Stable Value Funds vs Bond Funds

[LXEX55]

I plan to retire next year, and am pretty sure I am going to allocate my funds 60% stock index funds and 40% bond index funds. My wife feels that we should put the 40% in Stable Value Funds rather than bond funds, since she feels bond funds cannot go any higher, as the interest rate seems to be creeping up. Any thoughts or advice on this?

[abner kravitz]

Who knows where interest rates are going. I split my bond allocation 50/50 between bonds and stable value

[KlingKlang]

Who knows where interest rates are going. I split my bond allocation 50/50 between bonds and stable value

I agree with this advice 100%. Or split between bonds, TIPs, and stable value.

There seems to be quite a lot of variation on the yields and expenses of stable value funds. Some have rates higher than intermediate bond funds, some are barely better than money market funds. Make sure that the one(s) offered in your plan are in the first group.

[ruralavalon]

I plan to retire next year, and am pretty sure I am going to allocate my funds 60% stock index funds and 40% bond index funds. My wife feels that we should put the 40% in Stable Value Funds rather than bond funds, since she feels bond funds cannot go any higher, as the interest rate seems to be creeping up. Any thoughts or advice on this?

A 60/40 asset allocation seems reasonable in my opinion. Stable value funds vary quite a bit from plan to plan, and change over time.

What is the rate currently being paid on the stable value fund in your 401k? Another alternative is a short-term bond fund or a money market fund for a part of the fixed income allocation.

I would not be terribly afraid of intermediate-term bond funds, even retired you are still investing for the long term. For what it's worth we are both 71, retired, we have a little in short-term bonds (1-2 yrs), and about 85% of our fixed income allocation is in two intermediate-term bond funds.

[willthrill81]

It depends greatly on the terms of the stable value fund (SVF) and the rates they are paying. For instance, I have access to a SVF that pays a guaranteed 3.25% and has full liquidity. IMHO, that's preferable to just about any bond right now (a full point higher than 10 year bond yields).

[Nate79]

The SVF in my 401k has historically earned about 1% less than the TBM fund. I put my bonds in TBM for this reason.

[FCM]

I retired about 5 years ago from "megacorp." My stock-to-fixed income asset allocation is about 40/60. Half of my fixed income asset allocation is in my former company's 401k stable value fund, which currently yields about 2.5%. The balance of my fixed income asset allocation is a mix of Vanguard bond funds, TIPS, EE bonds, CDs, Treasury 2-year notes, and money market funds. The stable value fund with its 2.5% yield and no interest rate risk is very attractive to me.

[Tyler Aspect]

You need to be aware of the single insurer risk with having significant asset in a stable value fund.

It is not correct to say that you cannot make money if bond's interest rate goes up. You will earn higher rate on the underlying reinvested bond assets. Over time this will overcome the initial net asset value drop.

[welderwannabe]

The stable value fund I have access to stinks. However, even if it had a great return I would still want to limit my exposure to no more than 50% of my fixed income allocation. Just my opinion.

[Crisium]

My poor SVF has a yield of 1.87%

If you have at least 2.5% then 50/50 makes sense. All-in would only be advisable for the G-Fund, since that has the best insurer.

[Snowjob]

My Stable value fund has a 3% and change yield, diversified across multiple insurers. I of course have used this instead of bonds for the last 5-6 years do to the impending bond bubble LOL guess I missed out on all that repricing of credit as interest rates moved south.

[Bodacious]

My fixed income allocation is split 50/50 between and intermediate bond fund and a stable value fund. The stable value is in my Nationwide 457 and it currently yields 3.35%.

[livesoft]

My thoughts are that the two of you can have a contest. You get half the fixed income allocation and your spouse gets the other half. You each do what you think is best. Then whoever makes the most or loses the least gets to spend the difference on anything they want to.

[indexonlyplease]

I am with your wife for now. I also use my Nationwide stable value fund paying 3.5%. The board here approved 3 years ago when we set up the 3 fund portfolio.

Also, like I stated in another post. Women have something in the gut that tells them what is correct. Even sometimes when they know nothing. It took me 20 years to fiqure this out. Now I stopped making bad mistakes when I ask her advice. Hard to believe.

