How to implement a bond floor?

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makeitcount
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How to implement a bond floor?

Post by makeitcount »

As I understand it, a bond (or other fixed income) floor is an amount of money placed into bonds which may be added to, but not subtracted from, while rebalancing. Perhaps similar in nature to the liability matching concept. The idea appears to have a fair number of proponents here on the forum.
The concept is interesting to me and may be something I choose to implement in the future. That being said, it seems there are a number of moving parts compared to simply setting an asset allocation you are comfortable with and rebalancing based on yearly changes in the market and/or your required spending.
For instance:
-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?

Thanks.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: How to implement a bond floor?

Post by alex_686 »

I think I know where you want to go, but you are going down the wrong path. Any strategy that has a "don't sell X ever" is going to be riddled with cognitive errors. It can't be logically internally consistent. That is, it is a intuitive plan that address behavioral issues.

Here is a better idea, Constant Proportion Portfolio Insurance (CPPI), a rebalancing technique.

https://en.wikipedia.org/wiki/Constant_ ... _insurance
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
makeitcount
Posts: 288
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Re: How to implement a bond floor?

Post by makeitcount »

alex_686 wrote: Fri Jul 30, 2021 11:00 am I think I know where you want to go, but you are going down the wrong path. Any strategy that has a "don't sell X ever" is going to be riddled with cognitive errors. It can't be logically internally consistent. That is, it is a intuitive plan that address behavioral issues.

Here is a better idea, Constant Proportion Portfolio Insurance (CPPI), a rebalancing technique.

https://en.wikipedia.org/wiki/Constant_ ... _insurance
Will give that a read, thanks.
I certainly have not decided to move forward with a bond floor and if I did it would not be for quite some time. I (hopefully) have a number of years left in the accumulation phase and am comfortable with my current asset allocation.
The reasoning behind my post was that I periodically read posts from members who have adopted such plans but they tend to provide few details about the logistics. I was curious how they would address some of the "cognitive errors" you alluded to.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
alex_686
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Joined: Mon Feb 09, 2015 1:39 pm

Re: How to implement a bond floor?

Post by alex_686 »

I am going to break down my response into 2 parts.
makeitcount wrote: Fri Jul 30, 2021 12:50 pm The reasoning behind my post was that I periodically read posts from members who have adopted such plans but they tend to provide few details about the logistics. I was curious how they would address some of the "cognitive errors" you alluded to.
Your asset allocation is based on your market expectations and risk tolerances. It is designed to meet your goals.

Time A: Your asset allocation is optimized. i.e., prefect. Lets say 70/30.

Time B: The market zigs. You rebalance per your IPS to buy bonds. Lets say 65/35. You asset allocation is not optimized.

Time C: The market zags back to point A. You market expectations have not changed. If at time A the optimal asset allocation was 70/30, and your views have not changed, then how is 70/30 not your optimal asset allocation? Why wouldn't you sell bonds to get back there?

There are a couple of behavioral errors on why you won't. Hard to guess. However one of them is "loss aversion". If you never sell your bonds you will never suffer a realized loss. This implies that your past purchases are special, that the past will have some sort of impact on future returns, or something like that.

And while these common responses are intuitive and emotional, they are not rational or true.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: How to implement a bond floor?

Post by alex_686 »

makeitcount wrote: Fri Jul 30, 2021 12:50 pm I (hopefully) have a number of years left in the accumulation phase and am comfortable with my current asset allocation.
Most people misunderstand what liability matching is. It is only for the most risk adverse who can't take any risk. If you are in the accumulation phase I doubt liability matching is a good choice for you.

Even a CPPI strategy probably won't work. But you might be looking for a convex strategy, and CPPI is one of those. A good illustration.

When rebalancing, most people think of a concave strategy like constant mix strategy. i.e., having a 60/40 strategy.

So, let us think about concave verse convex strategy and why you should chose one over the other.

As your wealth grows your ability to take risks increases. As your wealth falls your ability to take risks falls. This is solid and objective.

However, as your wealth grows or falls does your willingness to take risk increase or decrease? This is personal and subjective.

With a convex strategy as your wealth declines so does your risk. You shift more and more of your assets into safe bonds. This limits your downside risk. This is why I think you should be looking at a convex strategy.

The concave strategy is the opposite. As your wealth falls you decrease safe bonds and increase risky equities in your portfolio.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: How to implement a bond floor?

