The need for bonds if I have a pension?

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CharlesNorris
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The need for bonds if I have a pension?

Post by CharlesNorris »

Hey guys, I love the website and the knowledge and confidence it has given me in the markets. I need a little wisdom about the utilization of bonds into my asset allocation. As a teacher, I'm one of the few that have a safe income in retirement in the form of a nice pension. I plan on working 25 more years which will result in a retirement income of 77% of my final average salary. This will be approximately 77k annual retirement income (rough estimate). My wife is also a therapist in the schools and will have a similar type of retirement income of 77k.

I have been pretty active in other retirement accounts in the markets during the past few years although I have the pension. Currently I'm in total stock market indexes and I max my wife and my roths, an HSA, and this year I'm beginning to dump 18k into a 457 plan that was established years ago that I stopped contributing to 5 years ago. I'm 100% stocks and I felt there was no need to be in conservative bonds because I look at my pension money ($144k annually) as my conservative investments. However, my readings throughout this website has made me question about not having bonds in my portfolio. I always thought of bonds as nothing more than a conservative investment but now I'm starting to see it as a way to rebalance the portfolio when stocks are low and bonds are high. Since I have a pension, am I smart to not be invested in bonds or should I allocate some of my funds towards them to take advantage of when stocks are low when I rebalance?

My stats are

Income (combined) 95k. Wife works part time, income will increase 30% in 3 years once young kids are in school

Checking and savings 71k - this is being spent down with the 18k 457 contribution. This is approximately 15 months of living expenses

Home 300 k - own, no mortgage

Roth his - 36k.
Roth hers -31k
457 hers - 32k
529s - 20k
HSA - 9k
Cash out values of pensions 102k, 100k.
Additionally we live in a slightly below average to average cost of living area. Thus money can go far here.
Last edited by CharlesNorris on Tue Feb 21, 2017 5:06 am, edited 1 time in total.
GMT-8
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Re: The need for bonds if I have a pension?

Post by GMT-8 »

Hi ChuckNorris,

I thought you made a lot more money than that in the movies and TV?

Seriously, you might consider adjusting your post to indicate what you consider to be "average living expenses".

Another poster recently said he brought home a bit more than you, but he was also spending $35k annually just at Amazon and Costco, not counting private school tuition for multiple kids and $2000 a month on clothing... your house could be paid off but be 100 years old, or you could live in Alaska or Hawaii, etc.

There are advantages to teacher pensions (my wife has one) and we have friends who have more take-home income now than when they were working. But lots of people retire when they don't expect to - injury, labor action makes the job no fun, kid population declines and school closes, etc. So try not to count the chickens before they hatch ...

Personally, I'd buy some bonds. I mean, I did buy them. We are at about 2/3 stock, 1/3 bonds despite the pension. And I sleep well at night.

Cheers,

CM
qwertyjazz
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Re: The need for bonds if I have a pension?

Post by qwertyjazz »

So you think you will be paid more in retirement then currently? Assuming you are 100 percent sure of the solvency of job and retirement, why are you saving for your retirement? If you are not then you probably need bonds. If you are then you should probably take more cruises now.
G.E. Box "All models are wrong, but some are useful."
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Peter Foley
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Re: The need for bonds if I have a pension?

Post by Peter Foley »

Having some bonds will not hurt you and will provide you with some dry powder if you need to rebalance. 20% is probably the minimum - a little lower than the usual 25% because you have a pension.
itstoomuch
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Re: The need for bonds if I have a pension?

Post by itstoomuch »

Not a teacher or gov.
We bought annuities and sold off bonds. We saw no need for bonds since the deferred annuities function the same way with greater safety (debatable).
YMMV :sharebeer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
Grt2bOutdoors
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Re: The need for bonds if I have a pension?

Post by Grt2bOutdoors »

Ah, yes, the thought of a "safe" pension. The thought I say because that is what teachers in other states thought or think they have, a well funded plan today, could be tomorrow's severely underfunded plan tomorrow. Always pays to have a Plan B. OP - now is the time to think about a Plan B when you have 25 years before the actual retirement date, don't wait until you are age 55 to think about developing it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Goinganontoday
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Re: The need for bonds if I have a pension?

Post by Goinganontoday »

OP, you seem very confident in your pension. What is its funding ratio at this time? Does the pension increase with inflation? Given that such a substantial portion of your retirement savings as well as your spouse's is tied up in one pension plan, I would be very cautious and definitely have a Plan B in place.
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munemaker
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Re: The need for bonds if I have a pension?

Post by munemaker »

Your pension won't go up if the value of your stocks go down. Bonds often move counter to stocks.

If I were you, I would own a bond fund.
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munemaker
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Re: The need for bonds if I have a pension?

Post by munemaker »

itstoomuch wrote:Not a teacher or gov.
We bought annuities and sold off bonds. We saw no need for bonds since the deferred annuities function the same way with greater safety (debatable).
YMMV :sharebeer

Can your heirs inherit an annuity like they can a bond?
Ron Ronnerson
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Re: The need for bonds if I have a pension?

Post by Ron Ronnerson »

What is your age?

My wife and I are 42. I'm a teacher and expecting a pension a little larger than yours in about 20 years. I say expecting as it may pay out less than stated. Like you, we max out our Roth IRAs and a 457b. In addition, my wife's employer contributes 15% of her salary in a SEP-IRA for her (she works for a small business). So all together, we invest about $3k per month outside the pension. We have a high risk-tolerance and were 100% equities until we turned 40. Now that we're a little older and have a bigger amount invested, we've switched to 80/20. My pension along with my wife's social security should pretty much cover our retirement expenses so we've chosen to take more risk. I expect that we'll be in the 60-70% range for equities as retirement approaches.

