Retirees with Bond Fund and AA Questions

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Topic Author
hawkfan55
Posts: 352
Joined: Thu Apr 03, 2014 9:04 pm

Retirees with Bond Fund and AA Questions

Post by hawkfan55 »

We have two questions that we would like to get BH feedback on. Thank you for your advice!

Ages Him 66, Her 62 Both Retired

MFJ, Fed Marginal Tax Rate 22%, State Tax 0%. Our goal is to Roth Convert so that we can stay in the 12% (or 15% in 2026) Fed tax bracket while using our Roth IRA Savings to supplement our fixed income while in our 70s, 80s and hopefully, into our 90s. :happy

Current Income: $72k/yr
1. Non Cola Pensions: $56k/yr
2. Her Social Security: $16k/yr
His Social Security FRA amount is $35k. He is waiting to start receiving Social Security until 68-70 (40k-46k) We know 70 is the optimal age to begin Social Security given longer than average lifespans.

Current Withdrawals from tax deferred accounts up to $172k MAGI to keep below MFJ IRMAA cliff. Withdrawals are used for Roth IRA Conversions, Spending and paying Federal Taxes. We do not have any debt obligations. Home value is approx. $600k.

Investment Portfolio is 50% Tax Deferred/ 50% Roth Accounts. Very small after tax high yield savings acct to hold funds for expenses.
100% of Tax Deferred Accounts are in fixed income, Short Term Bond Funds and Stable Value
90% of Roth Accounts are in Vanguard Total Stock Funds with 10% in Stable Value earning 4%.

Total Portfolio Assets: $1,425,000.

Total After Tax Portfolio: $13k in High Yield Savings Account earning .50%

Total Tax Deferred Portfolio: $707k (Him $355k in IRA, Her $352k in 403b)
Him:
16% VBIRX Vanguard Short-Term Bond Index Fund Admiral Shares
9% VFSUX Vanguard Short-Term Investment Grade Bond Index Admiral Shares
Her:
1% VBTLX Vanguard Total Bond Market Index Fund Admiral Shares
7% Stable Value Fund earning 4%
17% Stable Value Fund earning 2.5%

Total Roth Accounts Portfolio: $706k (Him $394k, Her $312k)
Him:
20% VTSAX Vanguard Total Stock Market Index Fund Admiral
8% VTIAX Vanguard Total Int'l Stock Index Fund Admiral
Her:
17% VTSAX Vanguard Total Stock Market Index Fund Admiral
5% Stable Value Fund earning 4%

Questions:

1. Are Short-Term Bond funds appropriate for our needs? Given we are both retired, what change, if any, would you recommend? Our thinking was that the shorter duration was appropriate as we might not have enough time to recover from losses due to rising interest rates before withdrawals occur. There also doesn’t seem to be much difference in yields between short and intermediate bond funds.

2. As we continue Roth Conversions, we either need to place bond funds in Roth IRA accounts or increase our stock fund asset allocation. Current AA is 45/55 Stock/Bond funds. Any thoughts on this?
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RetiredCSProf
Posts: 631
Joined: Tue Feb 28, 2017 4:59 pm

Re: Retirees with Bond Fund and AA Questions

Post by RetiredCSProf »

hawkfan55 wrote: Sun Jun 06, 2021 2:37 pm We have two questions that we would like to get BH feedback on. Thank you for your advice!

Ages Him 66, Her 62 Both Retired

Questions:

1. Are Short-Term Bond funds appropriate for our needs? Given we are both retired, what change, if any, would you recommend? Our thinking was that the shorter duration was appropriate as we might not have enough time to recover from losses due to rising interest rates before withdrawals occur. There also doesn’t seem to be much difference in yields between short and intermediate bond funds.

2. As we continue Roth Conversions, we either need to place bond funds in Roth IRA accounts or increase our stock fund asset allocation. Current AA is 45/55 Stock/Bond funds. Any thoughts on this?
I am facing similar questions

Question 1 on ST Bonds: My research is showing that the %age to be held in ST Bonds in retirement depends, at least in part, on (a) your AA and (b) guaranteed income from other sources (pension, SS, annuities). That is, how will you keep pace with inflation?

