30y Bond instead of bond mutual fund

[gg13]

My bond investments are entirely in mutual funds like VBTIX. I am considering moving it all to 30y Treasury bonds and would like to have peoples thoughts. Background is as follows:

- I am retired, my wife still works
- When she retires, I have a retirement budget with adequate 30yr survival given our assets
- 30yr financial survival was assessed with Jim Otar's tools
- That budget is funded via an initial withdrawal rate of 3.5%

Given all that, and given that 30yr bonds are currently at a bit over 4.5%, I am thinking of moving all of my bond investments out of things like VBTIX and into 30yr bonds on the secondary market. The primary place for this is my Fidelity Rollover IRA where I can buy bonds on the secondary market in chunks of $1k.

To my thinking, I am done with the accumulation phase and am now in the financial engineering phase. Buying the 4.5% cash stream for 30yr meets my 3.5% target and will be much, much higher than the rates we've suffered for the last couple of decades. I understand that this has no cost of living built into and I need a separate "inflation bucket" via equities.

What am I missing, if anything? I am afraid of sustained increases in inflation. I am afraid of my equities crashing in the next couple of years so that I start to care about accumulating again (but Otar's simulation should have factored this in). If I have unexpected expenses that makes me go into the principal behind the 30y bonds, I can do that in chunks of $1k, just in case rates have gone up.

This has probably been asked a million times in recent months..

[retired@50]

Are you intending to build a bond ladder (i.e. spending as bonds mature), or are you intending to sell bonds before maturity to raise money?

Regards,

[grok87]

My bond investments are entirely in mutual funds like VBTIX. I am considering moving it all to 30y Treasury bonds and would like to have peoples thoughts. Background is as follows:

- I am retired, my wife still works
- When she retires, I have a retirement budget with adequate 30yr survival given our assets
- 30yr financial survival was assessed with Jim Otar's tools
- That budget is funded via an initial withdrawal rate of 3.5%

Given all that, and given that 30yr bonds are currently at a bit over 4.5%, I am thinking of moving all of my bond investments out of things like VBTIX and into 30yr bonds on the secondary market. The primary place for this is my Fidelity Rollover IRA where I can buy bonds on the secondary market in chunks of $1k.

To my thinking, I am done with the accumulation phase and am now in the financial engineering phase. Buying the 4.5% cash stream for 30yr meets my 3.5% target and will be much, much higher than the rates we've suffered for the last couple of decades. I understand that this has no cost of living built into and I need a separate "inflation bucket" via equities.

What am I missing, if anything? I am afraid of sustained increases in inflation. I am afraid of my equities crashing in the next couple of years so that I start to care about accumulating again (but Otar's simulation should have factored this in). If I have unexpected expenses that makes me go into the principal behind the 30y bonds, I can do that in chunks of $1k, just in case rates have gone up.

This has probably been asked a million times in recent months..

i think a 30 yr tips ladder might make more sense. and buy at auction

[steadyosmosis]

I bought a TIPS ladder.

[gg13]

Are you intending to build a bond ladder (i.e. spending as bonds mature), or are you intending to sell bonds before maturity to raise money?

With a coupon of 4.5% or thereabouts, unless there is unexpected need, I would not need to touch the principal for some time. I would go into the principle if the "inflation bucket" of equities did not handle inflation. So, no, was not considering a bond ladder because my view of the income from this is interest not principal.

[retired@50]

Are you intending to build a bond ladder (i.e. spending as bonds mature), or are you intending to sell bonds before maturity to raise money?

With a coupon of 4.5% or thereabouts, unless there is unexpected need, I would not need to touch the principal for some time. I would go into the principle if the "inflation bucket" of equities did not handle inflation. So, no, was not considering a bond ladder because my view of the income from this is interest not principal.

I'd be very cautious here...

Unless you are virtually certain you can live off of the 4.5% interest. 30 year bond prices are extremely volatile when interest rates change.

If you are ever faced with selling a 30 year bond on the secondary market, and interest rates have moved against you, you're very likely to be disappointed in what you get in return for your bond.

Regards,

[rich126]

I think it is a good idea. The rate is solid. The average inflation rate historically is around 3.3%. While a fixed annuity would payout more money for as long as you live, the principal would be gone once you and your spouse passes away.

And if you needed to, you can always sell the bond down the road. If rates are much higher you'd lose some money, or if they are lower, you'd make some money.

I've pondered doing something like this as well but have yet to pull the trigger but if I had a bit more money I would.

[gg13]

I bought a TIPS ladder.