If you're youngish, 100% equities may be okay. However, I'd add in some bonds as you age.
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alec
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Re: The need for bonds if I have a pension?

Post by alec »

munemaker wrote:Your pension won't go up if the value of your stocks go down. Bonds often move counter to stocks.

If I were you, I would own a bond fund.
If bond prices increase, and interest rates decrease, the present value of the pension will increase, like a long term bond. However, the pension holder probably won't see the PV increase because it won't be on any monthly statement he/she can see.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
Raabe34
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Re: The need for bonds if I have a pension?

Post by Raabe34 »

My wife teaches in Nebraska and I'm extremely familiar with the pension so I'm going to assume it's similar to your situation. In this case it is an obligation of the state so if that would become an issue I assume the value of most of the other of our assets is wrecked.

So yes in our overall AA we are very aggressive. If I add contributions during the year in a lump sum I'll buy bonds and then sell them during downturns. Don't let these guys spook you, if you can handle the volatility be aggressive and we'll be rewarded in the end. And yes most educators I know retire to an increased cashflow.
rgs92
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Re: The need for bonds if I have a pension?

Post by rgs92 »

On the other hand, if one is fortunate enough to be blessed with substantial public sector pensions (and the wonderful job security that goes with it), you might consider taking less risk than normal in your savings portfolio since you don't need to.
Then you can really sleep well at night.
(I think this approach is suggested here often when this subject appears, but you might not have seen it.)
AlohaJoe
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Re: The need for bonds if I have a pension?

Post by AlohaJoe »

You don't "need" bonds if you have a pension. No one "needs" bonds. But many people find that having bonds lowers the volatility of their portfolio and that helps them worry less and sleep better. Also, many people overestimate their ability to handle volatility.
itstoomuch
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Re: The need for bonds if I have a pension?

Post by itstoomuch »

munemaker wrote:
itstoomuch wrote:Not a teacher or gov.
We bought annuities and sold off bonds. We saw no need for bonds since the deferred annuities function the same way with greater safety (debatable).
YMMV :sharebeer
Can your heirs inherit an annuity like they can a bond?
Yes, if there is a remainder. We paid for that option.
Like questions: at what costs are pensions, annuities, bonds for inheritance and/or survivorship?
What are the function of bonds, pensions, annuities, equities in a retirement portfolio?

We have a very small pension. We used the bond portion of our 60/40 to buy a pension in the form of annuities that are composed of equities.
Our annuities is our plan B.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Nate79
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Re: The need for bonds if I have a pension?

Post by Nate79 »

Here in Oregon the bills are coming due for the mistakes made in the past for overly generous pensions. They continue to discuss cuts. Plans have become less and less generous over the years as they tighten down with discussion of much more severe cuts in the future.

So nothing is safe.

Concerning the need for bonds it can be a personal decision whether you can withstand the next major market crash. If stocks drop >50% and take multiple years to even recover will you be ok or will you panic, sell at the bottom and miss out on the recovery?
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catdude
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Re: The need for bonds if I have a pension?

Post by catdude »

OP, IMO Grt2bOutdoors and Goinganontoday are giving you excellent advice. You can't just blindly assume that your (and your wife's) pension will be there 25 years from now. Maybe they will, maybe they won't. But I think it's good that you're socking away a lot of $$$... just keep doing that and you'll be well in your way to having a Plan B in place.

Pay attention to the pension landscape. Here's a good blog that will help you do that: http://www.pensiontsunami.com ... I check it every day because I'm a 61 y/o pensioner... I need to keep on top of this stuff.
catdude | | All generalizations are false, including this one.
spencer99
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Re: The need for bonds if I have a pension?

Post by spencer99 »

A few stray thoughts.

TFB, a guy who posts here occasionally and one I pay very close attention to posted an article on his blog recently. Recommended. http://www.oregonlive.com/business/inde ... s_pub.html

I'm fortunate enough to participate in a pension that is 100% funded, my daughter teaches in Illinois, a very different situation. Whatever your situation, keep in mind a lot can change in 25 years.

The fact that you expect to receive about 75% of your final salary leads me to believe your employer does not participate in Social Security. Is that correct? If so, give that some thought. Many here don't have pensions but they do have the social security equivalent and they still have AAs that include both equity and fixed income.

As others mentioned having some fixed income investments both smooths the ride and enables rebalancing when equities are down. And I encourage you do some research on historical returns of portfolios of varying equity:fixed compositions. You may be surprised how little return you forgo with modest percentages of fixed income.

There is research that shows that a 90:10 AA (rebalanced) returns more than a 100% equity portfolio. (Can't recall exactly where I read that but believe that both Swedroe and Bernstein mention this.)

All that said, welcome to Bogleheads, good luck on whatever your decision is, and it sure sounds like you're making a lot of good choices to ensure your family's future.

S
itstoomuch
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Re: The need for bonds if I have a pension?

Post by itstoomuch »

Nate79 wrote:Here in Oregon the bills are coming due for the mistakes made in the past for overly generous pensions. They continue to discuss cuts. Plans have become less and less generous over the years as they tighten down with discussion of much more severe cuts in the future.

So nothing is safe.

