A bond duration glide path for retirement investing

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Jaylat
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Re: A bond duration glide path for retirement investing

Post by Jaylat »

vineviz wrote: Tue Apr 19, 2022 12:34 pm
Jaylat wrote: Tue Apr 19, 2022 12:07 pm
vineviz wrote: Tue Apr 19, 2022 10:12 am
Jaylat wrote: Tue Apr 19, 2022 9:18 am The other factor is that individuals are much less diversified than banks. Stuff happens – people get divorced, injured, lose jobs, their house burns down, unexpected kids, etc. Any of these events might require you to liquidate your investment portfolio.
All of those events (specifically, the probability-weighted value of them occurring) are inputs in determining the investment horizon as well, at least indirectly, the overall asset allocation.
Can you explain how this would work in real life? Here's how I would envision this kind of logical thought process:

"I expect to retire in 30 years, but I have a 15% chance of getting a divorce in year 10, plus a 5% chance of my house burning down in year 20, plus a 30% chance of getting run over by a truck in year 25, resulting in a debilitating spinal injury."
That's one way to do it, but I suspect this approach will appeal to only to the overly analytical. I'm definitely try not to be dogmatic about being overly precise, since financial planning inherently involves working with a great deal of uncertainty. But I do think most people who are actively managing their personal finances have a pretty good idea about whether most of their future portfolio-funded consumption lies in the next five years or is more like 10+ years away.
I was actually joking. :happy

But the bigger point is that people are not like banks. They don't have clearly defined liabilities that can be known with certainty.

I find it ironic (and more than a bit worrysome) that you are touting LTT, which are extremely volatile, as a way of eliminating interest rate risk. As I've shown many times above, this is not the case in real life. I am worried that an unsuspecting investor will follow this advice and get burned.

It's very nice of you to engage like this, but as I've said before I don't think we will come to agreement.
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vineviz
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Re: A bond duration glide path for retirement investing

Post by vineviz »

Jaylat wrote: Tue Apr 19, 2022 4:24 pm
But the bigger point is that people are not like banks. They don't have clearly defined liabilities that can be known with certainty.
Certainty isn't necessary for duration matching to be a beneficial undertaking, which is good news because the future is ALWAYS uncertain. Financial planning is simply the process by which we plan for an uncertain future using expectations about our future assets and liabilities. It is these expectations that investors will match.

Jaylat wrote: Tue Apr 19, 2022 4:24 pm I find it ironic (and more than a bit worrysome) that you are touting LTT, which are extremely volatile, as a way of eliminating interest rate risk.
I'm not "touting" anything other than a sane approach to financial planning. Long-term assets and liabilities only appear to be "extremely volatile" when gauged on an inappropriately myopic timeframe. When long-term investors make decisions based on short-term fears, mistakes get made.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: A bond duration glide path for retirement investing

Post by vineviz »

I created this example for another post, but the illustration might be helpful here as well.


Imagine that 5 years ago you bought a 5-year Treasury bond at par with a 1.75% coupon. If you held onto that bond its price would have fluctuated: falling to a low of $95.96 in 2018, increasing to a high of $103.16 in 2020, and finally converging back to $100 at maturity. Initially, the bond's duration was 4.8 years and that duration steadily declined until it is 0 years at maturity. After collecting the coupon payments and reinvesting them along the way, you'd end up with roughly $108.76 by my count.

Replicating this same path is relatively straightforward using a combination of a Treasury bond fund and cash (i.e. Treasury bills). For the fund let's use Vanguard Intermediate-Term Treasury ETF (VGIT). I'm going to assume it has always had the same average duration it has now, which is 5.4 years. This is certainly not true, and will introduce a little divergence into our thought experiment but not much. The trick is simply to use a combination of VGIT and cash each month that, when combined, matches the duration of the actual bond. To get the initial duration of 4.8 years you invest 89% in VGIT and 11% in cash. A year later, when you want a duration of 3.9 years, you invest 73% in VGIT and 27% in cash. And so forth.