I see TIPS at around 2%. If I need 3.5% initial withdrawal, a TIPS ladder would mean going into the principal. That isn't a reason not to do it, but I see TIPS as a plan that would give me an inflation-protected income of around 2% (recognizing that the income stream will go up and down year to year). By contrast, 30yr bonds give me 4.5% for 30yr, but without inflation adjustments. What I have not said clearly is that there is another bucket of assets in equities that will be used for inflation. But you are right, I have not compared "everything in TIPS at 2%" vs. "A fraction in 30yr at 4.5% (with the balance off in equities for inflation)" to see which gives the larger cash stream.

[gg13]

I'd be very cautious here...

Unless you are virtually certain you can live off of the 4.5% interest. 30 year bond prices are extremely volatile when interest rates change.

If you are ever faced with selling a 30 year bond on the secondary market, and interest rates have moved against you, you're very likely to be disappointed in what you get in return for your bond.

Regards,

Yes, this is the sort of thing that worries me. I have a retirement expenditure budget in which I think I have been conservative, e.g., I assume SS payments will only be about 75% of expected try to use conservative estimates of health costs. Part of our income will be from federal FERS pension, some from SS, and some from a TIAA CREF traditional that will be annuitized. So, those are all "for life" cash flows, but with little to some COLA protection. In addition, there are assets that are mixtures of equities and bond funds living in retirement accounts and non tax-sheltered accounts.

Based on all of this, and using Jim Otar's simulations, survival probability was between 30 years and infinity for an initial withdrawal rate around 3.5%. Those models have bond funds that return something like the 6 month CD rate plus half a percent or 1 percent (need to double check). Since that rate is historically lower than 3.5% for at least recent decades, this means that income from bonds eats into principle. If I buy the 30yr bonds today, I should be able to just use interest from them.

That is the basis of my confidence. I suspect the fly in the ointment is a misunderstanding of how inflation affects all of this. 3.5% is just the initial withdrawal rate. It will need to go up in time to cover COLA. I fear I have a misunderstanding of how that will work, how the "inflation bucket" will be used to support this that will force me to dip into the principle (bonds) when rates force me to sell at a discount....HOWEVER, the plan is to buy thee on the secondary market through Fidelity so that they come in $1k chunks. I hope that will mitigate this risk a little in terms of not being force to sell more bond than need to get at a fraction of the principal.

[delamer]

With a coupon of 4.5% or thereabouts, unless there is unexpected need, I would not need to touch the principal for some time. I would go into the principle if the "inflation bucket" of equities did not handle inflation. So, no, was not considering a bond ladder because my view of the income from this is interest not principal.

I'd be very cautious here...

Unless you are virtually certain you can live off of the 4.5% interest. 30 year bond prices are extremely volatile when interest rates change.

If you are ever faced with selling a 30 year bond on the secondary market, and interest rates have moved against you, you're very likely to be disappointed in what you get in return for your bond.

Regards,

Plus if the sustained increases in inflation* are a big concern for you and they do occur, then you’ve locked in your bonds portfolio to a fixed return. Whether your equities’ returns will be enough to compensate is anyone’s guess.

Proportionally, how much do you have in stocks vs. bonds? A 50/50 allocation is different than a 75/25 allocation in terms of your likely success.

*Not exactly sure what you mean by this — inflation is the increase in prices of a fixed basket of goods and services. It happens virtually every year. Do you mean that you are concerned about a long period of inflation that is above the historical average? Remember that the real return on your portfolio is what matters, not whether inflation is higher thsn usual. Better 5% inflation and a 10% return on your portfolio than 3% inflation and a 6% return on your portfolio. (I’m speaking for you individually, not the overall economy.)

[gg13]

I bought a TIPS ladder.

I see TIPS at around 2%. If I need 3.5% initial withdrawal, a TIPS ladder would mean going into the principal. That isn't a reason not to do it, but I see TIPS as a plan that would give me an inflation-protected income of around 2% (recognizing that the income stream will go up and down year to year). By contrast, 30yr bonds give me 4.5% for 30yr, but without inflation adjustments. What I have not said clearly is that there is another bucket of assets in equities that will be used for inflation. But you are right, I have not compared "everything in TIPS at 2%" vs. "A fraction in 30yr at 4.5% (with the balance off in equities for inflation)" to see which gives the larger cash stream.

I did a quick calculation to explore TIPS vs. fixed-income plus inflation bucket using Otar's tables. I used $100k in fixed income at 4.5% as the basis.