Concerning the need for bonds it can be a personal decision whether you can withstand the next major market crash. If stocks drop >50% and take multiple years to even recover will you be ok or will you panic, sell at the bottom and miss out on the recovery?
Nothing is safe for state employees and failure of adjusting will mean dire consequences. I hope the unions will come to terms with the inevitability.
I whispered in Gov Brown's ear, to "fix PER s" at a December's concert.
I discovered in 2008 that annuity cos were selling something that replicated PER s,tier1. Saw a bunch of presentations for the infamous GLWB deferred VA, with Income stepups. If you can't fight them, then get what they got :twisted: :P :wink:
YMMV :sharebeer
Last edited by itstoomuch on Tue Feb 21, 2017 12:54 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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catdude
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Re: The need for bonds if I have a pension?

Post by catdude »

itstoomuch wrote:I whispered Gov Brown's ear, to "fix PER s" at a December's concert.
Don't keep us in suspense! What did she say?
catdude | | All generalizations are false, including this one.
Zedon
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Re: The need for bonds if I have a pension?

Post by Zedon »

I am in a similar situation. I have a pension coming. I do consider it a substitute for bonds. I will retire between 12 and 20 years from now. I can live off the pension. I consider it fairly safe, much safer than the stock market. Add on to that SS a decade later and I consider the rest of my investments(401k, 457b, and Roth IRA) as bonus to be used for either big purchases when I am retired or to leave to my beneficiaries. I think my current bond allocation is around 7 percent and it will only decrease from here. I also consider my cash a surrogate for bonds. I have maybe 12% in cash too but that will go into stocks shortly.

I think it's really about your tolerance for volatility. What if the market goes down 50% for 5 years, can you stay the course? Bonds will reduce this volatility and lessen the loss but will also lessen the gain. I may go in to more bonds as I get close to retirement if my stomach for volatility drops. I have never sold anything due to stock market drops so I think I am pretty confident I can stay the course but you never know. I would say the average bogle head is fairly conservative financially and has more bonds than I would have.

I think it might run in the family, my father is 72 and told me he is 80/20 but he has a modest pension too.
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

citromike wrote:Hi ChuckNorris,

I thought you made a lot more money than that in the movies and TV?
Too many lawsuits :happy

Seriously, you might consider adjusting your post to indicate what you consider to be "average living expenses".
Thanks for the advice. What I meant was we live in a slightly below average to average cost of living area. I fixed it


Another poster recently said he brought home a bit more than you, but he was also spending $35k annually just at Amazon and Costco, not counting private school tuition for multiple kids and $2000 a month on clothing... your house could be paid off but be 100 years old, or you could live in Alaska or Hawaii, etc.
We save roughly 50% of our income so we spend pretty wisely.

There are advantages to teacher pensions (my wife has one) and we have friends who have more take-home income now than when they were working. But lots of people retire when they don't expect to - injury, labor action makes the job no fun, kid population declines and school closes, etc. So try not to count the chickens before they hatch ...

Personally, I'd buy some bonds. I mean, I did buy them. We are at about 2/3 stock, 1/3 bonds despite the pension. And I sleep well at night.
Thanks for your personal experience and advice

Cheers,

CM
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

qwertyjazz wrote:So you think you will be paid more in retirement then currently? Assuming you are 100 percent sure of the solvency of job and retirement, why are you saving for your retirement? If you are not then you probably need bonds. If you are then you should probably take more cruises now.
There is some truth to this. We live off of 50% of income and our pensions will be 77% of income in retirement. Something to ponder. My greatest barrier is to always maximize saving and now investing. Grew up very poor with hardly little assistance and learned from an early age to save everything because there were no guarantees for food, shelter, etc...
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

Grt2bOutdoors wrote:Ah, yes, the thought of a "safe" pension. The thought I say because that is what teachers in other states thought or think they have, a well funded plan today, could be tomorrow's severely underfunded plan tomorrow. Always pays to have a Plan B. OP - now is the time to think about a Plan B when you have 25 years before the actual retirement date, don't wait until you are age 55 to think about developing it.
My plan B is intact, I save 14 percent of my income towards my pension (plan A) and 36% of my income towards other retirement accounts (plan B). Just trying to optimize my other retirement accounts if plan A (the pension) hits a roadblock. Thanks for the advice
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

Goinganontoday wrote:OP, you seem very confident in your pension. What is its funding ratio at this time? Does the pension increase with inflation? Given that such a substantial portion of your retirement savings as well as your spouse's is tied up in one pension plan, I would be very cautious and definitely have a Plan B in place.
If I was very confident I wouldn't be saving 36% of my income to fund other retirement accounts. The pension is STRS Ohio. Off of my head, they have 72 billion in assets. They distributed roughly 11 billion last year and collected, I believe 7 billion in assets, thus there is a deficit. This year they are collecting more from the participants (14% of income) which has gradually increased over the past year to the 14% mark. There is a 2% cola increase every 3 years when in retirement.
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

Ron Ronnerson wrote:What is your age?

My wife and I are 42. I'm a teacher and expecting a pension a little larger than yours in about 20 years. I say expecting as it may pay out less than stated. Like you, we max out our Roth IRAs and a 457b. In addition, my wife's employer contributes 15% of her salary in a SEP-IRA for her (she works for a small business). So all together, we invest about $3k per month outside the pension. We have a high risk-tolerance and were 100% equities until we turned 40. Now that we're a little older and have a bigger amount invested, we've switched to 80/20. My pension along with my wife's social security should pretty much cover our retirement expenses so we've chosen to take more risk. I expect that we'll be in the 60-70% range for equities as retirement approaches.

If you're youngish, 100% equities may be okay. However, I'd add in some bonds as you age.
We are in our young 30s. Thanks for the advice. We are about in the same boat in that we save about 3k each month towards other retirements that are not our pensions. I've always thought about getting into bonds later in my career but recently through my research on this website I've been questioning not doing it sooner. I appreciate your perspective.
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

Raabe34 wrote:My wife teaches in Nebraska and I'm extremely familiar with the pension so I'm going to assume it's similar to your situation. In this case it is an obligation of the state so if that would become an issue I assume the value of most of the other of our assets is wrecked.