For example, TRPrice AA online tool shows the following:
70/30 portfolio -- no ST bonds
60/40 portfolio -- 7% of portfolio (17.5% of bonds) in short-term TIPS
50/50 portfolio -- 12% of portfolio (24% of bonds) in short-term TIPS

There is also the "bucket plan" of keeping 2-4 years of tax-deferred in conservative fixed income funds to reduce the risk of having to distribute RMDs from equities in a market downturn.

Question 2 on AA: I am 73, retired, still taking Roth conversions. I recently started a thread on whether to separate my AA goals between Roth and tax-deferred, expecting that my tax-deferred account will become increasingly conservative over time. I am still sitting on the fence with this. I have two conflicting goals: 70/30 AA across all tax-advantaged accounts and 60/40 in tax-deferred accounts. At the moment, the numbers are close, but I will need to decide in the next year or two.
livesoft
Posts: 76567
Joined: Thu Mar 01, 2007 8:00 pm

Re: Retirees with Bond Fund and AA Questions

Post by livesoft »

hawkfan55 wrote: Sun Jun 06, 2021 2:37 pm 1. Are Short-Term Bond funds appropriate for our needs? Given we are both retired, what change, if any, would you recommend? Our thinking was that the shorter duration was appropriate as we might not have enough time to recover from losses due to rising interest rates before withdrawals occur. There also doesn’t seem to be much difference in yields between short and intermediate bond funds.
I would be riding the Stable Value funds with those nice yields instead of putting money into any Short-term bond funds.
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Topic Author
hawkfan55
Posts: 352
Joined: Thu Apr 03, 2014 9:04 pm

Re: Retirees with Bond Fund and AA Questions

Post by hawkfan55 »

Question 1 on ST Bonds: My research is showing that the %age to be held in ST Bonds in retirement depends, at least in part, on (a) your AA and (b) guaranteed income from other sources (pension, SS, annuities). That is, how will you keep pace with inflation?
Retired CSProf: Thanks for your reply. I'm counting on our stock funds to keep pace with inflation and am hoping our short-term bonds and stable value will stay close to inflation... maybe wishful thinking. I guess my concern is the short-term bias that my bond funds have... I am giving up yield.
Our asset allocation is 45/55 stocks/bonds. Our stock funds are all in our Roth IRA tax free accounts. 100% of our Short-Term Bonds and 90% of Stable Value funds are all in IRA/403b tax deferred accounts. Our Roth Conversions will have to be from Short-Term Bonds in the next three years. I don't like the thought of filling our Roth Accounts with fixed income however, if we want to keep our AA at 45/55, we will have to place fixed income bonds into our Roth Accounts. We do have pensions and DW has started SS so most of our expenses are covered. We might raise our stock allocation to 50-60%.
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Topic Author
hawkfan55
Posts: 352
Joined: Thu Apr 03, 2014 9:04 pm

Re: Retirees with Bond Fund and AA Questions

Post by hawkfan55 »

I would be riding the Stable Value funds with those nice yields instead of putting money into any Short-term bond funds.
Livesoft, we plan to do just that. For the next three or so years, we'll be withdrawing from my IRA and Converting to Roth IRA. I have only short-term bonds in my IRA. DW has only Stable Value in her 403b. We won't be starting her conversions from 403b to Roth IRA for another three years when she is 65. At that time, I'll be 69 and have only one year left before beginning SS.
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dbr
Posts: 35878
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirees with Bond Fund and AA Questions

Post by dbr »

Stable value funds aside the right bond duration for retirements is probably around the middle of the anticipated length of retirement. If long bonds seem a little scary any intermediate duration low cost bond funds are good enough. I personally hold about half in intermediate Treasuries and half in intermediate TIPS, but that doesn't mean anything in particular. If statistics can be believed we would have been in that allocation for over fifty years from beginning to end (knocking on wood). [Can someone tell me the correct verb form for a future conditional about a past condition or whatever that is supposed to be?]

What you are supposed to do when stocks take a fall is not wait for recovery but rebalance from stocks to bonds. Taking a withdrawal while simultaneously rebalancing is easy enough but makes the idea of taking the withdrawal "from" something in particular sort of meaningless. In a kind of contorted way an operation like this would constitute taking a negative withdrawal from the stocks.
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