I guess one day we will have to decide when better to be in bonds.

[Portfolio7]

I am with your wife for now. I also use my Nationwide stable value fund paying 3.5%. The board here approved 3 years ago when we set up the 3 fund portfolio.

Also, like I stated in another post. Women have something in the gut that tells them what is correct. Even sometimes when they know nothing. It took me 20 years to fiqure this out. Now I stopped making bad mistakes when I ask her advice. Hard to believe.

I guess one day we will have to decide when better to be in bonds.

100% SVF here, due to the superior yield. I think it depends on the quality of the Stable Value Fund. More Insurers with higher ratings is good, higher yield is good. I compare the yield to Intermediate Treasuries. For now that puts me 100% in the SVF.... but it is backed by multiple high quality insurance companies.

This question comes up a fair amount, and assuming that all are quality investments, I think there should be a yield-based algorithm to split FI between Treasuries, Tips, and SVFs. I'm not likely to have much time to think about it, though, until I retire.

[iceport]

I have access to a SVF that pays a guaranteed 3.25% and has full liquidity.

I also use my Nationwide stable value fund paying 3.5%.

The stable value is in my Nationwide 457 and it currently yields 3.35%.

My Stable value fund has a 3% and change yield, diversified across multiple insurers.

Some excellent yields there!

I'm relying heavily on my SVF with a 2.75% yield.

OP, the interest rate matters a lot; the quality of the SVF probably matters to a far lesser extent.

[willthrill81]

I have access to a SVF that pays a guaranteed 3.25% and has full liquidity.

I also use my Nationwide stable value fund paying 3.5%.

The stable value is in my Nationwide 457 and it currently yields 3.35%.

My Stable value fund has a 3% and change yield, diversified across multiple insurers.

Some excellent yields there!

I'm relying heavily on my SVF with a 2.75% yield.

OP, the interest rate matters a lot; the quality of the SVF probably matters to a far lesser extent.

If I were further down the road, I would be making use of my SVF, but I'll remain 100% equities for another 9 years or so. At that point, I'll begin moving one year's retirement expenses (necessary and probably at least some discretionary) into another version of my SVF that is currently paying 4%, but no more than 10% of deposits can be withdrawn in a calendar year. So once I reach my desired retirement age, I'll have a decade of spending squirreled away that should hopefully stay ahead of inflation with ease.

[student]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

[ikowik]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

I treat TIAA Traditional as Stable Value as well though with some withdrawal restrictions, and add the G fund in TSP to the mix.

[willthrill81]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

You are aware that it takes ten payments spread out over nearly ten years to withdraw from TIAA Trad? Unfortunately, not everyone that invests in this annuity knows that. There is a supplemental version of the annuity that allows for full and immediate withdrawals at any time, but it pays less (3.25% vs. 4.0%).

[student]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

You are aware that it takes ten payments spread out over nearly ten years to withdraw from TIAA Trad? Unfortunately, not everyone that invests in this annuity knows that. There is a supplemental version of the annuity that allows for full and immediate withdrawals at any time, but it pays less (3.25% vs. 4.0%).

I am aware of the difference between the liquid version and the illiquid version as well as the rate difference. Thank you.

[columbia]

Current rate for TIAA RC Traditional is 4.25%.

Yes, please, and for the foreseeable future.

[markcoop]

I always thought that SVFs tend to lag the rates of bonds. So, if bonds rates were to rise, SVFs having contracts based on older lower rates, would not do as well. Eventually, however, they would catch up. I was never sure I really understood this relationship.

[student]

I always thought that SVFs tend to lag the rates of bonds. So, if bonds rates were to rise, SVFs having contracts based on older lower rates, would not do as well. Eventually, however, they would catch up. I was never sure I really understood this relationship.

I think you are right. I posted this link a number of times. This is a study that talks about TIAA Traditional smoothing out the returns of bonds. http://collegeretirement.blogspot.com/2 ... -deal.html

[VA_Gent]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

You are aware that it takes ten payments spread out over nearly ten years to withdraw from TIAA Trad? Unfortunately, not everyone that invests in this annuity knows that. There is a supplemental version of the annuity that allows for full and immediate withdrawals at any time, but it pays less (3.25% vs. 4.0%).

