just retired. need to figure out a fixed income strategy.

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jt90505
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Joined: Wed Nov 28, 2018 8:10 pm

just retired. need to figure out a fixed income strategy.

Post by jt90505 »

For context...

Just retired, age 60. No pension, no inheritances, but wife and I have lived a happy life and saved diligently from the start of our careers.

With a real return of 1% we can maintain our standard of living til we are over 100 (based on a personally constructed spreadsheet). Online calculators show a very high probability of success though our planning age of 100. In the unlikely but possible event one of us lives longer than that we could draw on our housing equity.

So my read is we don't need to take much risk. My current thinking is we will start with an equity allocation of ~30%, which is where we are now. I've always focused on equities and am content with our current holdings. I am strongly inclined to go to a total return portfolio, drawing down assets. and starting Social Security at age 70.

The question...
I have no plan for the large fixed income component. Currently I have ~10% of fixed income in Total Bond funds and ~10% in a TIPS fund. A whopping 80% is sitting in CD's and Zero's maturing in 2 years or less.

By coincidence the real yield on TIPS is ~1% which is tempting me to build a TIPS ladder. Thinking out loud:
  • Increase Total Bond funds to 20% of fixed income, sell the TIPS fund, keep 1 year of expenses in cash. With remainder:
  • For first 5 years, ladder CD's or zero's to meet planned expenses
  • Ladder TIPS for years 6-15. For years 6-9 consider nominal bonds. Not sure what the breakeven tips rate would be.
  • Re-evaluate where we are at at year 15 (age 75)
I have pretty much eliminated annuities from consideration given the cost of getting even minimal inflation protection, and can't see the value of locking in a 40 year declining real income stream (for a fixed immediate annuity).

I am open to all suggestions.

thanks for any input
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vineviz
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Re: just retired. need to figure out a fixed income strategy.

Post by vineviz »

jt90505 wrote: Thu Nov 29, 2018 3:08 pm By coincidence the real yield on TIPS is ~1% which is tempting me to build a TIPS ladder. Thinking out loud:
  • Increase Total Bond funds to 20% of fixed income, sell the TIPS fund, keep 1 year of expenses in cash. With remainder:
  • For first 5 years, ladder CD's or zero's to meet planned expenses
  • Ladder TIPS for years 6-15. For years 6-9 consider nominal bonds. Not sure what the breakeven tips rate would be.
  • Re-evaluate where we are at at year 15 (age 75)
I have pretty much eliminated annuities from consideration given the cost of getting even minimal inflation protection, and can't see the value of locking in a 40 year declining real income stream (for a fixed immediate annuity).
Congratulations on your retirement.

I think the idea of building a TIPS ladder makes a lot of sense, and I'd probably build it out all the way to 30 years if I were in your positions. Probably wouldn't do it for 100% of my expected spending right away, and also wouldn't use TIPS exclusively.

You might consider building a 30-year TIPS ladder that accounts for 20% of what you expect to spend each year. Then add a ladder of iShares iBond ETFs covering another 20% of what you expect to spend for as far out as they go, which is currently 2028 for an average 4.01% YTM. https://www.ishares.com/us/strategies/b ... nd-ladders

I like your idea of a short-term ladder (CDs probably make the most sense) covering 3-5 years.

Then I'd keep the rest in some combo of PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ), Vanguard Long-Term Treasury ETF (VGLT), and Vanguard Total Bond Market ETF (BND) along with your 30% equity allocation. Every year or two I'd peel off some of this bond ETF/equity portion to extend and/or expand your ladder. This preserves some flexibility and adds insurance against future economic regime change. without being TOO complicated I hope.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
jt90505
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Re: just retired. need to figure out a fixed income strategy.

Post by jt90505 »

Thank you Vineviz. Very good suggestions, follow up questions/comments follow. (All responses are off the top of my head and subject to change as get smarter...please let me know if I'm way off base!)
  • I did not know the iShares iBond ETF's existed. I like the concept and while I'll need do some homework, I suspect they will fit nicely in the 4-9 year space.
  • Why the TIPS ETF vs. directly purchasing TIPS? I'm pretty strongly leaning to directly purchasing the TIPS 1) Since they provide the return I am looking for and 2) Avoid timing issues wrt sales. My thought is to totally eliminate all TIPS funds.
  • 30 year TIPS ladder. Yeah. I know. Especially since the return meets my projected needs. Good catch.
  • Probably the most important question. I view protecting against unexpected inflation as our primary objective given the low growth I need. You have alluded to future changes we need to be flexible to respond to...what do you view as the greatest risks which could potentially surface?
Thanks again
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vineviz
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Re: just retired. need to figure out a fixed income strategy.