Post by hudson »

makeitcount wrote: Fri Jul 30, 2021 10:09 am As I understand it, a bond (or other fixed income) floor is an amount of money placed into bonds which may be added to, but not subtracted from, while rebalancing. Perhaps similar in nature to the liability matching concept. The idea appears to have a fair number of proponents here on the forum.
The concept is interesting to me and may be something I choose to implement in the future. That being said, it seems there are a number of moving parts compared to simply setting an asset allocation you are comfortable with and rebalancing based on yearly changes in the market and/or your required spending.
For instance:
-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?

Thanks.
I like the idea of a bond floor. I don't rebalance. I'm 100% fixed.
I've been doing the bond floor since 2008. I never called it a bond floor.
The amount isn't static, if my income is more than my expenses, it will grow.
As a retiree, I hope that I have more than I need.
How do I spend from it? When interest dividends come in, depending on need, I either transfer it to my checking account, to a high yield savings account, or to my brokerage account....usually VWIUX.
SnowBog
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Re: How to implement a bond floor?

Post by SnowBog »

Some people think in terms of "years" vs. "percent" of fixed income assets.

As a simple example, let's say someone retires at 65 delaying social security until 70. They have 5 years they need to cover completely from their portfolio. Someone who is ultra conservative might decide that they need to cover those 5 years from "fixed income" (aka Bonds, etc.).

Let's also say that social security covers 50% of their expenses, and they want to cover an additional 10 years of remaining expenses via "fixed income". So to cover 50% of 10 years, they'll need another 5 years expense in fixed income.

Combined, that's 10 years of "fixed income" assets. In theory, regardless of market conditions, they can survive 15 years without having to draw down their equities (remember social security was estimated to cover 50% starting at age 70).

In such a case, they might think of their AA as:
  • Minimum of 10 years of fixed income
  • The rest in equities
If they had $1,000,000 in assets with $40k/year expenses, they'd have a 60/40 portfolio (if viewed by %), giving them 10x in fixed income ($400,000).

But let's say the stock market crashes 50% (for simplicity, let's say bonds are unchanged). They now have $300,000 in equities + $400,000 in fixed income; their AA is now roughly 43/57.

For them to maintain a 60/40 AA, they'd need to exchange $120k (3 years of expenses) from fixed income into equities.

But they don't necessarily think of their AA in % terms, from "years of expenses" they still have a steady 10 years of fixed income - so they don't rebalance (or don't rebalance beyond their minimum of 10 years of expenses).
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

alex_686 wrote: Fri Jul 30, 2021 1:16 pm I am going to break down my response into 2 parts.
makeitcount wrote: Fri Jul 30, 2021 12:50 pm The reasoning behind my post was that I periodically read posts from members who have adopted such plans but they tend to provide few details about the logistics. I was curious how they would address some of the "cognitive errors" you alluded to.
Your asset allocation is based on your market expectations and risk tolerances. It is designed to meet your goals.

Time A: Your asset allocation is optimized. i.e., prefect. Lets say 70/30.

Time B: The market zigs. You rebalance per your IPS to buy bonds. Lets say 65/35. You asset allocation is not optimized.

Time C: The market zags back to point A. You market expectations have not changed. If at time A the optimal asset allocation was 70/30, and your views have not changed, then how is 70/30 not your optimal asset allocation? Why wouldn't you sell bonds to get back there?

There are a couple of behavioral errors on why you won't. Hard to guess. However one of them is "loss aversion". If you never sell your bonds you will never suffer a realized loss. This implies that your past purchases are special, that the past will have some sort of impact on future returns, or something like that.

And while these common responses are intuitive and emotional, they are not rational or true.
yes, i believe loss aversion is the appeal of this approach, though as you have described, the approach certainly has its flaws.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

hudson wrote: Fri Jul 30, 2021 1:45 pm
makeitcount wrote: Fri Jul 30, 2021 10:09 am As I understand it, a bond (or other fixed income) floor is an amount of money placed into bonds which may be added to, but not subtracted from, while rebalancing. Perhaps similar in nature to the liability matching concept. The idea appears to have a fair number of proponents here on the forum.
The concept is interesting to me and may be something I choose to implement in the future. That being said, it seems there are a number of moving parts compared to simply setting an asset allocation you are comfortable with and rebalancing based on yearly changes in the market and/or your required spending.
For instance:
-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?