By precisely matching the duration of the individual bond, this combination of VGIT and cash will also very closely match the returns of that bond as well.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
international001
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Re: A bond duration glide path for retirement investing

Post by international001 »

Thanks for the example. But I guess what I'm not getting is why do you want to "exactly match liabilities".
You typically also have stocks you sell/get dividends from and that fluctuate a lot. So your approach works only if you want to exclusively use bonds, no?
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Re: A bond duration glide path for retirement investing

Post by vineviz »

international001 wrote: Tue May 10, 2022 8:01 pm Thanks for the example. But I guess what I'm not getting is why do you want to "exactly match liabilities".
You typically also have stocks you sell/get dividends from and that fluctuate a lot. So your approach works only if you want to exclusively use bonds, no?
This is really just a tool for managing interest rate risk, which begs the question about why you might want to do THAT.

I think the principal benefit of bonds is in the name of the asset class: fixed income. Having more certainty around the income that your bond portfolio will provide, by immunizing it agains the effect of yield curve changes, is something that many investors (most of whom are loss averse) value implicitly if not explicitly.

Having portion of the portfolio that produces a predictable stream of income is something that some, though definitely not all, investors value. This is a way to achieve that without having to buy a bunch of individual bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
international001
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Re: A bond duration glide path for retirement investing

Post by international001 »

vineviz wrote: Tue May 10, 2022 8:39 pm
international001 wrote: Tue May 10, 2022 8:01 pm Thanks for the example. But I guess what I'm not getting is why do you want to "exactly match liabilities".
You typically also have stocks you sell/get dividends from and that fluctuate a lot. So your approach works only if you want to exclusively use bonds, no?
This is really just a tool for managing interest rate risk, which begs the question about why you might want to do THAT.

I think the principal benefit of bonds is in the name of the asset class: fixed income. Having more certainty around the income that your bond portfolio will provide, by immunizing it agains the effect of yield curve changes, is something that many investors (most of whom are loss averse) value implicitly if not explicitly.

Having portion of the portfolio that produces a predictable stream of income is something that some, though definitely not all, investors value. This is a way to achieve that without having to buy a bunch of individual bonds.
Fair enough. I just think if you plan to spend your retirement money during 20+ years, there are other strategies (like a typical mix of stocks and bonds using a glide path) that will allow you to withdraw much more money with just marginal more risk.
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Re: A bond duration glide path for retirement investing

Post by Wrench »

international001 wrote: Wed May 11, 2022 3:01 am
vineviz wrote: Tue May 10, 2022 8:39 pm
international001 wrote: Tue May 10, 2022 8:01 pm Thanks for the example. But I guess what I'm not getting is why do you want to "exactly match liabilities".
You typically also have stocks you sell/get dividends from and that fluctuate a lot. So your approach works only if you want to exclusively use bonds, no?
This is really just a tool for managing interest rate risk, which begs the question about why you might want to do THAT.

I think the principal benefit of bonds is in the name of the asset class: fixed income. Having more certainty around the income that your bond portfolio will provide, by immunizing it agains the effect of yield curve changes, is something that many investors (most of whom are loss averse) value implicitly if not explicitly.

Having portion of the portfolio that produces a predictable stream of income is something that some, though definitely not all, investors value. This is a way to achieve that without having to buy a bunch of individual bonds.
Fair enough. I just think if you plan to spend your retirement money during 20+ years, there are other strategies (like a typical mix of stocks and bonds using a glide path) that will allow you to withdraw much more money with just marginal more risk.
Here is a specific, real example where LMP of bonds might make sense. In 2033 (or sooner) the social security trust fund will run out of money. Without changes to the current law, social security benefits for all retirees will decrease by ~20%. (Whether or not this may or may not happen is a topic not allowed on this forum as it is a political one. But, without changes in the today''s laws it will happen). One response might be to build a TIPs ladder or LMP as vineviz suggests that will generate the equivalent income to the 20% loss of one's social security income for the retirees remaining life expectancy of 20-30 years. For this known, definable liability, this is a much lower risk approach than depending on withdrawals from stock/bond portfolio, albeit with a concomitant lower potential return. This approach appeals to me both because social security is a major portion of my expected retiree income, and the investment required for me to make up the lost income still allows me to have a reasonable stock allocation with my remaining portfolio. YMMV.