Principal in 4.5% coupon bond: 100,000
Income, today dollars: $4500 / yr

From Otar, 30yr inflation bucket requires $10.9 in bucket per $ of annual income.
Inflation bucket for $4500 /yr : $49,050

Total assets required for $4500/yr income in today dollars = $149,050 = $100k in 4.5% coupon bond plus $49,050 in S&P500 index fund.

Now, as alternative, put that $149,050 into TIPS which are paying 2.2% for 30yr tips right now.

Income from TIPS in today dollars = $3300

So, the 30yr gives a larger income in today dollars, but it has the risk of the inflation bucket working. The Otar simulations give something like 95% CL for 30yr survival. The TIPS has lower income, but is guaranteed to match inflation. You also end up with COLA-adjusted principle at the end equal in value to today's buying power.

I have not explored the scenario of making the $4500/yr income stream from the TIPS over 30yr by dipping into the principle and then computing NPV for the two. That would be real work.

[gavinsiu]

Yes, this is the sort of thing that worries me. I have a retirement expenditure budget in which I think I have been conservative, e.g., I assume SS payments will only be about 75% of expected try to use conservative estimates of health costs. Part of our income will be from federal FERS pension, some from SS, and some from a TIAA CREF traditional that will be annuitized. So, those are all "for life" cash flows, but with little to some COLA protection. In addition, there are assets that are mixtures of equities and bond funds living in retirement accounts and non tax-sheltered accounts.

Based on all of this, and using Jim Otar's simulations, survival probability was between 30 years and infinity for an initial withdrawal rate around 3.5%. Those models have bond funds that return something like the 6 month CD rate plus half a percent or 1 percent (need to double check). Since that rate is historically lower than 3.5% for at least recent decades, this means that income from bonds eats into principle. If I buy the 30yr bonds today, I should be able to just use interest from them.

That is the basis of my confidence. I suspect the fly in the ointment is a misunderstanding of how inflation affects all of this. 3.5% is just the initial withdrawal rate. It will need to go up in time to cover COLA. I fear I have a misunderstanding of how that will work, how the "inflation bucket" will be used to support this that will force me to dip into the principle (bonds) when rates force me to sell at a discount....HOWEVER, the plan is to buy thee on the secondary market through Fidelity so that they come in $1k chunks. I hope that will mitigate this risk a little in terms of not being force to sell more bond than need to get at a fraction of the principal.

So Let's say your withdraw is initially $10K is your 3.5% withdraw, the amount is increase each year. Say inflation is 3%, then your next year's withdraw is $10,300. Assuming 3%, in 10 years, your withdraw will be $13,439, in 20 years $18,061 and 30 years $24,273. Assuming your goal is to just live off the interest, then inflation may cause you exceed 4.5% in about 10 years and start needing to sell of asset. The problem with the 30 year bond is that the asset is pretty volatile if interest rate goes up, the value of your bond goes down. Keep in mind that in 10 years, your 30 year bond is now 20 year bond, so it should be less volatile.

One way to alleviate market risk is to create a bond ladder using TIPS. Using the same example of $10K a year, you can build a TIPS using a tools like https://www.tipsladder.com/. You would create a rung each year that yield $10K inflation adjusted return. Each year the rung matures and releases $10K of inflation adjusted income.

The advantage of this is that you have essentially set aside part of your portfolio to be consumed as income. Because of the TIPS's growth, your cost in the ladder will be less than the final output. If inflation shoots up, TIPS will increase in value to compensate. If the stock market crash or interest rate goes up, the tips ladder is unaffected as long as you consume one rung per year.

The disadvantage is that you will be locking away that portfolio. You may for example have calculated the expense improperly, building the ladder wrong. Your personal inflation could be different than the TIPS cpi adjustment. TIPS is limited to 30 years, so if you are still alive after 30 years, the ladder will be consumed. However, I am assuming that you are not going to put your entire portfolio into the ladder and you have money left over that you can invest in equity/bond during the time you draw your ladder. You have money at the end if you exceed your ladder.

If you don't like the idea, I would probably stick with an intermediate bond fund instead of buying a 30 year long bond for the inflation reason. At 3.5%, it's still pretty conservative if you have a reasonable equity of 30% or greater and if you are willing to make adjustment if it's not working out.

Did you account for social security? Social security does adjust for inflation. It's often a big help in combating inflation.

[gg13]

Plus if the sustained increases in inflation* are a big concern for you and they do occur, then you’ve locked in your bonds portfolio to a fixed return. Whether your equities’ returns will be enough to compensate is anyone’s guess.