So yes in our overall AA we are very aggressive. If I add contributions during the year in a lump sum I'll buy bonds and then sell them during downturns. Don't let these guys spook you, if you can handle the volatility be aggressive and we'll be rewarded in the end. And yes most educators I know retire to an increased cashflow.
Thanks for your perspective. I believe I can handle the volatility because I have no debt, high emergency fund and my wife has a very in demand profession. When doing the math, it seems there is a great chance I'll have increased cashflow in retirement as well. But we shall see. I appreciate your advice
qwertyjazz
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Re: The need for bonds if I have a pension?

Post by qwertyjazz »

CharlesNorris wrote:
qwertyjazz wrote:So you think you will be paid more in retirement then currently? Assuming you are 100 percent sure of the solvency of job and retirement, why are you saving for your retirement? If you are not then you probably need bonds. If you are then you should probably take more cruises now.
There is some truth to this. We live off of 50% of income and our pensions will be 77% of income in retirement. Something to ponder. My greatest barrier is to always maximize saving and now investing. Grew up very poor with hardly little assistance and learned from an early age to save everything because there were no guarantees for food, shelter, etc...
That argues for bonds until you have built up a nest egg you would feel comfortable with large losses on. If you save at your current rate at 70/30 with a reasonable return for a decade or so, you will have built a very nice nest egg. At that point you can safely choose what to do.
At that point going 100 percent stock might make sense
But remember you save/invest for goals
Safety in moderate term, retirement, kids schooling etc. Link the goals with your actions.
Good luck
G.E. Box "All models are wrong, but some are useful."
Quark
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Re: The need for bonds if I have a pension?

Post by Quark »

Think of a pension as something that reduces your income needs, not as a bond equivalent. Pick an asset allocation appropriate to your remaining income needs and other circumstances.
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

Peter Foley wrote:Having some bonds will not hurt you and will provide you with some dry powder if you need to rebalance. 20% is probably the minimum - a little lower than the usual 25% because you have a pension.
That seems to be the prevailing theme on the boards. I didn't know if my situation altered it. Thanks for your input.
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

rgs92 wrote:On the other hand, if one is fortunate enough to be blessed with substantial public sector pensions (and the wonderful job security that goes with it), you might consider taking less risk than normal in your savings portfolio since you don't need to.
Then you can really sleep well at night.
(I think this approach is suggested here often when this subject appears, but you might not have seen it.)
That is defintely a valid point as well. If I'm going to be secure already why go balls out if there's not a need to.
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

catdude wrote:OP, IMO Grt2bOutdoors and Goinganontoday are giving you excellent advice. You can't just blindly assume that your (and your wife's) pension will be there 25 years from now. Maybe they will, maybe they won't. But I think it's good that you're socking away a lot of $$$... just keep doing that and you'll be well in your way to having a Plan B in place.

Pay attention to the pension landscape. Here's a good blog that will help you do that: http://www.pensiontsunami.com ... I check it every day because I'm a 61 y/o pensioner... I need to keep on top of this stuff.
Thanks for the advice and the website
Topic Author
CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

spencer99 wrote:A few stray thoughts.

TFB, a guy who posts here occasionally and one I pay very close attention to posted an article on his blog recently. Recommended. http://www.oregonlive.com/business/inde ... s_pub.html

I'm fortunate enough to participate in a pension that is 100% funded, my daughter teaches in Illinois, a very different situation. Whatever your situation, keep in mind a lot can change in 25 years.

The fact that you expect to receive about 75% of your final salary leads me to believe your employer does not participate in Social Security. Is that correct? If so, give that some thought. Many here don't have pensions but they do have the social security equivalent and they still have AAs that include both equity and fixed income.

As others mentioned having some fixed income investments both smooths the ride and enables rebalancing when equities are down. And I encourage you do some research on historical returns of portfolios of varying equity:fixed compositions. You may be surprised how little return you forgo with modest percentages of fixed income.

There is research that shows that a 90:10 AA (rebalanced) returns more than a 100% equity portfolio. (Can't recall exactly where I read that but believe that both Swedroe and Bernstein mention this.)

All that said, welcome to Bogleheads, good luck on whatever your decision is, and it sure sounds like you're making a lot of good choices to ensure your family's future.

S
Thanks for the input. We do not pay into social security. So that is a valid point about those on here who do but still have bonds.
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

There's a lot of proponents of bonds for my situation. How often do people rebalance their portfolio? Do they rebalance once/twice a year or whenever it has strayed? I've never had to do it because I've always been 100% VTSAX.
donaldfair71
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Re: The need for bonds if I have a pension?

Post by donaldfair71 »

CharlesNorris wrote:
citromike wrote:Hi ChuckNorris,

I thought you made a lot more money than that in the movies and TV?
Too many lawsuits :happy

Seriously, you might consider adjusting your post to indicate what you consider to be "average living expenses".
Thanks for the advice. What I meant was we live in a slightly below average to average cost of living area. I fixed it


Another poster recently said he brought home a bit more than you, but he was also spending $35k annually just at Amazon and Costco, not counting private school tuition for multiple kids and $2000 a month on clothing... your house could be paid off but be 100 years old, or you could live in Alaska or Hawaii, etc.
We save roughly 50% of our income so we spend pretty wisely.

There are advantages to teacher pensions (my wife has one) and we have friends who have more take-home income now than when they were working. But lots of people retire when they don't expect to - injury, labor action makes the job no fun, kid population declines and school closes, etc. So try not to count the chickens before they hatch ...