Thanks.
I like the idea of a bond floor. I don't rebalance. I'm 100% fixed.
I've been doing the bond floor since 2008. I never called it a bond floor.
The amount isn't static, if my income is more than my expenses, it will grow.
As a retiree, I hope that I have more than I need.
How do I spend from it? When interest dividends come in, depending on need, I either transfer it to my checking account, to a high yield savings account, or to my brokerage account....usually VWIUX.
floor = total portfolio? I suppose that eliminates a number of the concerns I mentioned.
Are you not worried about losing ground to inflation? I recall that it is commonly suggested not to go under 30/70 (stocks/bonds) to guard against inflation over time. Perhaps you meet the standard of my final bullet point in the OP (having so much what you do, within reason, really doesn't matter too much).
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

SnowBog wrote: Fri Jul 30, 2021 1:54 pm Some people think in terms of "years" vs. "percent" of fixed income assets.

As a simple example, let's say someone retires at 65 delaying social security until 70. They have 5 years they need to cover completely from their portfolio. Someone who is ultra conservative might decide that they need to cover those 5 years from "fixed income" (aka Bonds, etc.).

Let's also say that social security covers 50% of their expenses, and they want to cover an additional 10 years of remaining expenses via "fixed income". So to cover 50% of 10 years, they'll need another 5 years expense in fixed income.

Combined, that's 10 years of "fixed income" assets. In theory, regardless of market conditions, they can survive 15 years without having to draw down their equities (remember social security was estimated to cover 50% starting at age 70).

In such a case, they might think of their AA as:
  • Minimum of 10 years of fixed income
  • The rest in equities
If they had $1,000,000 in assets with $40k/year expenses, they'd have a 60/40 portfolio (if viewed by %), giving them 10x in fixed income ($400,000).

But let's say the stock market crashes 50% (for simplicity, let's say bonds are unchanged). They now have $300,000 in equities + $400,000 in fixed income; their AA is now roughly 43/57.

For them to maintain a 60/40 AA, they'd need to exchange $120k (3 years of expenses) from fixed income into equities.

But they don't necessarily think of their AA in % terms, from "years of expenses" they still have a steady 10 years of fixed income - so they don't rebalance (or don't rebalance beyond their minimum of 10 years of expenses).
Thank you.
What you described makes sense to me. I think it's the logistics of implementing the plan (other than the no rebalancing part) that is tough to understand. If you have a known, upcoming, expense it makes some sense to use such a plan. If your upcoming expense = retirement it seems harder to fit the pieces together.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
SnowBog
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Re: How to implement a bond floor?

Post by SnowBog »

The "full scale" version is the Liability Matching Portfolio (LMP). The idea being, if you are very conservative (unwilling to take risk) - and have far more money than you'll need (arguably required for a full LMP), you put the total amount you'll spend in retirement in something like I Bonds and/or TIPS. The idea being, they'll cover inflation and protect your money. Anything left is the "risk" portfolio, which is usually invested for growth - as its likely money being left to heirs/charity/etc.

Some might take a narrower view, like "usually the markets recover with X years". So their "floor" becomes X years.

For arguments sake, let's say that's 5 years, and let's say that (using our example above) that put them at a 80/20 portfolio. But that's really more "aggressive" than they want, so they opt for a 60/40 AA. Again, per our hypothetical 50% crash above, they could rebalance back to 60/40 - while still maintaining their 5 years of fixed income. But if there was a subsequent crash (before recovery), at some point they will hit their "threshold" where they simply won't sell any more bonds (so they don't go below their floor). In this case, I think it's mostly just a sanity check that they use when rebalancing - that they'll "knowingly" not rebalance if it requires them fyi reduce their bonds below their threshold.

As to the "day-to-day", my working theory is not much else changes. If markets are doing fine, they'll withdraw/rebalance whatever is higher (cognizant of their "floor"). If markets are poor, they might be forced to use their "floor". In theory, if markets are recovered "in time" they'll simply rebalance to "rebuild" their floor. But if they aren't... Well, they'll do the same as the rest of us - figure it out by cutting costs or being forced to sell stocks to maintain the floor, etc.

I should note, I'm still in accumulation phase. I currently don't have a bond floor as such. But I am building an "income floor" out of I Bonds and EE Bonds. Conceptually this will provide "income" (by selling) of roughly $40k/year from [early] retirement through [delayed] social security if markets are down during initial retirement - thus minimizing the downdraw on our portfolio. If markets are doing well, I'll let these grow (increasing the "income" mostly as there will be fewer years to cover), until eventually we spend these down prior to collecting SS/pensions. These I & EE Bonds are a small part of our 60/40 AA, so we have lots of other bond funds to rebalance when needed. It's not quite as conservative as a full LMP, but gives us some comfort that we'll have a small minimal amount of income we can relay on independent of what the markets may be doing. We'll likely have "less" at the end with this approach, but we expect to still have "enough".
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jeffyscott
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Re: How to implement a bond floor?