Proportionally, how much do you have in stocks vs. bonds? A 50/50 allocation is different than a 75/25 allocation in terms of your likely success.

*Not exactly sure what you mean by this —

What I mean is precisely what you guessed: That the inflation bucket fails to provide adequate inflation adjustment to the fixed income. In Otar's calculations of his inflation buckets, he iterates over 30-yr brackets sliding along the history of equities, inflations, CDs/bonds and computes the number of times that the cash flow fails. I have forgotten whether his requirement is for 90% or 95% success rate for 30yr. His assumptions for the inflation bucket are: The asset mix of the investment portfolio used as the inflation bucket is 50% S&P500 index and 50% fixed income. Equity: dividend yield is 2%, management costs 2% for a net alpha of 0%. Fixed Income has a net yield of 6–month CD interest rate plus 0.5%. (Otar, Jim C.. UNVEILING THE RETIREMENT MYTH: Advanced Retirement Planning based on Market History (p. 346). Kindle Edition. )

As for my current asset mix, it is roughly 60/40 fixed / equity. Not included is a sack o' cash that represents realized assets that would be used to pay the bills if I flipped the switch to start living off the investments instead of my wife's income. In reality, that "cash" is in a pile of 8-wk bills broken into 8 tranches that reinvest into new bills as they mature. I don't count this in the fixed portion of the allocation nor do I count the emergency cash on hand or earmarked savings for house repairs and vehicle depreciation.

[BrooklynInvest]

Far too much risk for me.

One, you're locking in 4.5%, which could be high, could be low. But there's risk there. Two, for every 1% increase in rates your principal's going down 30% with your day 1 duration - or up of course, but again risk in decumulation. I'm not sure what a financial engineering phase is TBH.

Typically the yield curve flattens after, what 15 or so years? Going longer than that means you're increasing duration and rate risk a lot for what I think is a very small increase in income.

I'll stick with BND and chill.

[gg13]

So Let's say your withdraw is initially $10K is your 3.5% withdraw, the amount is increase each year. Say inflation is 3%, then your next year's withdraw is $10,300.

No, there is a separate investment handling inflation. Please see my other post regarding inflation buckets. See also, https://www.hubinternational.com/-/medi ... uckets.pdf and Jim Otar's book that I cited in my other posting.

The problem with the 30 year bond is that the asset is pretty volatile if interest rate goes up, the value of your bond goes down. Keep in mind that in 10 years, your 30 year bond is now 20 year bond, so it should be less volatile.

I agree. It all comes down to whether I will have to dip into the principle or if the inflation bucket will do its job.

One way to alleviate market risk is to create a bond ladder using TIPS. Using the same example of $10K a year, you can build a TIPS using a tools like https://www.tipsladder.com/. You would create a rung each year that yield $10K inflation adjusted return. Each year the rung matures and releases $10K of inflation adjusted income.

The advantage of this is that you have essentially set aside part of your portfolio to be consumed as income. Because of the TIPS's growth, your cost in the ladder will be less than the final output. If inflation shoots up, TIPS will increase in value to compensate. If the stock market crash or interest rate goes up, the tips ladder is unaffected as long as you consume one rung per year.

The disadvantage is that you will be locking away that portfolio. You may for example have calculated the expense improperly, building the ladder wrong. Your personal inflation could be different than the TIPS cpi adjustment. TIPS is limited to 30 years, so if you are still alive after 30 years, the ladder will be consumed. However, I am assuming that you are not going to put your entire portfolio into the ladder and you have money left over that you can invest in equity/bond during the time you draw your ladder. You have money at the end if you exceed your ladder.

If you don't like the idea, I would probably stick with an intermediate bond fund instead of buying a 30 year long bond for the inflation reason. At 3.5%, it's still pretty conservative if you have a reasonable equity of 30% or greater and if you are willing to make adjustment if it's not working out.

Did you account for social security? Social security does adjust for inflation. It's often a big help in combating inflation.

I need to think more about TIPS. Thank you for the info. As I indicated in a separate post, it looks like TIPS gives a lower cash stream than the 4.4% 30 yr plus inflation bucket, but it is more secure. In my case, the bonds are just one portion of the whole portfolio. There are annuities, SS, and federal pensions giving much of the income and dividing down some of this risk.

Your final comment really puts the finger on things. A conventional bond fund can adjust to rates over time. Maybe that helps if rates go up and it is an intermediate or short term bond fund (although there are losses to principle hiding in this). On the other hand, for the last couple of decades, bond funds have paid much less than 4.5% haven't they? So I will miss that extra income if things are similar going forward. I don't know how to quantify that at the moment.