Post by vineviz »

jt90505 wrote: Thu Nov 29, 2018 5:05 pm
  • Why the TIPS ETF vs. directly purchasing TIPS? I'm pretty strongly leaning to directly purchasing the TIPS 1) Since they provide the return I am looking for and 2) Avoid timing issues wrt sales. My thought is to totally eliminate all TIPS funds.
My view is that even the most diligent planners will have difficulty making an accurate estimate at age 60 of what kind of income they'll need at age 90. Individual TIPS are ideal at matching known liabilities, but they can be a little more cumbersome if you need to change plans due to illness or some other unforeseen event. That said, TIPS are very liquid so I certainly don't view the TIPS fund as critical to the plan if have built a solid TIPS ladder already.
jt90505 wrote: Thu Nov 29, 2018 5:05 pm
  • Probably the most important question. I view protecting against unexpected inflation as our primary objective given the low growth I need. You have alluded to future changes we need to be flexible to respond to...what do you view as the greatest risks which could potentially surface?
TIPS are good at protecting against unexpectedly HIGH inflation. If inflation is unexpectedly LOW or even negative then nominal bonds will provide more real return so I think you want to keep a balance of exposure.

Additionally, even though your equity sleeve is just 30% if we got lucky and experienced another 10 years of strong bull markets then your equities might very well throw off all the real return you actually need: that'd make the TIPS "inflation insurance" an unnecessary expense. Finally, most retirees find their annual spending increases at a rate that is notably LESS than inflation (1% less is the rule of thumb). Because Social Security is fully indexed to inflation, the amount of explicit inflation protection needed in the rest of the portfolio is less than 100%. And likely much less if Social Security will be covering 40%+ of your annual spending.

I'm a big fan of planning, but 40 or more years could be a long retirement so my view is that retirees should balance the need to defend against unexpectedly high inflation with the other significant unknowns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
marcopolo
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Re: just retired. need to figure out a fixed income strategy.

Post by marcopolo »

vineviz wrote: Thu Nov 29, 2018 4:12 pm Then add a ladder of iShares iBond ETFs covering another 20% of what you expect to spend for as far out as they go, which is currently 2028 for an average 4.01% YTM. https://www.ishares.com/us/strategies/b ... nd-ladders
Regarding the iShares iBond ETFs. First I had heard of them. But...
Did anyone else expect these to be something different than what they are?
I was expecting this to be an ETF invested in Treasury Series I Bonds, commonly referred to as iBonds.
Looking at the iShares description, these ETFs appear to invested Corporate Bonds.

I wonder why the use the iBonds moniker.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Watty
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Re: just retired. need to figure out a fixed income strategy.

Post by Watty »

The way TIPS are taxed on the inflation adjustment each year can be a problem if they are not in a retirement account so be sure to consider that.
jt90505 wrote: Thu Nov 29, 2018 3:08 pm ....and starting Social Security at age 70.
This is usually a good idea. This web site was created by a poster here who has written a book on Social Security to help figure out your best Social Security claiming strategy.

https://opensocialsecurity.com/

You might want to consider buying a series of single income immediate annuities (SPIA) when you are in your 70s to provide the income you need.
Thesaints
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Re: just retired. need to figure out a fixed income strategy.

Post by Thesaints »

Maybe that would have been something to plan before retiring...
megabad
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Re: just retired. need to figure out a fixed income strategy.

Post by megabad »

I could not tell whether your portfolio consists of tax advantaged qualified retirement plan or taxable assets, but I would make absolutely sure you consider the tax implications of the strategies you are considering. Retiring at 60 and holding off on SS until 70 would lead me to design my portfolio strategy for the next 10 years around tax strategies. You have an excellent opportunity to prepare for the future. I would recommend considering the viability of Roth conversions, the impact of possibly realizing capital gains, and the horrendous tax treatment of TIPS if held outside a retirement plan.
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patrick013
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Re: just retired. need to figure out a fixed income strategy.

Post by patrick013 »

jt90505 wrote: Thu Nov 29, 2018 3:08 pm
I have no plan for the large fixed income component. Currently I have ~10% of fixed income in Total Bond funds and ~10% in a TIPS fund. A whopping 80% is sitting in CD's and Zero's maturing in 2 years or less.
I've seen some 5 year CD's at 4% already. Good for the CD ladder. A 3 to 5 year CD ladder seems to always have excellent rates when budgeting for future expenses. Spend some and reinvest the rest. Buying 5 year CD's each year will result in yields comparable to 10 year TRSY's usually. Your spreadsheet has you solvent till 100 which is good.