Post by jeffyscott »

makeitcount wrote: Fri Jul 30, 2021 10:09 am-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
I set a rebalancing floor in 2008-09 to protect my ability to retire, at the time that was planned for 6-10 years in the future. It was a change in strategy due to the seeming unending decline in stock prices.
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
I estimated a need for a minimum of $X to feel comfortable retiring when I wanted to. Due to low spending, pensions and SS, this was not a huge sum. I would have stopped rebalancing into stocks had the amount in fixed income reached that level of $X.

As it turned out, we never got to the floor and remained at 50/50 throughout the decline. The floor remained in place, but never came close to it being an issue subsequently. Had there been another severe decline, the floor would have been updated based on whatever the revised minimum needed to retire was at the time.
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?
As things have worked out in retirement, we need very little from our portfolio and once SS and Medicare start, then it'll likely be completely surplus. Still, I won't fully rebalance into stocks, when/if they go down. Any floor now is purely for psychological reasons, but I'll likely stick with this strategy that is "riddled with cognitive errors" and not "logically internally consistent", etc. :mrgreen:
tomsense76
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Re: How to implement a bond floor?

Post by tomsense76 »

Have you read Mel's article on using EE Bonds for this purpose?

https://www.forbes.com/sites/theboglehe ... wn-annuity
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Mike Scott
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Re: How to implement a bond floor?

Post by Mike Scott »

It's something I've been thinking about especially when thinking about how to get from retirement date to SS claiming date. I don't know if this makes it an internal goal or a bucket or what but there is a gap that will need filling with more money or more flexible dates. It does seem like something that would be easiest to implement if you already have enough money in hand to cover it. If you are only trying to move in this direction and don't have enough money yet, it might look more like one-way rebalancing on the way toward building up the bond threshold.
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makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

SnowBog wrote: Fri Jul 30, 2021 4:50 pm The "full scale" version is the Liability Matching Portfolio (LMP). The idea being, if you are very conservative (unwilling to take risk) - and have far more money than you'll need (arguably required for a full LMP), you put the total amount you'll spend in retirement in something like I Bonds and/or TIPS. The idea being, they'll cover inflation and protect your money. Anything left is the "risk" portfolio, which is usually invested for growth - as its likely money being left to heirs/charity/etc.

Some might take a narrower view, like "usually the markets recover with X years". So their "floor" becomes X years.

For arguments sake, let's say that's 5 years, and let's say that (using our example above) that put them at a 80/20 portfolio. But that's really more "aggressive" than they want, so they opt for a 60/40 AA. Again, per our hypothetical 50% crash above, they could rebalance back to 60/40 - while still maintaining their 5 years of fixed income. But if there was a subsequent crash (before recovery), at some point they will hit their "threshold" where they simply won't sell any more bonds (so they don't go below their floor). In this case, I think it's mostly just a sanity check that they use when rebalancing - that they'll "knowingly" not rebalance if it requires them fyi reduce their bonds below their threshold.

As to the "day-to-day", my working theory is not much else changes. If markets are doing fine, they'll withdraw/rebalance whatever is higher (cognizant of their "floor"). If markets are poor, they might be forced to use their "floor". In theory, if markets are recovered "in time" they'll simply rebalance to "rebuild" their floor. But if they aren't... Well, they'll do the same as the rest of us - figure it out by cutting costs or being forced to sell stocks to maintain the floor, etc.

I should note, I'm still in accumulation phase. I currently don't have a bond floor as such. But I am building an "income floor" out of I Bonds and EE Bonds. Conceptually this will provide "income" (by selling) of roughly $40k/year from [early] retirement through [delayed] social security if markets are down during initial retirement - thus minimizing the downdraw on our portfolio. If markets are doing well, I'll let these grow (increasing the "income" mostly as there will be fewer years to cover), until eventually we spend these down prior to collecting SS/pensions. These I & EE Bonds are a small part of our 60/40 AA, so we have lots of other bond funds to rebalance when needed. It's not quite as conservative as a full LMP, but gives us some comfort that we'll have a small minimal amount of income we can relay on independent of what the markets may be doing. We'll likely have "less" at the end with this approach, but we expect to still have "enough".
I suspect this is a key component of making this plan work.
In my situation, it is possible my pension + SS will cover the majority of our needs. Therefore we could 'afford' to create a floor to preserve at least a base level of 'wants'. If someone is not in such a favorable position the concept seems less enticing.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

jeffyscott wrote: Fri Jul 30, 2021 5:31 pm
makeitcount wrote: Fri Jul 30, 2021 10:09 am-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
I set a rebalancing floor in 2008-09 to protect my ability to retire, at the time that was planned for 6-10 years in the future. It was a change in strategy due to the seeming unending decline in stock prices.
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
I estimated a need for a minimum of $X to feel comfortable retiring when I wanted to. Due to low spending, pensions and SS, this was not a huge sum. I would have stopped rebalancing into stocks had the amount in fixed income reached that level of $X.