[sycamore]

In general I think you'll be fine with your plan.

I do have a question, though it may not apply to your personality type.

What about regret at having locked in 4.5% as rates go up by 1%, 2%, 3% ?

Look at what 10 year bond rates did starting in the late 1960s through the 1980s: https://www.govinfo.gov/content/pkg/ERP ... able73.pdf. 30 year bonds started in 1977 at 7.75%, and peaked 10.79% in 1985.

So maybe inflation doesn't ever get as bad as the 70's/80's, but it's conceivable we could see rates going 3 percentage points higher over a 30 year span.

Even though I'd ignore the "mark to market" value drop in my 30 year bond, what about regret at having missed out on a higher yield? This was something I pondered as I built out a TIPS ladder. Eventually I realized that I might have some regret but the current YTM was good enough (and I'd still have Social Security and the rest of my portfolio).

[gavinsiu]

I am not familar with the inflation bucket or Jim Otar. If I have time, I will try to read it.

Think of TIPS as a nominal bond with inflation insurance. Suppose a nomimal treasury yields 4% while a TIPS yield 2%. Let's say inflation is 2%, then TIPS and nominal return the same total return. Let's say inflation shoots up 5%, you nominal treasury is now -1% in real retun because it's eaten up by inflation. Your TIPS will adjust and get 7% return. The reverse happens and if inflation drops to 1%. Your TIPS now only return 3% (2% + 1%) total. Don't forget the value of the bond will be affected by interest rate. If interest rate on the bond increases, this makes your existing bond less valuable. This is why in 2022, bonds fell in value.

The collapsing TIPS ladder actually has you expending the principle. The idea is that you have reserved 30 years of income or a bucket. This method essentially trade growth for safety, which serves to protect against market and interest rate risk. The other method of holding a bund fund has a possibility of growth but also exposes you to market and interest rate risk.

[BirdFood]

A hurried and sloppy spreadsheet calculation suggests that with two percent inflation, you will need to spend the entire coupon income from your bonds in fourteen years, and at three percent, in eleven years. After that, you'll need to supplement from somewhere else.

Unless your primary goal, overriding other goals, is to never touch principal, I would suggest going with a TIPS ladder instead, and accepting that you will spend some of the principal as the bonds mature.

[gg13]

I have not explored the scenario of making the $4500/yr income stream from the TIPS over 30yr by dipping into the principle and then computing NPV for the two. That would be real work.

Okay, I did this, sort of, in a sheer dumb luck sort of way. A 30yr TIPS ladder bought today is claimed to have a safe withdrawal rate of 4.47% which is darn near equal to the 4.5% ish 30yr bond coupon. So, I could have equal income from the TIPS.

Comparison:
TIPS ladder: After 30 years, the TIPS ladder is gone, but I am nearly certain to have the 30 yr of income. If I live longer, too bad.

4.5% 30yr bond plus inflation bucket: 90 to 95% CL 30yr survival (I really need to look that up....embarrassing) for same income, but at the end of the 30yr, I still have the principal. If I live longer, yay. Downside are all the risks people have identified here including the methodological risk of Otar's estimate of portfolio survival.

This isn't a fair comparison because it does not recognize the money put into the inflation bucket, so it isn't a dollar for dollar comparison between the two. I'll try to do that better later, but I think it does capture the difference at some level.

[gg13]

In general I think you'll be fine with your plan.

I do have a question, though it may not apply to your personality type.

What about regret at having locked in 4.5% as rates go up by 1%, 2%, 3% ?

Look at what 10 year bond rates did starting in the late 1960s through the 1980s: https://www.govinfo.gov/content/pkg/ERP ... able73.pdf. 30 year bonds started in 1977 at 7.75%, and peaked 10.79% in 1985.

So maybe inflation doesn't ever get as bad as the 70's/80's, but it's conceivable we could see rates going 3 percentage points higher over a 30 year span.

Even though I'd ignore the "mark to market" value drop in my 30 year bond, what about regret at having missed out on a higher yield? This was something I pondered as I built out a TIPS ladder. Eventually I realized that I might have some regret but the current YTM was good enough (and I'd still have Social Security and the rest of my portfolio).