Personally, I'd buy some bonds. I mean, I did buy them. We are at about 2/3 stock, 1/3 bonds despite the pension. And I sleep well at night.
Thanks for your personal experience and advice

Cheers,

CM
I am not certain of how safe your pension is. But if it is 100% certain, and you save 50% of your income, there is little reason to save in anything more than the safest of investments (short term bond funds, Savings Bonds, or a CD ladder, for example). Unless, of course, you would like to leave an inheritance and want to grow that out.

As teachers, my wife and I are "in line" to receive a pension in 20 years equal to about 52% of our last 3 years. But we still save and invest almost 30% of our incomes in 457s, 403bs, and Roth IRAs because you simply cannot, with 100% certainty, expect the pension to be the way it is now.

I came up with the following assumption: The pension will stay, but it could be reduced in the future. To account for that, I base all of my retirement plans/goals on a 26%-of-our-last-3 scenario. That way, a cushion is built in. Not for the worst case scenario (no pension at all), but for a really bad case scenario.
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Re: The need for bonds if I have a pension?

Post by itstoomuch »

catdude wrote:
itstoomuch wrote:I whispered Gov Brown's ear, to "fix PER s" at a December's concert.
Don't keep us in suspense! What did she say?
I ambushed her.
She turned, being surprised. We made eye contact by which time I was several paces away. Sparks erupted. Her crowd around her stepped back knowing the fury of this 5foot leader. For a fraction of a second, I realized that my fears and all my meager courage to do this gauche deed would end in embarrassment and shame at this Christmas concert by Tommy Emmanuel. ...
It was a typical dark and stormy night. Unremarkable by western Oregon standards. ...
She gave me a coy smile.
I returned that smile with a knowing grin for mission accomplished.
:happy
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

donaldfair71 wrote:
CharlesNorris wrote:
citromike wrote:Hi ChuckNorris,

I thought you made a lot more money than that in the movies and TV?
Too many lawsuits :happy

Seriously, you might consider adjusting your post to indicate what you consider to be "average living expenses".
Thanks for the advice. What I meant was we live in a slightly below average to average cost of living area. I fixed it


Another poster recently said he brought home a bit more than you, but he was also spending $35k annually just at Amazon and Costco, not counting private school tuition for multiple kids and $2000 a month on clothing... your house could be paid off but be 100 years old, or you could live in Alaska or Hawaii, etc.
We save roughly 50% of our income so we spend pretty wisely.

There are advantages to teacher pensions (my wife has one) and we have friends who have more take-home income now than when they were working. But lots of people retire when they don't expect to - injury, labor action makes the job no fun, kid population declines and school closes, etc. So try not to count the chickens before they hatch ...

Personally, I'd buy some bonds. I mean, I did buy them. We are at about 2/3 stock, 1/3 bonds despite the pension. And I sleep well at night.
Thanks for your personal experience and advice

Cheers,

CM
I am not certain of how safe your pension is. But if it is 100% certain, and you save 50% of your income, there is little reason to save in anything more than the safest of investments (short term bond funds, Savings Bonds, or a CD ladder, for example). Unless, of course, you would like to leave an inheritance and want to grow that out.

As teachers, my wife and I are "in line" to receive a pension in 20 years equal to about 52% of our last 3 years. But we still save and invest almost 30% of our incomes in 457s, 403bs, and Roth IRAs because you simply cannot, with 100% certainty, expect the pension to be the way it is now.

I came up with the following assumption: The pension will stay, but it could be reduced in the future. To account for that, I base all of my retirement plans/goals on a 26%-of-our-last-3 scenario. That way, a cushion is built in. Not for the worst case scenario (no pension at all), but for a really bad case scenario.
I agree with your assumption that our pensions will probably change and not for the better. Which is why I'm being proactive in the other retirement accounts. At the beginning of my teaching career I didn't care about additional retirement accounts because at the time we only had to contribute 10% of our salary to receive 88% of our final average salary for 35 years of service. Well that's changed recently to 14% contribution for 77% of our final average salary. Since then I have become more involved with other retirement accounts. As for the safest investments I feel like those barely beat inflation and since I'm going to be in the markets for 25 more years there's no reason to not be invested in total stock market funds. Now, I feel I might just tone down a little of the aggressive 100% allocation to stocks. Thanks for the input
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ruralavalon
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Re: The need for bonds if I have a pension?

Post by ruralavalon »

Welcome to the forum :) .

You pose an excellent question.
CharlesNorris wrote:Hey guys, I love the website and the knowledge and confidence it has given me in the markets. I need a little wisdom about the utilization of bonds into my asset allocation. As a teacher, I'm one of the few that have a safe income in retirement in the form of a nice pension. I plan on working 25 more years which will result in a retirement income of 77% of my final average salary. This will be approximately 77k annual retirement income (rough estimate). My wife is also a therapist in the schools and will have a similar type of retirement income of 77k.

. . . . .
In general a solid pension reduces the need for a bond allocation, in my opinion. But many pension systems are underfunded, many teachers are not eligible for Social Security, and a lot will probably change over 25 years.

Also a modest bond allocation of 20-30% has historically reduced portfolio volatility significantly, while having a relatively small impact on portfolio growth.

spencer99 wrote:A few stray thoughts.

TFB, a guy who posts here occasionally and one I pay very close attention to posted an article on his blog recently. Recommended. http://www.oregonlive.com/business/inde ... s_pub.html

I'm fortunate enough to participate in a pension that is 100% funded, my daughter teaches in Illinois, a very different situation. Whatever your situation, keep in mind a lot can change in 25 years.