As it turned out, we never got to the floor and remained at 50/50 throughout the decline. The floor remained in place, but never came close to it being an issue subsequently. Had there been another severe decline, the floor would have been updated based on whatever the revised minimum needed to retire was at the time.
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?
As things have worked out in retirement, we need very little from our portfolio and once SS and Medicare start, then it'll likely be completely surplus. Still, I won't fully rebalance into stocks, when/if they go down. Any floor now is purely for psychological reasons, but I'll likely stick with this strategy that is "riddled with cognitive errors" and not "logically internally consistent", etc. :mrgreen:
Thank you for sharing your real-life experience.
I'm not sure the two are synonymous, however, creating a bond floor and one way rebalancing seem to be similar themes.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

tomsense76 wrote: Fri Jul 30, 2021 5:48 pm Have you read Mel's article on using EE Bonds for this purpose?

https://www.forbes.com/sites/theboglehe ... wn-annuity
I have not read the article but will do so, thank you.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Topic Author
makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

Mike Scott wrote: Fri Jul 30, 2021 6:05 pm It's something I've been thinking about especially when thinking about how to get from retirement date to SS claiming date. I don't know if this makes it an internal goal or a bucket or what but there is a gap that will need filling with more money or more flexible dates. It does seem like something that would be easiest to implement if you already have enough money in hand to cover it. If you are only trying to move in this direction and don't have enough money yet, it might look more like one-way rebalancing on the way toward building up the bond threshold.
It certainly does feel buckety to me. As noted up-thread, having a certain amount set aside for a known future expense seems logical. When the concept is extended indefinitely it feels a bit shaky.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
SnowBog
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Re: How to implement a bond floor?

Post by SnowBog »

makeitcount wrote: Fri Jul 30, 2021 9:05 pm
tomsense76 wrote: Fri Jul 30, 2021 5:48 pm Have you read Mel's article on using EE Bonds for this purpose?

https://www.forbes.com/sites/theboglehe ... wn-annuity
I have not read the article but will do so, thank you.
Essentially, this is what I'm doing. But it takes 20 years for EE Bonds to double, and I didn't start 20 years in advance. So I'm "back filling" the years missed with I Bonds. But it's the same general idea, a DIY Annuity.
revhappy
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Re: How to implement a bond floor?

Post by revhappy »

makeitcount wrote: Fri Jul 30, 2021 10:09 am As I understand it, a bond (or other fixed income) floor is an amount of money placed into bonds which may be added to, but not subtracted from, while rebalancing. Perhaps similar in nature to the liability matching concept. The idea appears to have a fair number of proponents here on the forum.
The concept is interesting to me and may be something I choose to implement in the future. That being said, it seems there are a number of moving parts compared to simply setting an asset allocation you are comfortable with and rebalancing based on yearly changes in the market and/or your required spending.
For instance:
-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?

Thanks.
OP I fully agree with you. I am a big fan of William Bernstein and you can read his thoughts on this below:

https://www.whitecoatinvestor.com/berns ... -the-game/

Specifically this part:
How Much Is Enough?
Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets. No stocks at all. This should be in TIPS, SPIAs, and short-term bonds. If you have more than that, that's your “risk portfolio”, which he describes this way:
“Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass.”
This is a little bit of a different way to think about things. The 4% Rule was developed based on keeping a significant portion of risky assets in the mix. The Trinity Study showed that having fewer stocks in the retirement portfolio INCREASED your risk of running out of money early. But Bernstein is suggesting that once you hit your number (which is about the same number you'd hit using the 4% Rule) you put all your money into safe assets. If you want a “risk portfolio” then you need to keep working a while longer. If you buy into Bernstein's theory, you'd better plan on working a little longer, saving more, or spending less in retirement.
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jeffyscott
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Re: How to implement a bond floor?