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Re: A bond duration glide path for retirement investing

Post by international001 »

Wrench wrote: Wed May 11, 2022 6:14 am
Here is a specific, real example where LMP of bonds might make sense. In 2033 (or sooner) the social security trust fund will run out of money. Without changes to the current law, social security benefits for all retirees will decrease by ~20%. (Whether or not this may or may not happen is a topic not allowed on this forum as it is a political one. But, without changes in the today''s laws it will happen). One response might be to build a TIPs ladder or LMP as vineviz suggests that will generate the equivalent income to the 20% loss of one's social security income for the retirees remaining life expectancy of 20-30 years. For this known, definable liability, this is a much lower risk approach than depending on withdrawals from stock/bond portfolio, albeit with a concomitant lower potential return. This approach appeals to me both because social security is a major portion of my expected retiree income, and the investment required for me to make up the lost income still allows me to have a reasonable stock allocation with my remaining portfolio. YMMV.

Wrench
I don't get it. SS works as an insurance, so it's good because it pays you while you are alive.
Even if you knew your moment of death, SS would stop any income then. A bond build to mature then would still have the principal remaining.
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Re: A bond duration glide path for retirement investing

Post by StillGoing »

In this post, just so we have some numbers to discuss, I present some backtesting results for safe withdrawal rates with various combinations and glidepaths of bonds and bills.

1) JST dataset (https://www.macrohistory.net) of annual stock, bond and bill returns (for the US, data are from 1872-2016). Bonds prior to 1929 are around 10 year maturity, From 1929 onwards, bonds have a maturity of about 20 years (see.the document data from “The Rate of Return on Everything, 1870–2015”, downloaded from https://www.macrohistory.net/database/ and references therein). Bills were of 3 month maturity, although I’ve assumed that the interest rate was available across the whole year (implicitly assuming that a one year bond was available at the same yield as the 3 month variety – this would have been a good enough approximation in most years).
2) Portfolio consisting of 50% stocks and 50% fixed income with withdrawals and rebalancing taking place on an annual basis. Results for a 30 year retirement period are presented.
3) Three runs were undertaken with constant allocations to fixed income (bonds only, used as a baseline, bills only, and a 50/50 mix of bonds and bills).
4) Three glide paths were tested (see following figure), Glide00 where a linear transition from bonds to bills start immediately after retirement, Glide10, where the transition started after 10 years, and Glide20 where the transition started after 20 years.

Image

In the following table, the percentiles of the difference between the SWR for the test case (i.e. bills, 50/50 mix etc.) and the SWR for bonds for each of the rolling retirements are shown. So, what do the numbers mean? For example, for Bills only, at the 1st percentile, the number -2.17 indicates that in 1% of historical cases, the SWR for bills was over 2 percentage points lower than the SWR for bonds. The final column in the table (P>Bonds) indicates the percentage of rolling retirement periods where the SWR for the portfolio under test was better than the SWR using bonds. For example, the SWR for bills was better than that for bonds in 68% of retirement periods.

Code: Select all

	Percentiles
	1	10	25	50	75	90	99	P>Bonds
Bills	-2.17	-0.51	-0.21	0.27	0.47	0.57	0.77	68
50/50	-1.08	-0.25	-0.10	0.13	0.24	0.29	0.39	69
Glide00	-0.45	-0.19	-0.08	0.07	0.13	0.20	0.32	63
Glide10	-0.21	-0.10	-0.05	0.02	0.06	0.11	0.22	58
Glide20	-0.06	-0.02	-0.01	0.00	0.02	0.03	0.09	51
A few general comments on the table:
1) Although historically, in the USA, bills have tended to produce a higher SWR than bonds, when bills did badly they did very badly indeed (although this tended to happen where the SWR was high, see some graphs I posted in viewtopic.php?t=376989).
2) As might be expected, reducing the fraction of bills to 50% of the fixed income component brings the results closer to that of bonds, but about the same proportion of cases (i.e. 69%) remained better than using bonds alone.
3) Again, as expected, starting the transition from bonds to bills later gave SWR values closer to those with bonds. The glidepaths reduced the number of retirement periods where the SWR was higher than using bonds alone.