The fact that you expect to receive about 75% of your final salary leads me to believe your employer does not participate in Social Security. Is that correct? If so, give that some thought. Many here don't have pensions but they do have the social security equivalent and they still have AAs that include both equity and fixed income.

As others mentioned having some fixed income investments both smooths the ride and enables rebalancing when equities are down. And I encourage you do some research on historical returns of portfolios of varying equity:fixed compositions. You may be surprised how little return you forgo with modest percentages of fixed income.

There is research that shows that a 90:10 AA (rebalanced) returns more than a 100% equity portfolio. (Can't recall exactly where I read that but believe that both Swedroe and Bernstein mention this.)

All that said, welcome to Bogleheads, good luck on whatever your decision is, and it sure sounds like you're making a lot of good choices to ensure your family's future.

S
This is a good summary of reasons to have a bond allocation anyway.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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catdude
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Re: The need for bonds if I have a pension?

Post by catdude »

itstoomuch wrote:
catdude wrote:
itstoomuch wrote:I whispered Gov Brown's ear, to "fix PER s" at a December's concert.
Don't keep us in suspense! What did she say?
I ambushed her.
She turned, being surprised. We made eye contact by which time I was several paces away. Sparks erupted. Her crowd around her stepped back knowing the fury of this 5foot leader. For a fraction of a second, I realized that my fears and all my meager courage to do this gauche deed would end in embarrassment and shame at this Christmas concert by Tommy Emmanuel. ...
It was a typical dark and stormy night. Unremarkable by western Oregon standards. ...
She gave me a coy smile.
I returned that smile with a knowing grin for mission accomplished.
:happy
Good job, dude! PERS is gonna get fixed and all of us Oregonians can live happily ever after! :)
catdude | | All generalizations are false, including this one.
itstoomuch
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Re: The need for bonds if I have a pension?

Post by itstoomuch »

^ I don't have high hopes. Oregon is already a fairly expensive state, if PERs does not get solved, Oregon will get more expensive with less jobs, less services, and higher education costs. We have been accumulating cash to move to Seattle, which may seem more expensive but could actually less costly in total.
YMMV
Last edited by itstoomuch on Tue Feb 21, 2017 2:17 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: The need for bonds if I have a pension?

Post by Good Listener »

Grt2bOutdoors wrote:Ah, yes, the thought of a "safe" pension. The thought I say because that is what teachers in other states thought or think they have, a well funded plan today, could be tomorrow's severely underfunded plan tomorrow. Always pays to have a Plan B. OP - now is the time to think about a Plan B when you have 25 years before the actual retirement date, don't wait until you are age 55 to think about developing it.
Yes. This is far too rosy. There is no apparent possibility that in my state of New Jersey pensions will be as hoped in 25 years. And even worse in Illinois. And there is no guarantee your wife will earn so much more in 3 years. Just have a backup plan.
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Re: The need for bonds if I have a pension?

Post by friar1610 »

Quark wrote:Think of a pension as something that reduces your income needs, not as a bond equivalent. Pick an asset allocation appropriate to your remaining income needs and other circumstances.
Not a teacher here but a military retiree so the pension situation is roughly equivalent. I always ignored the advice to think of my impending pension as a bond equivalent. I thought of it as Quark mentions above. I will need $X per year in retirement. The pension will cover $Y. So if $X - $Y = $Z, I needed to structure my investment program with the goal of generating $Z per year from a certain age onward.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
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Re: The need for bonds if I have a pension?

Post by friar1610 »

friar1610 wrote:
Quark wrote:Think of a pension as something that reduces your income needs, not as a bond equivalent. Pick an asset allocation appropriate to your remaining income needs and other circumstances.
Not a teacher here but a military retiree so the pension situation is roughly equivalent. I always ignored the advice to think of my impending pension as a bond equivalent. I thought of it as Quark mentions above. I will need $X per year in retirement. The pension will cover $Y. So if $X - $Y = $Z, I needed to structure my investment program with the goal of generating $Z per year from a certain age onward.

Edited to add: that allocation included an appropriate (for me) dose of bonds.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

friar1610 wrote:
Quark wrote:Think of a pension as something that reduces your income needs, not as a bond equivalent. Pick an asset allocation appropriate to your remaining income needs and other circumstances.
Not a teacher here but a military retiree so the pension situation is roughly equivalent. I always ignored the advice to think of my impending pension as a bond equivalent. I thought of it as Quark mentions above. I will need $X per year in retirement. The pension will cover $Y. So if $X - $Y = $Z, I needed to structure my investment program with the goal of generating $Z per year from a certain age onward.
Thanks for the reply and your service. When did you get into bonds and did it pay off for you? I'm young 30s with 25 more years of teaching before I retire. Currently I'm 100% stocks
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CyclingDuo
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Re: The need for bonds if I have a pension?

Post by CyclingDuo »

CharlesNorris wrote: Mon Feb 20, 2017 6:19 pm Hey guys, I love the website and the knowledge and confidence it has given me in the markets. I need a little wisdom about the utilization of bonds into my asset allocation. As a teacher, I'm one of the few that have a safe income in retirement in the form of a nice pension. I plan on working 25 more years which will result in a retirement income of 77% of my final average salary. This will be approximately 77k annual retirement income (rough estimate). My wife is also a therapist in the schools and will have a similar type of retirement income of 77k.