Post by jeffyscott »

makeitcount wrote: Fri Jul 30, 2021 9:05 pm
jeffyscott wrote: Fri Jul 30, 2021 5:31 pm
makeitcount wrote: Fri Jul 30, 2021 10:09 am-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
I set a rebalancing floor in 2008-09 to protect my ability to retire, at the time that was planned for 6-10 years in the future. It was a change in strategy due to the seeming unending decline in stock prices.
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
I estimated a need for a minimum of $X to feel comfortable retiring when I wanted to. Due to low spending, pensions and SS, this was not a huge sum. I would have stopped rebalancing into stocks had the amount in fixed income reached that level of $X.

As it turned out, we never got to the floor and remained at 50/50 throughout the decline. The floor remained in place, but never came close to it being an issue subsequently. Had there been another severe decline, the floor would have been updated based on whatever the revised minimum needed to retire was at the time.
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?
As things have worked out in retirement, we need very little from our portfolio and once SS and Medicare start, then it'll likely be completely surplus. Still, I won't fully rebalance into stocks, when/if they go down. Any floor now is purely for psychological reasons, but I'll likely stick with this strategy that is "riddled with cognitive errors" and not "logically internally consistent", etc. :mrgreen:
Thank you for sharing your real-life experience.
I'm not sure the two are synonymous, however, creating a bond floor and one way rebalancing seem to be similar themes.
Those and LMP all seem to me to be ways avoid rebalancing into oblivion or rebalacing until total assets = $X and then bailing out of stocks entirely, both of which seem like worse errors to me.

Idealized version of what I am sort of migrating to would be to, for example, put 50% of assets in a 50/50 balanced fund, 25% in a stock fund, and 25% in a bond fund. Then do no manual rebalancing, so that the only rebalancing would be what occurs in the balanced fund. For withdrawals, it might make sense to just take from whichever has the largest (adjusted) balance (where the adjustment would be to use 1/2 of the balanced fund and compare to full balance of the stock and bond funds).

makeitcount wrote: Fri Jul 30, 2021 9:01 pm In my situation, it is possible my pension + SS will cover the majority of our needs. Therefore we could 'afford' to create a floor to preserve at least a base level of 'wants'. If someone is not in such a favorable position the concept seems less enticing.
That was an important part of my calculation in 2008/09, early retirement pension plus SS (even at 62) would be enough to satisfy our low-spending ways. So an easy way to ensure the ability to retire early was to take the age 62 SS benefit and multiply by the difference between that and planned retirement age.

In my case, the other big factor was the lack of inflation indexing of pension, so I had to also estimate the amount that would be needed to supplement, in case the pension never increased. I also assumed that SS might be cut and that increases might be less than CPI, used a 75% factor for both of those.
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makeitcount
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Re: How to implement a bond floor?

Post by makeitcount »

jeffyscott wrote: Sat Jul 31, 2021 9:50 am
makeitcount wrote: Fri Jul 30, 2021 9:05 pm
jeffyscott wrote: Fri Jul 30, 2021 5:31 pm
makeitcount wrote: Fri Jul 30, 2021 10:09 am-If you believe in setting such a floor, at what point did/do you put such a plan into action? Do you base it on age (e.g. 5 years before retirement), a savings amount (e.g. 25x expenses) or something else?
I set a rebalancing floor in 2008-09 to protect my ability to retire, at the time that was planned for 6-10 years in the future. It was a change in strategy due to the seeming unending decline in stock prices.
-What amount did you choose as your floor and is that amount static (i.e. do you plan to have the same floor at 65 as you do at 85)?
I estimated a need for a minimum of $X to feel comfortable retiring when I wanted to. Due to low spending, pensions and SS, this was not a huge sum. I would have stopped rebalancing into stocks had the amount in fixed income reached that level of $X.

As it turned out, we never got to the floor and remained at 50/50 throughout the decline. The floor remained in place, but never came close to it being an issue subsequently. Had there been another severe decline, the floor would have been updated based on whatever the revised minimum needed to retire was at the time.
-How do you spend from your floor based portfolio?
-Do you have much more than you need (>40x spending) such that some of the known concerns with a floor based plan aren’t particularly relevant?
As things have worked out in retirement, we need very little from our portfolio and once SS and Medicare start, then it'll likely be completely surplus. Still, I won't fully rebalance into stocks, when/if they go down. Any floor now is purely for psychological reasons, but I'll likely stick with this strategy that is "riddled with cognitive errors" and not "logically internally consistent", etc. :mrgreen:
Thank you for sharing your real-life experience.
I'm not sure the two are synonymous, however, creating a bond floor and one way rebalancing seem to be similar themes.
Those and LMP all seem to me to be ways avoid rebalancing into oblivion or rebalacing until total assets = $X and then bailing out of stocks entirely, both of which seem like worse errors to me.