It is important to note that I have used rebalancing across the whole portfolio here – if the intention is to maintain the fixed income portfolio independently of the stock component then these results will not apply.

To my mind, the performance of the glide paths is not sufficiently attractive to warrant any additional complexity and I will stick to my (roughly) 50/50 mix of bonds and cash (with most of the cash in what, in the UK, are confusing known as fixed-rate bond accounts and, I think, cash deposits in the US).

Results for different countries were quite different (e.g. for Japan since 1950, the equivalent P>bonds values were all below 50%). So there is no reason to believe the historical outcomes presented here will continue into the future.

Cheers
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Re: A bond duration glide path for retirement investing

Post by Wrench »

international001 wrote: Wed May 11, 2022 6:46 pm
Wrench wrote: Wed May 11, 2022 6:14 am
Here is a specific, real example where LMP of bonds might make sense. In 2033 (or sooner) the social security trust fund will run out of money. Without changes to the current law, social security benefits for all retirees will decrease by ~20%. (Whether or not this may or may not happen is a topic not allowed on this forum as it is a political one. But, without changes in the today''s laws it will happen). One response might be to build a TIPs ladder or LMP as vineviz suggests that will generate the equivalent income to the 20% loss of one's social security income for the retirees remaining life expectancy of 20-30 years. For this known, definable liability, this is a much lower risk approach than depending on withdrawals from stock/bond portfolio, albeit with a concomitant lower potential return. This approach appeals to me both because social security is a major portion of my expected retiree income, and the investment required for me to make up the lost income still allows me to have a reasonable stock allocation with my remaining portfolio. YMMV.

Wrench
I don't get it. SS works as an insurance, so it's good because it pays you while you are alive.
Even if you knew your moment of death, SS would stop any income then. A bond build to mature then would still have the principal remaining.
The point is that under current law social security will stop paying 100% of it's payout when the trust fund runs dry, which is projected to occur in ~2033. That will leave recipients in ~2033 with checks that are ~20% less than they had been getting (or were expecting). I was suggesting that a bond ladder or LMP could be used to make up that shortfall. You would create a ladder to run until your expected date of death and maybe a few years beyond just in case. If you are wrong and die younger your heirs will inherit the remaining principal in the ladder.

Wrench
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Re: A bond duration glide path for retirement investing

Post by vineviz »

Wrench wrote: Thu May 12, 2022 10:19 am The point is that under current law social security will stop paying 100% of it's payout when the trust fund runs dry, which is projected to occur in ~2033. That will leave recipients in ~2033 with checks that are ~20% less than they had been getting (or were expecting).
To be more precise the current law creates a dilemma if and when the trust fund is exhausted. Without a change in the law, the Treasury would be both prevented from paying full benefits and required to continue paying full benefits.

Either Congress or the courts will have to decide which action the Treasury must take.
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Re: A bond duration glide path for retirement investing

Post by BrooklynInvest »

I've read through this a couple of times and I'll admit to still being confused. Not sure I understand the application of this.

If I hold a bond to maturity I eliminate rate risk to be sure. Similarly with a bond ladder.

If I hold a fund with a duration of 5 years for 5 years I haven't eliminated rate risk because in 5 years I'm still holding something with a duration of 5 years... or thereabouts. It could change a bit either way depending on the fund right?

But if I sell out of that fund over time into a shorter duration fund to reduce my portfolio's duration, I have indeed reduced my rate risk. I got that far.

