder
will keep up with rising rates. Check the yields. Perhaps buy a
3 and a 5 year CD every year till you have it. When they mature
spend some and reinvest the rest. Some years stock returns may be
less so spending some matured CD money may be in order to keep
your desired AA.
age in bonds, buy-and-hold, 10 year business cycle

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ruralavalon
Posts: 13309
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Transitioning from bond funds as retirement approaches?...

Post by ruralavalon » Mon Jul 09, 2018 3:29 pm

Johnsson wrote:
Mon Jul 09, 2018 8:02 am
Hi folks.

For better or worse over the last 3 years we transitioned from 100% equities, working towards 60E/40B with the bonds split evenly between VBTLX (Vanguard total bond market) and VFIDX (Vanguard Intermediate investment grade). We plan to transition with this equity ratio into retirement at the end of 2021.

Our plan is to spend taxable equities (thank you Livesoft) for the first 10 years of retirement (while selling bond funds and buying equities in pre-tax to replace what was sold in taxable). [All bonds/cash are in pre-tax, but may need some in after-tax as we run out of space in pre-tax.]

Thinking about the long-term I was happy in the bond funds (even with the short-term losses)... EXCEPT I really didn't have a good spending plan. Now, thinking about the need to begin retirement spending in 3+ years, it may make sense to have money split between the bond funds we have, VMMXX (Vanguard Prime MM), and a brokered CD ladder (or a short-term fund), all still in pre-tax.

My thoughts have been evolving as I have ready many posts on this subject.

We will end up spending 50-60% of our bond/cash holdings to get through the 10 pre-SS years.

I am current putting new savings into VMMXX... probably to use buying CDs valued at a years worth of spending.

I assume when we get to retirement we'd want immediate needs in VMMXX, medium term needs in 3-5 year CDs/ladder, long-term in the bond funds.

Questions...

1. Does this plan sound reasonable/as optimal as possible is this changing environment? If not, what should change?

2. If the plan is reasonable, how do I determine the best amounts/transition plan to have in each vehicle over time?

I have my own thoughts but am looking for input from those who are MUCH better informed.

Thanks in advance!!!
I have no idea if that plan is "optimal". In my opinion the plan is reasonable, although overly complicated.

For what it's worth we are 73 years of age next month, retired 7 years, and our fixed income allocation is entirely in Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) except for a little in a money market fund from dividends not yet reinvested and a couple months expenses in our checking account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

John Z
Posts: 300
Joined: Sun Nov 14, 2010 5:42 pm

Re: Transitioning from bond funds as retirement approaches?...

Post by John Z » Mon Jul 09, 2018 3:57 pm

For retirement withdrawal plans, go to:

http://livingoffyourmoney.com/

and download the first 3 chapters free. Chapter 3 covers about a dozen withdrawal strategies and suggests the top 2 or 3 based on backtesting results.

Johnsson
Posts: 99
Joined: Mon Jul 17, 2017 2:28 pm

Re: Transitioning from bond funds as retirement approaches?...

Post by Johnsson » Wed Jul 11, 2018 6:27 am

Thank you for your suggestions.

My concern is not the spending, it is the correct apportionment between the 3 vehicles as time goes on...

Vanguard Prime (duration of zero)
CDs (2 or 3 year)
VFIDX and VBTLX (50/50... duration of 5.82 yrs)

I'm looking to use these three to get the benefit of the intermediate term funds while mitigating the effect of rising rates by using the cash as a short term buffer (I will be gathering cash during the last 3 years of our working life to fund the cash vehicles while the intermediate funds continue to adjust to rate changes and grow.

I would like to maintain a 40% bond+cash allocation (and use alternate prime harvesting, from McClung).

My thoughts were to retire at the end of 2021 with one year's expenses in Prime, and a 3 year CD ladder to fund years 2, 3 and 4. That will take us to about 7 years from today.

I'll still have ~10 years expenses in bonds.

As things stand today, does the cash in Prime and CDs make sense?

Does staying with the bond funds make more sense?

Thanks again!!

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patrick013
Posts: 2253
Joined: Mon Jul 13, 2015 7:49 pm

Re: Transitioning from bond funds as retirement approaches?...

Post by patrick013 » Wed Jul 11, 2018 2:19 pm

Johnsson wrote:
Wed Jul 11, 2018 6:27 am
Thank you for your suggestions.

My concern is not the spending, it is the correct apportionment between the 3 vehicles as time goes on...

Vanguard Prime (duration of zero)
CDs (2 or 3 year)
VFIDX and VBTLX (50/50... duration of 5.82 yrs)

I'm looking to use these three to get the benefit of the intermediate term funds while mitigating the effect of rising rates by using the cash as a short term buffer (I will be gathering cash during the last 3 years of our working life to fund the cash vehicles while the intermediate funds continue to adjust to rate changes and grow.

I would like to maintain a 40% bond+cash allocation (and use alternate prime harvesting, from McClung).

My thoughts were to retire at the end of 2021 with one year's expenses in Prime, and a 3 year CD ladder to fund years 2, 3 and 4. That will take us to about 7 years from today.

I'll still have ~10 years expenses in bonds.

As things stand today, does the cash in Prime and CDs make sense?

Does staying with the bond funds make more sense?

Thanks again!!
If you had a 50-50 portfolio it makes sense to me. Withdraw from
stocks on an uptick, an increase in price. Maintain your AA. The 3 year
CD ladder is excellent. I'm not a big fan of TBM. Apart from the CD's
the bond market is not on an uptick. Sometime in early 2020's I'd
go long term but that is a bunch of market timing. CD's at +4%,
govt agency bonds at 5%, BLV at a much higher yield.

Then I'm going to enjoy my retirement.
age in bonds, buy-and-hold, 10 year business cycle

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Taylor Larimore
Advisory Board
Posts: 27099
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Transitioning from bond funds as retirement approaches?...

Post by Taylor Larimore » Wed Jul 11, 2018 2:35 pm

Johnsson:

No need to make this complicated. I simply put money that I cannot afford to lose into Total Bond Market whose worst annual loss was -2.66% in 1994 (TBM gained +16% in 1995). Any safe fixed income security that is liquid is acceptable.

I put the rest into Vanguard 500 Index fund and I sleep like a baby. I would prefer Total Stock Market but I'm locked-in with capital-gains.

Keep investing simple. Especially in retirement.
The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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