I have been pretty active in other retirement accounts in the markets during the past few years although I have the pension. Currently I'm in total stock market indexes and I max my wife and my roths, an HSA, and this year I'm beginning to dump 18k into a 457 plan that was established years ago that I stopped contributing to 5 years ago. I'm 100% stocks and I felt there was no need to be in conservative bonds because I look at my pension money ($144k annually) as my conservative investments. However, my readings throughout this website has made me question about not having bonds in my portfolio. I always thought of bonds as nothing more than a conservative investment but now I'm starting to see it as a way to rebalance the portfolio when stocks are low and bonds are high. Since I have a pension, am I smart to not be invested in bonds or should I allocate some of my funds towards them to take advantage of when stocks are low when I rebalance?

My stats are

Income (combined) 95k. Wife works part time, income will increase 30% in 3 years once young kids are in school

Checking and savings 71k - this is being spent down with the 18k 457 contribution. This is approximately 15 months of living expenses

Home 300 k - own, no mortgage

Roth his - 36k.
Roth hers -31k
457 hers - 32k
529s - 20k
HSA - 9k
Cash out values of pensions 102k, 100k.
Additionally we live in a slightly below average to average cost of living area. Thus money can go far here.
CharlesNorris - here we are at the 4 year point beyond your original post. Sorry for the Zombie thread revival, but we were curious about how things have progressed for your household during that time frame (AA, how your state's pension fund is doing, if you stuck to your plan during the 2020 pandemic and market swoon, etc...).

Our household is also in teaching and my spouse is about 2 years away from beginning a state pension as she approaches her qualifying age to receive the full amount (and she has the option to purchase an additional 5 years of service if she so desires at retirement). I will have no pension as I taught at the private college level, so only had the 403b and Roth IRA route to utilize. Wife had pension, 403b, 457b, and Roth IRA investment vehicles to utilize. Our state pension plan that my wife is under does have the employee paying into SS, so she will receive her full SS as well as the pension. So that kind of adds to your original question of portfolio allocation and thinking of the overall household income flow in retirement from pension(s), SS, bonds, stocks, dividends, etc... . Our retirement accounts through work (403b, 457b, 401k, etc... are at 70/30 AA for me and 60/40 for her). All of our taxable and IRA accounts are allocated a bit more aggressive than that.

Anyway, we were just curious how things are going for you 4 years later after your original post regarding your plans, AA, etc... . We hope and trust all is well.

TIA

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
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Re: The need for bonds if I have a pension?

Post by grabiner »

Quark wrote: Tue Feb 21, 2017 6:21 am Think of a pension as something that reduces your income needs, not as a bond equivalent. Pick an asset allocation appropriate to your remaining income needs and other circumstances.
And this may have much less in bonds than a non-pensioner would have.

Suppose that you and I both would like to retire on $60K per year. You have a $40K pension and a $500K portfolio, while I have no pension and a $1.5M portfolio. Both of us can take 4% from our portfolios and meet our standard of living, but 4% is not guaranteed. But if your portfolio loses half its value, you lose only 1/6 of your standard of living, while if mine loses half its value, I lose half of mine. Therefore, you have much more risk tolerance.
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CharlesNorris
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Re: The need for bonds if I have a pension?

Post by CharlesNorris »

CyclingDuo wrote: Fri Feb 12, 2021 9:51 am
CharlesNorris wrote: Mon Feb 20, 2017 6:19 pm Hey guys, I love the website and the knowledge and confidence it has given me in the markets. I need a little wisdom about the utilization of bonds into my asset allocation. As a teacher, I'm one of the few that have a safe income in retirement in the form of a nice pension. I plan on working 25 more years which will result in a retirement income of 77% of my final average salary. This will be approximately 77k annual retirement income (rough estimate). My wife is also a therapist in the schools and will have a similar type of retirement income of 77k.

I have been pretty active in other retirement accounts in the markets during the past few years although I have the pension. Currently I'm in total stock market indexes and I max my wife and my roths, an HSA, and this year I'm beginning to dump 18k into a 457 plan that was established years ago that I stopped contributing to 5 years ago. I'm 100% stocks and I felt there was no need to be in conservative bonds because I look at my pension money ($144k annually) as my conservative investments. However, my readings throughout this website has made me question about not having bonds in my portfolio. I always thought of bonds as nothing more than a conservative investment but now I'm starting to see it as a way to rebalance the portfolio when stocks are low and bonds are high. Since I have a pension, am I smart to not be invested in bonds or should I allocate some of my funds towards them to take advantage of when stocks are low when I rebalance?

My stats are

Income (combined) 95k. Wife works part time, income will increase 30% in 3 years once young kids are in school

Checking and savings 71k - this is being spent down with the 18k 457 contribution. This is approximately 15 months of living expenses

Home 300 k - own, no mortgage

Roth his - 36k.
Roth hers -31k
457 hers - 32k
529s - 20k
HSA - 9k
Cash out values of pensions 102k, 100k.
Additionally we live in a slightly below average to average cost of living area. Thus money can go far here.
CharlesNorris - here we are at the 4 year point beyond your original post. Sorry for the Zombie thread revival, but we were curious about how things have progressed for your household during that time frame (AA, how your state's pension fund is doing, if you stuck to your plan during the 2020 pandemic and market swoon, etc...).

Our household is also in teaching and my spouse is about 2 years away from beginning a state pension as she approaches her qualifying age to receive the full amount (and she has the option to purchase an additional 5 years of service if she so desires at retirement). I will have no pension as I taught at the private college level, so only had the 403b and Roth IRA route to utilize. Wife had pension, 403b, 457b, and Roth IRA investment vehicles to utilize. Our state pension plan that my wife is under does have the employee paying into SS, so she will receive her full SS as well as the pension. So that kind of adds to your original question of portfolio allocation and thinking of the overall household income flow in retirement from pension(s), SS, bonds, stocks, dividends, etc... . Our retirement accounts through work (403b, 457b, 401k, etc... are at 70/30 AA for me and 60/40 for her). All of our taxable and IRA accounts are allocated a bit more aggressive than that.