But what's my investment horizon? Absent that foresight what's the end point? Not retirement. I still need income and I still need diversification. And if the goal is to be more conservative wrt portfolio losses as I enter my dotage, surely the largest change should be my stock-bond allocation?

If I'm understanding correctly, at death (ahem) my duration should be zero - meaning I'm 100% cash and probably earning very little yield? I've completely eliminated rate risk by being in cash and simultaneously eliminated equity diversification while almost eliminating bond yield. I suppose I don't need the yield due to the fact that I'm dying tomorrow. Then again, I won't need the cash either ;-)
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Re: A bond duration glide path for retirement investing

Post by LTCM »

Im 41 and my wife is 45 so we both have a life expectancy of approx 38. Let's call it 40!

We have a combined account. We've only been saving a couple of years. Balance is approx. 100k with recent downturn.

We're 80% stocks and 20% LTT. House is paid for. No debt.

If I buy 10k I-bonds and replace 8k of LTT with stocks what have I done to my duration with regards to my investment horizon?

Is there going to be a problem with getting out out of balance and shortening my duration too much if I do this every year from now on? Ie buy approx 40k of stock and 10k i-bonds? (we're solo 401k).

Should I be aiming for a 50/50 split nominal/inflation protected on treasuries? Can I use EE bonds for the nominals to get more 401k space for stocks?
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Re: A bond duration glide path for retirement investing

Post by LMK5 »

vineviz wrote: Tue May 10, 2022 1:58 pm I created this example for another post, but the illustration might be helpful here as well.


Imagine that 5 years ago you bought a 5-year Treasury bond at par with a 1.75% coupon. If you held onto that bond its price would have fluctuated: falling to a low of $95.96 in 2018, increasing to a high of $103.16 in 2020, and finally converging back to $100 at maturity. Initially, the bond's duration was 4.8 years and that duration steadily declined until it is 0 years at maturity. After collecting the coupon payments and reinvesting them along the way, you'd end up with roughly $108.76 by my count.

Replicating this same path is relatively straightforward using a combination of a Treasury bond fund and cash (i.e. Treasury bills). For the fund let's use Vanguard Intermediate-Term Treasury ETF (VGIT). I'm going to assume it has always had the same average duration it has now, which is 5.4 years. This is certainly not true, and will introduce a little divergence into our thought experiment but not much. The trick is simply to use a combination of VGIT and cash each month that, when combined, matches the duration of the actual bond. To get the initial duration of 4.8 years you invest 89% in VGIT and 11% in cash. A year later, when you want a duration of 3.9 years, you invest 73% in VGIT and 27% in cash. And so forth.

By precisely matching the duration of the individual bond, this combination of VGIT and cash will also very closely match the returns of that bond as well.

Image
That's a great graph and goes to the heart of my question: I definitely understand how, by having duration glide towards 0, you have done OK at the end of the 5 year period. But as your ETF trace illustrates, rolling bond fund investors didn't do very well because, I presume, the duration of the ETF is held constant (not gliding towards zero). Does this not bolster the argument that you are better off with individual bonds or a defined maturity bond fund?

If interest rates were to keep rising, say 1% per year for 5 more years after your 5 year period, what would the ETF balance look like, and if rates remained steady after those additional 5 years, how long would it take for the ETF fund investor to catch up to the people who held individual bonds instead? From your graph, can I conclude that rolling bond funds are not suitable as liability-matching vehicles?
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Re: A bond duration glide path for retirement investing

Post by vineviz »

BrooklynInvest wrote: Thu May 12, 2022 11:07 am But what's my investment horizon? Absent that foresight what's the end point? Not retirement. I still need income and I still need diversification. And if the goal is to be more conservative wrt portfolio losses as I enter my dotage, surely the largest change should be my stock-bond allocation?
Probably the easiest way to think about your investment horizon is that it is the average amount of time until your future portfolio withdrawals.