There is another way:

GRA: Lump-sum withdrawals are available from
TIAA Traditional only within 120 days after
termination of employment and are subject to
a 2.5% surrender charge. All other withdrawals
and transfers must be paid in ten annual
installments.

[willthrill81]

Current rate for TIAA RC Traditional is 4.25%.

Yes, please, and for the foreseeable future.

I'm not sure which version you are referring to. On my end, TIAA Trad is still paying 4.0%.

[willthrill81]

I don't know enough to give advice but I can tell you that my fixed income allocation consists essentially all stable value fund, namely, TIAA Traditional.

You are aware that it takes ten payments spread out over nearly ten years to withdraw from TIAA Trad? Unfortunately, not everyone that invests in this annuity knows that. There is a supplemental version of the annuity that allows for full and immediate withdrawals at any time, but it pays less (3.25% vs. 4.0%).

There is another way:

GRA: Lump-sum withdrawals are available from
TIAA Traditional only within 120 days after
termination of employment and are subject to
a 2.5% surrender charge. All other withdrawals
and transfers must be paid in ten annual
installments.

Good to keep in mind, though I'm not sure why a retiree would want to do this unless they wanted to move all of their investments from TIAA to someone else upon separation. I'll probably move most of mine away from them because of their fees, but I'll probably leave enough in to make use of TIAA Trad.

[columbia]

Current rate for TIAA RC Traditional is 4.25%.

Yes, please, and for the foreseeable future.

I'm not sure which version you are referring to. On my end, TIAA Trad is still paying 4.0%.

Right here:
https://www.tiaa.org/public/investment- ... er=TIAAPRC

[willthrill81]

I always thought that SVFs tend to lag the rates of bonds. So, if bonds rates were to rise, SVFs having contracts based on older lower rates, would not do as well. Eventually, however, they would catch up. I was never sure I really understood this relationship.

In the current environment, a guaranteed 3.25% with full liquidity is close to a sure bet over bonds right now. The yield on 10 year bonds is 2.19%, and with interest rates rising, bonds seem very unlikely to appreciate in value in the near future enough to close that 1.06% difference.

[willthrill81]

Current rate for TIAA RC Traditional is 4.25%.

Yes, please, and for the foreseeable future.

I'm not sure which version you are referring to. On my end, TIAA Trad is still paying 4.0%.

Right here:
https://www.tiaa.org/public/investment- ... er=TIAAPRC

Good for you! Sadly, I don't have access to the Retirement Choice version of TIAA Trad.

[columbia]

Some don't like the liquidity terms: 84 monthly payouts. I'll just direct those into TBM in my 403b and enjoy the nice weather.

[Northern Flicker]

I plan to retire next year, and am pretty sure I am going to allocate my funds 60% stock index funds and 40% bond index funds. My wife feels that we should put the 40% in Stable Value Funds rather than bond funds, since she feels bond funds cannot go any higher, as the interest rate seems to be creeping up. Any thoughts or advice on this?

Would suggest learning the rules of the SVF such as under what circumstances are withdrawals processed at market value instead of stable value, and what are the liquidity constraints?

Would also suggest trying to understand what the underlying investments are in the SVF. For instance if it is corporate bonds then you might want to avoid credit risk in bond funds held as diversifiers, and consider treasuries, TIPs, and GNMAs for that purpose.

[Earl Lemongrab]

I'm also have the 50/50 allocation, in my case bond index and stable-value (currently 2.31%). I've been doing that for about ten years. Interestingly, it's made little difference. Last check:

Bond Market Index Fund: $354,565.24
Stable Value Fund: $348,604.60

Bond Index has been more volatile (as you'd expect) but they've been trending the same way over the years. How will things change in the coming years? Who's to know?

[Earl Lemongrab]

You need to be aware of the single insurer risk with having significant asset in a stable value fund.

This might or might not be a problem depending on the specifics of the plan. Megacorp uses synthetic GICs, meaning that the plan owns the underlying assets. They have a pool of six insurers to guarantee the rate. So no single risk anywhere.