watchnerd wrote: ↑Thu May 25, 2023 9:05 pm
I really don't see the problem with making a pretty steep pivot to TIPS once you're <5 years from retirement and / or have 'hit your number'.
After all, plenty (although not all) of target date retirement funds have a steep bond fund pivot in the final years before retirement, including adding TIPS late in the game, not in the accumulation years.
So as I have pointed out before, the relatively small DFA Target funds do all their pre-retirement de-risking with TIPS, and the federal Thrift Savings Plan in the L Funds also primarily de-risks with the G Fund (which is their rough TIPS equivalent), and yet none of the really big Target fund companies like Vanguard ever
use much TIPS.
It is possible that DFA/TSP being on one side and all the big marketed Target funds on the other side is a difference in modeling results, but I personally suspect not. Rather, I think the issue is that the big Target funds are so big that if they actually tried to use mostly TIPS for de-risking, they would completely dominate the TIPS market and likely make it illiquid/inefficient. In contrast, DFA is far too small for that to be a concern, and of course the G Fund is only available in the TSP and has its returns set by statute with reference to the market rates for Treasuries.
To be clear, I don't think this has anything to do with using risky bonds as part of your risky portfolio. But I personally would not rely on the really big Target funds for guidance on optimal de-risking before and through retirement, because I think they are practically constrained by the size of the TIPS market to only use a relatively small amount of TIPS for de-risking.
We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path -- didn't accumulate any TIPS 15-20 years before retirement and used a stock heavy accumulator portfolio (70/30) up until the last few years when we hit both 51 years old / <5 years from retirement and 40x, then sold a bunch of stocks and starting building the TIPS ladder.
This allowed us to use a more aggressive portfolio strategy in the accumulation years than if we have been trying to buy TIPS for 15-20 years.
So as I have also mentioned before, at a high level the point of starting the de-risking process well before retirement is basically just to smooth out the relative pricing of risky assets and very-low-risk assets. This smoothing helps reduce sequence of real returns risk, since if you wait until shortly before retirement to de-risk, it is possible that risky assets at that point will be in a temporary low cycle of prices relative to very-low-risk assets. The opportunity cost associated with this strategy is it is possible in retrospect that you will have given up some accumulation returns if the sequence of real returns for your risky assets does not result in such a low cycle in relative pricing during a de-risking period concentrated much closer to retirement.
In your case, it sounds like a bad sequence of real returns simply didn't happen during your relatively concentrated de-risking period. Meaning it sounds like by the time you started de-risking, your risky portfolio had decent pricing relative to TIPS.
But I would caution against thinking because that worked for you it means there is no such risk at all. I think the proper interpretation is more just that because your sequence of real returns ended up not being bad, you got that extra accumulation from waiting to de-risk. But of course if your sequence of real returns had ended up with your risky assets in a relative price down cycle, you might have been better off de-risking sooner.
Of course that analysis doesn't mean you made a mistake. If you are likely to have a relatively high supply of savings (through human capital, inheritances, a good early sequence of returns, or so on) relative to your target retirement income, it is entirely rational to decide to take more risk with those savings pre-retirement in the pursuit of possible upside scenarios, since you can still meet your retirement income goals with a broader range of possible downside scenarios. If you look at a lot of Target fund white papers, you will see this frequently discussed, that depending on your exact goals for retirement, different amounts of risk can rationally lead to different glidepaths.
For example, here is a chart from Vanguard's white paper:
In their model, if you were on the "maintaining lifestyle" end of their spectrum (basically meaning you were averse to taking much risk to your sustainable retirement income), you would potentially start de-risking very early. If you were instead on the "prioritizing legacy" end of their spectrum (basically meaning you were fine taking some more risk as to where your sustainable retirement income ended up in order to improve your chances of ending up with a decent amount extra to give away), you would rationally follow a riskier glidepath.
However, I think it is worth noting that in almost all the model comparisons like this that I have seen, the main variable ends up not being when you de-risk, but instead the level of risk you take throughout the glidepath. Which makes sense--the exact timing of your de-risking process is really small ball compared to that entire-life-cycle decision.
So personally, I think generally speaking the most robust way of thinking about all this is actually to separate out your safe retirement income portfolio from your legacy/giving portfolio. Your safe retirement income portfolio can follow a very conservative path when it comes to sequence of real returns risk--again, I personally think the DFA/TSP path is likely the best guide. But then you can layer on top of that a legacy/giving portfolio which could arguably be entirely in risky assets the whole time.
In fact, I strongly suspect DFA's typical Target client does exactly that, meaning they put only a portion of their wealth in a DFA Target fund for retirement income purposes, and then probably invest the rest more aggressively.
So personally, I do think starting to de-risk on the early side specifically with retirement income savings tends to make sense, understanding that you might not de-risk at all with the portion of your savings that is really more about legacy/giving.