For instance, imagine a 60 year old couple. If they expect to start withdrawing from their portfolio at age 65 and want to plan for a retirement that lasts until age 95, then their investment horizon is roughly 20 years. That's because the mid-point of their retirement spending is approximately at age 80, which is 15 years away.

The investment horizon grows shorter by one year annually until they retire, and after that it grows shorter by 1/2 year annually.
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Re: A bond duration glide path for retirement investing

Post by vineviz »

LMK5 wrote: Fri May 13, 2022 3:33 pm That's a great graph and goes to the heart of my question: I definitely understand how, by having duration glide towards 0, you have done OK at the end of the 5 year period. But as your ETF trace illustrates, rolling bond fund investors didn't do very well because, I presume, the duration of the ETF is held constant (not gliding towards zero). Does this not bolster the argument that you are better off with individual bonds or a defined maturity bond fund?
Right, but rather than focus on the fact that the constant duration ETF didn't do as well in this example I'd encourage you to focus on the question of certainty vs uncertainty. After all, risk only exists when there is uncertainty.

The commonly touted advantages of an individual bond revolves around the certainty it provides about the amount and timing of its cash flows, both coupon payments and maturity value. That certainty can allow for more efficient planning, because you know what the value will be at a particular point in time (i.e. at maturity ) or over time (because you can count on the bond's cash flows).

I'm attempting to illustrate that bond fund investors can get those same advantages. Instead of picking a bond fund with a duration in the middle somewhere and calling it "good enough", it's pretty easy IMHO to give yourself more certainty without sacrificing the low costs and transactional ease of bond funds.
LMK5 wrote: Fri May 13, 2022 3:33 pmFrom your graph, can I conclude that rolling bond funds are not suitable as liability-matching vehicles?
I'd say it's not so much that the FUNDS are unsuitable. Instead, I'd say that it is not ideal for investors to maintain a constant bond duration (with a rolling bond ladder and/or constant duration bond fund) when their investment horizon is naturally declining over time.
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Re: A bond duration glide path for retirement investing

Post by LMK5 »

vineviz wrote: Fri May 13, 2022 4:01 pm
LMK5 wrote: Fri May 13, 2022 3:33 pm That's a great graph and goes to the heart of my question: I definitely understand how, by having duration glide towards 0, you have done OK at the end of the 5 year period. But as your ETF trace illustrates, rolling bond fund investors didn't do very well because, I presume, the duration of the ETF is held constant (not gliding towards zero). Does this not bolster the argument that you are better off with individual bonds or a defined maturity bond fund?
Right, but rather than focus on the fact that the constant duration ETF didn't do as well in this example I'd encourage you to focus on the question of certainty vs uncertainty. After all, risk only exists when there is uncertainty.

The commonly touted advantages of an individual bond revolves around the certainty it provides about the amount and timing of its cash flows, both coupon payments and maturity value. That certainty can allow for more efficient planning, because you know what the value will be at a particular point in time (i.e. at maturity ) or over time (because you can count on the bond's cash flows).

I'm attempting to illustrate that bond fund investors can get those same advantages. Instead of picking a bond fund with a duration in the middle somewhere and calling it "good enough", it's pretty easy IMHO to give yourself more certainty without sacrificing the low costs and transactional ease of bond funds.
LMK5 wrote: Fri May 13, 2022 3:33 pmFrom your graph, can I conclude that rolling bond funds are not suitable as liability-matching vehicles?
I'd say it's not so much that the FUNDS are unsuitable. Instead, I'd say that it is not ideal for investors to maintain a constant bond duration (with a rolling bond ladder and/or constant duration bond fund) when their investment horizon is naturally declining over time.
I see. So, as a 61 year old ready to retire, I have about 45% of my assets in Vanguard Total Bond Market Index Fund. If I'm going to retire in the next 2 years, what would be the best vehicle(s) to use to achieve the best results and lower my uncertainty associated with constant duration, assuming I'm planning to age 92?
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Re: A bond duration glide path for retirement investing

Post by vineviz »

LMK5 wrote: Fri May 13, 2022 4:35 pm I see. So, as a 61 year old ready to retire, I have about 45% of my assets in Vanguard Total Bond Market Index Fund. If I'm going to retire in the next 2 years, what would be the best vehicle(s) to use to achieve the best results and lower my uncertainty associated with constant duration, assuming I'm planning to age 92?
I'll give a hypothetical answer, but keep in mind you should evaluate your own circumstances and preferences.

Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.

You could basically achieve that with 35% of your portfolio in Vanguard Long-Term Bond ETF (BLV) and 10% in Vanguard Total Bond Market ETF (BND).

You'd gradually reduce weight of BLV relative to BND, that by age 70 you're roughly half BLV and half BND.

By age 79 you'd be back to 45% of your portfolio in BND, after which you'd glide into more and more shorter instruments.
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Re: A bond duration glide path for retirement investing

Post by LMK5 »

vineviz wrote: Fri May 13, 2022 5:28 pm
LMK5 wrote: Fri May 13, 2022 4:35 pm I see. So, as a 61 year old ready to retire, I have about 45% of my assets in Vanguard Total Bond Market Index Fund. If I'm going to retire in the next 2 years, what would be the best vehicle(s) to use to achieve the best results and lower my uncertainty associated with constant duration, assuming I'm planning to age 92?
I'll give a hypothetical answer, but keep in mind you should evaluate your own circumstances and preferences.

Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.

You could basically achieve that with 35% of your portfolio in Vanguard Long-Term Bond ETF (BLV) and 10% in Vanguard Total Bond Market ETF (BND).

You'd gradually reduce weight of BLV relative to BND, that by age 70 you're roughly half BLV and half BND.

By age 79 you'd be back to 45% of your portfolio in BND, after which you'd glide into more and more shorter instruments.
Thanks vineviz.
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Re: A bond duration glide path for retirement investing

Post by international001 »

vineviz wrote: Fri May 13, 2022 5:28 pm
Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
So are you suggesting to get a 29 year bond (92-62) when you are 63?
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Re: A bond duration glide path for retirement investing

Post by Morik »

vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
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Re: A bond duration glide path for retirement investing

Post by vineviz »

international001 wrote: Fri May 13, 2022 6:10 pm
vineviz wrote: Fri May 13, 2022 5:28 pm
Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
So are you suggesting to get a 29 year bond (92-62) when you are 63?
Probably not ONLY a 29 year bond, since presumably you'd want some cashflows in the first 28 years of retirement too.
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Re: A bond duration glide path for retirement investing

Post by vineviz »

Morik wrote: Fri May 13, 2022 6:44 pm
vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
If you don't account for the bigger withdrawals in the early years, the calculation is ((92-63)/2) + (63-61) = 16.5.
"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: A bond duration glide path for retirement investing

Post by Drew31 »

vineviz wrote: Fri May 13, 2022 9:09 pm
Morik wrote: Fri May 13, 2022 6:44 pm
vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
If you don't account for the bigger withdrawals in the early years, the calculation is ((92-63)/2) + (63-61) = 16.5.
Seeing if I’m understanding this concept. Taking this example as someone still accumulating at age 40, but using the same withdrawal/expectancy timelines, investment horizon is (92-63)/2 + (63-40) = 37.5 years?
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Re: A bond duration glide path for retirement investing

Post by Morik »

vineviz wrote: Fri May 13, 2022 9:09 pm
Morik wrote: Fri May 13, 2022 6:44 pm
vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
If you don't account for the bigger withdrawals in the early years, the calculation is ((92-63)/2) + (63-61) = 16.5.
Ah thanks, I had a couple things wrong there.