Fed Farm Credit Bank 10 year bonds have 4% coupons at par. I suspect they will yield more next year and that would be a better time to buy. Almost as good as TRSY's (AA+ rating) with higher rates usually. Those and Fed Home Loan Bank are state tax exempt. New issues at Fidelity. Good for some AA to hedge possible rate decreases.

Ticker BLV is one of my fav's for some AA when rates peak in a year or 2 for some AA and a nice yield.

Don't give up completely on the SPIA. When rates rise the premium will fall just like the price of bonds. Talk About Annuities

So, we may eventually have:

10% TIPS
10% BND
5% BLV
5% Agency Bond
30% Stock Fund
40% revolving CD ladder

You can sell for capital gains either stock or bonds to fund the CD ladder when volatility is positive.
age in bonds, buy-and-hold, 10 year business cycle
Topic Author
jt90505
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Re: just retired. need to figure out a fixed income strategy.

Post by jt90505 »

megabad wrote: Thu Nov 29, 2018 7:43 pm I could not tell whether your portfolio consists of tax advantaged qualified retirement plan or taxable assets, but I would make absolutely sure you consider the tax implications of the strategies you are considering. Retiring at 60 and holding off on SS until 70 would lead me to design my portfolio strategy for the next 10 years around tax strategies. You have an excellent opportunity to prepare for the future. I would recommend considering the viability of Roth conversions, the impact of possibly realizing capital gains, and the horrendous tax treatment of TIPS if held outside a retirement plan.
Good post, thank you. About 85% of assets are in IRA's or other tax deferred accounts, 10% in Roths or HSA's, 5% taxable. All TIPS are/ will be held in the tax deferred accounts. I've been moving relatively small amounts for the past several years into Roths, which I expect to continue.

Two items for the "to do" list: I should be able realize the relatively small capital gains I have tax free, but yes, I do need to set things up to make that happen. I also need to take a closer look at tax implications of RMD's once hit 70.5, determine if I need to address, and best approach to mitigating if needed.
Topic Author
jt90505
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Re: just retired. need to figure out a fixed income strategy.

Post by jt90505 »

[/quote]
So, we may eventually have:

10% TIPS
10% BND
5% BLV
5% Agency Bond
30% Stock Fund
40% revolving CD ladder

You can sell for capital gains either stock or bonds to fund the CD ladder when volatility is positive.
[/quote]

Interesting suggestion...does anyone else have thoughts on reducing the TIPS % in favor of the larger revolving 5 year CD ladder (or 5 year iBond EFT)?
megabad
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Re: just retired. need to figure out a fixed income strategy.

Post by megabad »

marcopolo wrote: Thu Nov 29, 2018 5:57 pm I wonder why the use the iBonds moniker.
I was thinking the same thing. Wish the federal government would pursue trademark like protection or something. In a thread talking about TIPs and inflation protection, repeatedly using the moniker i-bonds for something other than actual i-bonds was very confusing for me.
Broken Man 1999
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Re: just retired. need to figure out a fixed income strategy.

Post by Broken Man 1999 »

megabad wrote: Fri Nov 30, 2018 9:45 am
marcopolo wrote: Thu Nov 29, 2018 5:57 pm I wonder why the use the iBonds moniker.
I was thinking the same thing. Wish the federal government would pursue trademark like protection or something. In a thread talking about TIPs and inflation protection, repeatedly using the moniker i-bonds for something other than actual i-bonds was very confusing for me.
Probably confuses many people.

Info from the link:

iBonds ETFs are available in either investment grade corporate bond or municipal bond exposures.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
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patrick013
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Re: just retired. need to figure out a fixed income strategy.

Post by patrick013 »

jt90505 wrote: Thu Nov 29, 2018 11:21 pm I also need to take a closer look at tax implications of RMD's once hit 70.5, determine if I need to address, and best approach to mitigating if needed.
Yes, you need to estimate your marginal tax rate when 70, when the tax rate will affect your tIRA withdrawals. You invest in tIRA's during your career when in a tax bracket higher than your estimated tax bracket when retired. When in a lower tax bracket approaching full retirement incomes and higher taxes, the tIRA can be converted to Roth and realize some economic benefit in doing so during those earlier years. A lower or equal tax bracket is when that may be done. Not a higher tax bracket. Stocks are best placed in the Roth.
age in bonds, buy-and-hold, 10 year business cycle
Mr. Jelly
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Re: just retired. need to figure out a fixed income strategy.

Post by Mr. Jelly »

Everyone seems so smart here. I didn't and don't know what I'm doing so when I retired at 57 I put my 401K into an IRA VTINX fund. In recent days there have been times I'm real glad I did. This fund seems to be kind of what you are doing but more conservative.
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