I think regret is a very key question and is at the heart of the "financial engineering" comment I made earlier. If I believe the portfolio survival calculations from Otar for the inflation bucket and for the total portfolio, then I can buy my retirement cash flow now, at least the bond portion. It will be "good enough." It will solve the cash flow problem given the retirement budget. If the survival calculations are right, I'm happy; however, as you point out, if I buy 30yr at 4.5% today because I believe rates are going down soon yet don't need the cash flow for 5 years and then the rates go up, well I could have sat on my assets 5yr and enjoyed a larger fixed income stream. Will there be regret? It is an important question and saying, no, good enough is good enough, is sort of the difference between an engineering perspective and a gambler's "get as much as I can" perspective.

I can't decide if the discussion has gone off the rails or not. (That's not aimed at you). I can't decide whether the fact that no one is discussing 30 yr bond vs. bond fund (the original question) means we are off the rails or if "get TIPS" is actually answering the question.

What I need is a model for something like VBTIX from, say, early 1900s through today and then I can do an Otar-like calculation to see how it compares with just buying 30 yr at 4.5%.

[dbr]

It is an option, but I think inflation risk makes the proposal untenable.

A question is whether your budget need is in real dollars or not. 3.5% real is not available. 2% real is available.

[Northern Flicker]

My bond investments are entirely in mutual funds like VBTIX. I am considering moving it all to 30y Treasury bonds and would like to have peoples thoughts. Background is as follows:

- I am retired, my wife still works
- When she retires, I have a retirement budget with adequate 30yr survival given our assets
- 30yr financial survival was assessed with Jim Otar's tools
- That budget is funded via an initial withdrawal rate of 3.5%

Given all that, and given that 30yr bonds are currently at a bit over 4.5%, I am thinking of moving all of my bond investments out of things like VBTIX and into 30yr bonds on the secondary market. The primary place for this is my Fidelity Rollover IRA where I can buy bonds on the secondary market in chunks of $1k.

To my thinking, I am done with the accumulation phase and am now in the financial engineering phase. Buying the 4.5% cash stream for 30yr meets my 3.5% target and will be much, much higher than the rates we've suffered for the last couple of decades. I understand that this has no cost of living built into and I need a separate "inflation bucket" via equities.

What am I missing, if anything? I am afraid of sustained increases in inflation. I am afraid of my equities crashing in the next couple of years so that I start to care about accumulating again (but Otar's simulation should have factored this in). If I have unexpected expenses that makes me go into the principal behind the 30y bonds, I can do that in chunks of $1k, just in case rates have gone up.

This has probably been asked a million times in recent months..

i think a 30 yr tips ladder might make more sense. and buy at auction

How long does it take to fill out a 30-yr TIPS ladder if the bonds are bought at auction if the strategy optimizes for that length of time?

[steadyosmosis]

I bought a TIPS ladder.

But not with my entire portfolio.

[dbr]

In general I think you'll be fine with your plan.

I do have a question, though it may not apply to your personality type.

What about regret at having locked in 4.5% as rates go up by 1%, 2%, 3% ?

Look at what 10 year bond rates did starting in the late 1960s through the 1980s: https://www.govinfo.gov/content/pkg/ERP ... able73.pdf. 30 year bonds started in 1977 at 7.75%, and peaked 10.79% in 1985.

So maybe inflation doesn't ever get as bad as the 70's/80's, but it's conceivable we could see rates going 3 percentage points higher over a 30 year span.

Even though I'd ignore the "mark to market" value drop in my 30 year bond, what about regret at having missed out on a higher yield? This was something I pondered as I built out a TIPS ladder. Eventually I realized that I might have some regret but the current YTM was good enough (and I'd still have Social Security and the rest of my portfolio).

I think regret is a very key question and is at the heart of the "financial engineering" comment I made earlier. If I believe the portfolio survival calculations from Otar for the inflation bucket and for the total portfolio, then I can buy my retirement cash flow now, at least the bond portion. It will be "good enough." It will solve the cash flow problem given the retirement budget. If the survival calculations are right, I'm happy; however, as you point out, if I buy 30yr at 4.5% today because I believe rates are going down soon yet don't need the cash flow for 5 years and then the rates go up, well I could have sat on my assets 5yr and enjoyed a larger fixed income stream. Will there be regret? It is an important question and saying, no, good enough is good enough, is sort of the difference between an engineering perspective and a gambler's "get as much as I can" perspective.

I can't decide if the discussion has gone off the rails or not. (That's not aimed at you). I can't decide whether the fact that no one is discussing 30 yr bond vs. bond fund (the original question) means we are off the rails or if "get TIPS" is actually answering the question.