So its:
W/2 + T
W: # of years you will be withdrawing for
T: # of years until you begin withdrawing
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Re: A bond duration glide path for retirement investing

Post by vineviz »

Drew31 wrote: Fri May 13, 2022 9:47 pm
vineviz wrote: Fri May 13, 2022 9:09 pm
Morik wrote: Fri May 13, 2022 6:44 pm
vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
If you don't account for the bigger withdrawals in the early years, the calculation is ((92-63)/2) + (63-61) = 16.5.
Seeing if I’m understanding this concept. Taking this example as someone still accumulating at age 40, but using the same withdrawal/expectancy timelines, investment horizon is (92-63)/2 + (63-40) = 37.5 years?
Yep, that seems about right assuming we are talking exclusively about retirement planning.

A typical 40 year old might have other financial goals to plan for that have a shorter horizon than that (children, weddings, houses, etc).
"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: A bond duration glide path for retirement investing

Post by vineviz »

Morik wrote: Fri May 13, 2022 10:18 pm So its:
W/2 + T
W: # of years you will be withdrawing for
T: # of years until you begin withdrawing
You got it. This is a simple approximation that assumes constant spending etc. but it’s going to get you close enough most of the time.
"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: A bond duration glide path for retirement investing

Post by Morik »

vineviz wrote: Sat May 14, 2022 7:10 am
Morik wrote: Fri May 13, 2022 10:18 pm So its:
W/2 + T
W: # of years you will be withdrawing for
T: # of years until you begin withdrawing
You got it. This is a simple approximation that assumes constant spending etc. but it’s going to get you close enough most of the time.
I take it to adjust you can modify the constant '2'.
E.g., to account for larger withdrawals early, you would increase that 2. E.g., W/2.2 + T would shift the horizon to be shorter to account somewhat for larger withdrawals early. Would you typically do this proportionally? E.g., if the withdrawals during the first half are 2x the withdrawals in the second half, would you use W/3+T?
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Re: A bond duration glide path for retirement investing

Post by vineviz »

Morik wrote: Sat May 14, 2022 11:34 am I take it to adjust you can modify the constant '2'.
You could, although if you're going to go that far you might as well IMHO just go all the way to a spreadsheet and compute the duration manually instead of estimating it.
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Re: A bond duration glide path for retirement investing

Post by Drew31 »

vineviz wrote: Sat May 14, 2022 7:08 am
Drew31 wrote: Fri May 13, 2022 9:47 pm
vineviz wrote: Fri May 13, 2022 9:09 pm
Morik wrote: Fri May 13, 2022 6:44 pm
vineviz wrote: Fri May 13, 2022 5:28 pm Let's assume that portfolio withdrawals start at age 63 and continue until age 92. Let's further assume that Social Security will be claimed starting at age 70, so benefits kick in starting at age 71. This means bigger withdrawals in the first 8 years, leading to an estimated investment horizon of roughly 14 years.
Can you show how that is derived?

I think its (93-61)/2 - (63-61) = 14, but that isn't doing anything to overweight the first 8 years of withdrawals?
If you don't account for the bigger withdrawals in the early years, the calculation is ((92-63)/2) + (63-61) = 16.5.
Seeing if I’m understanding this concept. Taking this example as someone still accumulating at age 40, but using the same withdrawal/expectancy timelines, investment horizon is (92-63)/2 + (63-40) = 37.5 years?
Yep, that seems about right assuming we are talking exclusively about retirement planning.

A typical 40 year old might have other financial goals to plan for that have a shorter horizon than that (children, weddings, houses, etc).
Thanks - And yes, I was speaking strictly of retirement planning in isolation vs. the other goals you mentioned.

So this is why the recommendation that a younger investor put the early part of his bonds (fixed income) into long duration. This insulates from the interest rate risk. True, rates could rise and you've locked in a lower rate for the duration but an investor also does not know what rates may do and the longer duration lets you KNOW what $ you would have at that duration. Buying a shorter duration is fine, but to some degree speculation in that
in 6.5 years (just using avg. Intermediate duration) you're going to be resetting your rate and while it could work in your favor it could also work against you. As your investing horizon gets shorter, you shorten duration.

I probably mixed a bunch of concepts together there but I'm trying to test my understanding by saying it myself.
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