Idealized version of what I am sort of migrating to would be to, for example, put 50% of assets in a 50/50 balanced fund, 25% in a stock fund, and 25% in a bond fund. Then do no manual rebalancing, so that the only rebalancing would be what occurs in the balanced fund. For withdrawals, it might make sense to just take from whichever has the largest (adjusted) balance (where the adjustment would be to use 1/2 of the balanced fund and compare to full balance of the stock and bond funds).

makeitcount wrote: Fri Jul 30, 2021 9:01 pm In my situation, it is possible my pension + SS will cover the majority of our needs. Therefore we could 'afford' to create a floor to preserve at least a base level of 'wants'. If someone is not in such a favorable position the concept seems less enticing.
That was an important part of my calculation in 2008/09, early retirement pension plus SS (even at 62) would be enough to satisfy our low-spending ways. So an easy way to ensure the ability to retire early was to take the age 62 SS benefit and multiply by the difference between that and planned retirement age.

In my case, the other big factor was the lack of inflation indexing of pension, so I had to also estimate the amount that would be needed to supplement, in case the pension never increased. I also assumed that SS might be cut and that increases might be less than CPI, used a 75% factor for both of those.
Have never considered such an idea. Will give it some thought, thanks.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
dbr
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Re: How to implement a bond floor?

Post by dbr »

I don't think there is a practical difference between a bond "floor" and a bond "allocation." It is just thought about differently

For purposes of supplying retirement income the essence of the problem is an income floor. That means a holistic model involving annuities, pensions, entitlements (aka Social Security), and possibly using bonds in a liability matching configuration (simplest and most extreme example being a TIPS ladder). Just bucketing assets into different asset groups is probably not a meaningful exercise. It is easy to do a lot of mental accounting here.

From another thread this paper might be interesting: http://www.modernretirementtheory.com/w ... d-Yang.pdf

I think if one wants to look at the "safety" retirement concept I would look at Bodie, Milevsky, Pfau, and Kitces for perspective.
Topic Author
makeitcount
Posts: 288
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Re: How to implement a bond floor?

Post by makeitcount »

dbr wrote: Sat Jul 31, 2021 4:21 pm I don't think there is a practical difference between a bond "floor" and a bond "allocation." It is just thought about differently

For purposes of supplying retirement income the essence of the problem is an income floor. That means a holistic model involving annuities, pensions, entitlements (aka Social Security), and possibly using bonds in a liability matching configuration (simplest and most extreme example being a TIPS ladder). Just bucketing assets into different asset groups is probably not a meaningful exercise. It is easy to do a lot of mental accounting here.

From another thread this paper might be interesting: http://www.modernretirementtheory.com/w ... d-Yang.pdf

I think if one wants to look at the "safety" retirement concept I would look at Bodie, Milevsky, Pfau, and Kitces for perspective.
Thank you.
I am currently making my way through that paper.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Speckles
Posts: 107
Joined: Sun Jul 21, 2019 1:36 am

Re: How to implement a bond floor?

Post by Speckles »

dbr wrote: Sat Jul 31, 2021 4:21 pm
From another thread this paper might be interesting: http://www.modernretirementtheory.com/w ... d-Yang.pdf

I think if one wants to look at the "safety" retirement concept I would look at Bodie, Milevsky, Pfau, and Kitces for perspective.
I found the article incredibly enlightening! I was alway confused by the different retirement investment/withdrawal strategies. This article put them in perspective for me. Thank you, dbr! I always find your posts very insightful and helpful. Thank you for taking the time to post.

Specks
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: How to implement a bond floor?

Post by tomsense76 »

SnowBog wrote: Fri Jul 30, 2021 11:25 pm
makeitcount wrote: Fri Jul 30, 2021 9:05 pm
tomsense76 wrote: Fri Jul 30, 2021 5:48 pm Have you read Mel's article on using EE Bonds for this purpose?

https://www.forbes.com/sites/theboglehe ... wn-annuity
I have not read the article but will do so, thank you.
Essentially, this is what I'm doing. But it takes 20 years for EE Bonds to double, and I didn't start 20 years in advance. So I'm "back filling" the years missed with I Bonds. But it's the same general idea, a DIY Annuity.
Yeah am doing the same (buying I & EE Bonds). Started in my early 30s. Would have liked to start a few years earlier, but I think it will be ok even without having done that.