What I need is a model for something like VBTIX from, say, early 1900s through today and then I can do an Otar-like calculation to see how it compares with just buying 30 yr at 4.5%.

Assuming you can find calculations somewhere I think it is very difficult to show that for a whole portfolio of stocks and bonds questions such as sustainable withdrawals, survival, and so on depend very much on exactly what one chooses in fixed income. It is a futile undertaking to produce a convincing choice of just what investment one can make in bonds that actually matters to a meaningful degree. The same comment would apply to deciding to buy a TIPS, or to buy a TIPS ladder, or to buy an SPIA. There are also differences regarding whether or not you want the "principle" to survive and "live off the income" or if you just want secure funding of your retirement spending and dying wealthy is asking for too much. Note also that if dying wealthy is the objective, then at the very least the principle must increase with inflation, which the face value of a nominal bond does not do.

[Northern Flicker]

What I need is a model for something like VBTIX from, say, early 1900s through today and then I can do an Otar-like calculation to see how it compares with just buying 30 yr at 4.5%.

Securitized mortgages and asset-backed securities did not exist in 1900, and the corporate bond market was smaller than today. But here is some historical data for corporate bond yields going back to 1900.

https://www.nber.org/system/files/chapt ... /c9268.pdf

The Bengen SWR studies used the S&P500 and treasuries (not sure of the duration). The Trinity study used the S&P500 and long-term investment grade corporate bonds.

It sounds to me like what you want is to create an income floor to cover essential expenses.

[dbr]

What I need is a model for something like VBTIX from, say, early 1900s through today and then I can do an Otar-like calculation to see how it compares with just buying 30 yr at 4.5%.

FireCalc is a historical data model that allows choices for fixed income of commercial paper, long bonds, 30 year Treasury, and 5 year Treasury from 1871 or a portfolio choosing between LT Treasury, LT Corporate, or one month Treasury from 1927. https://www.firecalc.com/


There are Monte Carlo calculators of many varieties that can have granular choices for investment inputs.

[gg13]

What I need is a model for something like VBTIX from, say, early 1900s through today and then I can do an Otar-like calculation to see how it compares with just buying 30 yr at 4.5%.

FireCalc is a historical data model that allows choices for fixed income of commercial paper, long bonds, 30 year Treasury, and 5 year Treasury from 1871 or a portfolio choosing between LT Treasury, LT Corporate, or one month Treasury from 1927. https://www.firecalc.com/

There are Monte Carlo calculators of many varieties that can have granular choices for investment inputs.

Firecalc appears to be essentially identical in method to Otar, at least conceptually, although they use a different data period. I have not found a detailed description of the underlying data, so I cannot say if there is a difference there.

Since I want to compare holding a 30y bond at 4.5% with owning a mutual fund like VBTIX using methods like FireCalc and Otar, what I really need is to build a model of something like VBTIX over a long period back in time. I realize this will need to be a bit of a Frankenstein model stitching together different funds and synthesizing models for when they didn't exist and when the underlying investment options differed. I don't know if that is possible or, frankly, even makes sense.

Out of curiosity, have you see criticism of FireCalc methodology? I tried to find criticism of Otar's methodology back when I first encountered it, but found very little discussion. I do agree with him that Monte Carlo methods are unlikely to be very good because they will lack important correlations and modeling of cyclical changes. That is not to say that Monte Carlo is fundamentally inapplicable, but is just to say that as practiced now for financial modeling, I think people leave all of that out (since who knows the details of all of the correlations and cycles?)

[gg13]

It sounds to me like what you want is to create an income floor to cover essential expenses.

Already done. I am very fortunate in that the annuity, pension, and 75%*Social Security portions of my assets will handle that, barring huge unforeseen medical issues.

[dbr]

FireCalc is a historical data model that allows choices for fixed income of commercial paper, long bonds, 30 year Treasury, and 5 year Treasury from 1871 or a portfolio choosing between LT Treasury, LT Corporate, or one month Treasury from 1927. https://www.firecalc.com/

There are Monte Carlo calculators of many varieties that can have granular choices for investment inputs.

Firecalc appears to be essentially identical in method to Otar, at least conceptually, although they use a different data period. I have not found a detailed description of the underlying data, so I cannot say if there is a difference there.

Since I want to compare holding a 30y bond at 4.5% with owning a mutual fund like VBTIX using methods like FireCalc and Otar, what I really need is to build a model of something like VBTIX over a long period back in time. I realize this will need to be a bit of a Frankenstein model stitching together different funds and synthesizing models for when they didn't exist and when the underlying investment options differed. I don't know if that is possible or, frankly, even makes sense.