Anyway, we were just curious how things are going for you 4 years later after your original post regarding your plans, AA, etc... . We hope and trust all is well.

TIA

CyclingDuo
CyclingDuo, thanks for asking. We are doing really well. Although the 2020 meltdown I made a minor overreaction with one of our 529s I was able to stay the course with everything else. We are still 100% stocks and thankful to have stayed that route. At age 39, we joined the 2 comma club and our net worth increased by 285k last year. The pension seems to be intact and funded well. Our combined pension is now estimated to be worth $170k annually. Now that we are entering our 40s I’m trying to save less and live more. We have constantly saved 50-60% of our income and if we don’t save another dollar the accounts should continue to grow at a rate that will fund an amazing retirement. With that being said I’ll always max roth, HSA, and the 14% strs Ohio contribution for my wife and I. Our savings will still be 40% of income but just dialing it back some. I plan on staying 100% stocks for the time being. My wife is back in the work force full time and that has been a major help.

The 2020 meltdown brought out some amateur investors in my school and a lot of people were now curious in individual stocks. So they hyped this stock and that stock but didn’t know when to get in and get out. I just smiled and nodded because my approach was boring to them. Fast forward to tax season and the most vocal of the investors was deflated when he realized he spent all that time stressing when to get in and out and chasing performance for a measly $600 capital gain for the year. Me on the other hand increased my net worth $285k with a Boglehead approach of buy and hold index funds and keep costs low……….Holy [expletive deleted by moderator oldcomputerguy] this site is unbelievable. THANKS TO ALL - I grew up dirt poor in section 8 housing for a good percentage of life and was homeless at one point. My career path was chosen not based on the money I could make but rather the difference I could make. With that being said, with the Boglehead approach I’m doing both and it’s a win-win.

Forever grateful,
Charles Norris
🥋😀
Admiral
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Re: The need for bonds if I have a pension?

Post by Admiral »

This question has been asked many times.

Your pension is in a quarter century. Lots can happen in 25 years.

Yes, you should have some fixed income.

It's no more complicated than that. Any calculation you make that presumes your pension stands in for fixed income should use ONLY the future value of your pension should you leave your job tomorrow (NOT what you think/hope/dream it will be if you keep working.) So, the vested value today.

That's the conservative, and in my view the correct, calculation. When you get to a point where retirement is much closer, then I think it's fine to make some more liberal assumptions about the payout.
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Re: The need for bonds if I have a pension?

Post by Michael Patrick »

I'm a state employee in Wisconsin. Thankfully, our pension system is fully funded. After grad school I could have easily wound up working in my home state of Illinois, and I am grateful that through fate/luck I wound up sticking around in Madison after I graduated from UW.

Even with about as sure a thing as pensions get, plus social security, I still have around 20% bonds in my retirement savings.
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Re: The need for bonds if I have a pension?

Post by ruralavalon »

CharlesNorris wrote: Mon Feb 20, 2017 6:19 pmCash out values of pensions 102k, 100k.
In my opinion you are using the right way to value the pensions when intending to count them as bonds for purposes of asset allocation.

In asset allocation the value of any asset should be its value today, not its value at some future date.

In my opinion the value of a pension for asset allocation purposes is the amount of cash you could receive today if you left the job today.


CharlesNorris wrote: Sat Sep 25, 2021 6:34 amCyclingDuo, thanks for asking. We are doing really well. Although the 2020 meltdown I made a minor overreaction with one of our 529s I was able to stay the course with everything else. We are still 100% stocks and thankful to have stayed that route. At age 39, we joined the 2 comma club and our net worth increased by 285k last year. The pension seems to be intact and funded well. Our combined pension is now estimated to be worth $170k annually. Now that we are entering our 40s I’m trying to save less and live more. We have constantly saved 50-60% of our income and if we don’t save another dollar the accounts should continue to grow at a rate that will fund an amazing retirement. With that being said I’ll always max roth, HSA, and the 14% strs Ohio contribution for my wife and I. Our savings will still be 40% of income but just dialing it back some. I plan on staying 100% stocks for the time being. My wife is back in the work force full time and that has been a major help.

The 2020 meltdown brought out some amateur investors in my school and a lot of people were now curious in individual stocks. So they hyped this stock and that stock but didn’t know when to get in and get out. I just smiled and nodded because my approach was boring to them. Fast forward to tax season and the most vocal of the investors was deflated when he realized he spent all that time stressing when to get in and out and chasing performance for a measly $600 capital gain for the year. Me on the other hand increased my net worth $285k with a Boglehead approach of buy and hold index funds and keep costs low……….Holy [expletive deleted by moderator oldcomputerguy] this site is unbelievable. THANKS TO ALL - I grew up dirt poor in section 8 housing for a good percentage of life and was homeless at one point. My career path was chosen not based on the money I could make but rather the difference I could make. With that being said, with the Boglehead approach I’m doing both and it’s a win-win.

Forever grateful,
Charles Norris
🥋😀
Congratulations on joining the two comma club at age 39, on staying the course, and on your excellent savings rate.

I am glad everything is working well for you :D


CharlesNorris wrote: Sat Sep 25, 2021 6:34 amNow that we are entering our 40s I’m trying to save less and live more.
. . . . .
Our savings will still be 40% of income but just dialing it back some.
:thumbsup :thumbsup
Last edited by ruralavalon on Sat Sep 25, 2021 7:19 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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