Am debating whether it makes sense to setup a trust to buy more (as there are purchase limits), but it does feel like a lot of work just for this purpose.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
SnowBog
Posts: 4700
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Re: How to implement a bond floor?

Post by SnowBog »

tomsense76 wrote: Sun Aug 01, 2021 3:50 pm
SnowBog wrote: Fri Jul 30, 2021 11:25 pm
makeitcount wrote: Fri Jul 30, 2021 9:05 pm
tomsense76 wrote: Fri Jul 30, 2021 5:48 pm Have you read Mel's article on using EE Bonds for this purpose?

https://www.forbes.com/sites/theboglehe ... wn-annuity
I have not read the article but will do so, thank you.
Essentially, this is what I'm doing. But it takes 20 years for EE Bonds to double, and I didn't start 20 years in advance. So I'm "back filling" the years missed with I Bonds. But it's the same general idea, a DIY Annuity.
Yeah am doing the same (buying I & EE Bonds). Started in my early 30s. Would have liked to start a few years earlier, but I think it will be ok even without having done that.
I'm assuming you are planning to retire early...

Otherwise, I'm not sure I'd recommend EE Bonds for anyone in their 30's, as most people are at peak income years in their 50's.

We didn't start buying until early 40's, about when we realized we could probably retire by early 50's. In hindsight, wish we know about EE Bonds and started buying earlier - but it will work out just fine...
tomsense76 wrote: Sun Aug 01, 2021 3:50 pm Am debating whether it makes sense to setup a trust to buy more (as there are purchase limits), but it does feel like a lot of work just for this purpose.
We ended up setting up two trusts - a living trust for each of us. This was part of setting up basic will and estate plan, but at least part of my thought was to give the option to purchase more I Bonds. But don't think I'd have done this just to buy more...

Now that they are in place, I'm buying I Bonds via the trusts as well. On paper, this gives us enough via I Bonds to "backfill" the missing years of EE Bonds, so it seems like it's working out.
tomsense76
Posts: 1428
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Re: How to implement a bond floor?

Post by tomsense76 »

SnowBog wrote: Sun Aug 01, 2021 6:46 pm
tomsense76 wrote: Sun Aug 01, 2021 3:50 pm
Yeah am doing the same (buying I & EE Bonds). Started in my early 30s. Would have liked to start a few years earlier, but I think it will be ok even without having done that.
I'm assuming you are planning to retire early...

Otherwise, I'm not sure I'd recommend EE Bonds for anyone in their 30's, as most people are at peak income years in their 50's.

We didn't start buying until early 40's, about when we realized we could probably retire by early 50's. In hindsight, wish we know about EE Bonds and started buying earlier - but it will work out just fine...
Not everyone gets to choose when they retire. Plenty of people struggle with being forced into retirement in their 50s ( viewtopic.php?t=273092 ). If I'm wrong, I can delay cashing them in for another 10 years. The downside of not having them seems worse than the downside of having them and not needing them.
SnowBog wrote: Sun Aug 01, 2021 6:46 pm
tomsense76 wrote: Sun Aug 01, 2021 3:50 pm Am debating whether it makes sense to setup a trust to buy more (as there are purchase limits), but it does feel like a lot of work just for this purpose.
We ended up setting up two trusts - a living trust for each of us. This was part of setting up basic will and estate plan, but at least part of my thought was to give the option to purchase more I Bonds. But don't think I'd have done this just to buy more...

Now that they are in place, I'm buying I Bonds via the trusts as well. On paper, this gives us enough via I Bonds to "backfill" the missing years of EE Bonds, so it seems like it's working out.
That makes sense. I'm not sure that I'm at a point where a trust makes sense for estate planning yet.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
SnowBog
Posts: 4700
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Re: How to implement a bond floor?

Post by SnowBog »

tomsense76 wrote: Sun Aug 01, 2021 7:05 pm ...
We ended up setting up two trusts - a living trust for each of us. This was part of setting up basic will and estate plan, but at least part of my thought was to give the option to purchase more I Bonds. But don't think I'd have done this just to buy more...
...
That makes sense. I'm not sure that I'm at a point where a trust makes sense for estate planning yet.
[/quote]

The driver for us was our state estate/death tax, which does not follow the national exemptions. While we aren't to the point we "need" to worry about this, we likely will be before retirement. And since we needed to get a will (and things like guardianship for child) established, seemed like a good time to get things in order.
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