Out of curiosity, have you see criticism of FireCalc methodology? I tried to find criticism of Otar's methodology back when I first encountered it, but found very little discussion. I do agree with him that Monte Carlo methods are unlikely to be very good because they will lack important correlations and modeling of cyclical changes. That is not to say that Monte Carlo is fundamentally inapplicable, but is just to say that as practiced now for financial modeling, I think people leave all of that out (since who knows the details of all of the correlations and cycles?)

I am not aware of a focused discussion of retirement income modeling methodology. There is a Wiki entry on retirement planners:

https://www.bogleheads.org/wiki/Retirem ... d_spending

I do know that FireCalc originated with some people over on the Early Retirement Forum (John Greaney, et al) and there may be discussion there. The actual methodology is just the basic Bengen/Trinity Study/etc. fleshed out to work as a planner with income streams and so on.

https://www.google.com/search?sitesearc ... &q=greaney

One limitation, of course, is that the data isn't there to get a lot of granularity on exactly what assets are in the portfolio. Another planner in the same group that has an interesting graphic output is this one: https://engaging-data.com/visualizing-4-rule/

I think a lot of people find falling back on real world data to make sense and to relieve the burden of properly figuring out the complexity of actual investment behavior.

[David Jay]

Unless you are virtually certain you can live off of the 4.5% interest. 30 year bond prices are extremely volatile when interest rates change.

This!

[muffins14]

My bond investments are entirely in mutual funds like VBTIX. I am considering moving it all to 30y Treasury bonds and would like to have peoples thoughts. Background is as follows:

- I am retired, my wife still works
- When she retires, I have a retirement budget with adequate 30yr survival given our assets
- 30yr financial survival was assessed with Jim Otar's tools
- That budget is funded via an initial withdrawal rate of 3.5%

Given all that, and given that 30yr bonds are currently at a bit over 4.5%, I am thinking of moving all of my bond investments out of things like VBTIX and into 30yr bonds on the secondary market. The primary place for this is my Fidelity Rollover IRA where I can buy bonds on the secondary market in chunks of $1k.

To my thinking, I am done with the accumulation phase and am now in the financial engineering phase. Buying the 4.5% cash stream for 30yr meets my 3.5% target and will be much, much higher than the rates we've suffered for the last couple of decades. I understand that this has no cost of living built into and I need a separate "inflation bucket" via equities.

What am I missing, if anything? I am afraid of sustained increases in inflation. I am afraid of my equities crashing in the next couple of years so that I start to care about accumulating again (but Otar's simulation should have factored this in). If I have unexpected expenses that makes me go into the principal behind the 30y bonds, I can do that in chunks of $1k, just in case rates have gone up.

This has probably been asked a million times in recent months..

i think a 30 yr tips ladder might make more sense. and buy at auction

I agree. Or at least 50/50

[Northern Flicker]

It sounds to me like what you want is to create an income floor to cover essential expenses.

Already done. I am very fortunate in that the annuity, pension, and 75%*Social Security portions of my assets will handle that, barring huge unforeseen medical issues.

Then you don't need a 30-year fixed nominal income stream from the remaining assets. You've already covered that part of your expected liabilities. Remaining assets would be available to fund idiosyncratic and unpredictable expenses, and any residual inflation risk in the income floor, and a 30-year treasury is not a good match to many of the outcomes.

[Saintor]

No way I would do this for many of the good reasons above. Bottom line, to get 4.5%+, you are not obliged to lock for 30 years.

[TBillT]

I have recently been bullish on 20-30yr TBonds for my Traditional IRA. I try for issues with ~4.6 to 4.7% coupon at Fidelity on secondary market or also new issues if avail. Recent days it appreciated (market rates went down) so I am up a little bit now. Some say rates headed higher long term, but maybe lower short term. So if I see huge return (lower rates) I would probably take the profit. You need a bit thick skin because if rates go up, you will could see large (unrealized) loss in your principal.

[Tyler Aspect]

The net asset value of your 30 year bond will be too volatile to serve as a source of stability for your portfolio.

I myself am moving to short term bonds coupled with a 4% increase of stock allocation. (American Golden Age?)

https://testfol.io/?s=jeod1jQLUCr

[Grt2bOutdoors]

Would a single premium immediate annuity solve your problem? The nominal return would theoretically be higher than the 4.5% the 30 year bond returns. If your concern is a steady stream of income, the SPIA would provide a stream of payments for the rest of your lives. In return though, you would give up control of the principal.