Bogleheads take on bond tent

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loukycpa
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Re: Bogleheads take on bond tent

Post by loukycpa »

loukycpa wrote: Tue Jan 25, 2022 7:05 am https://hackyourwealth.com/asset-allocation

I plan to listen again to this podcast that addresses the bond tent strategy. I do think vineviz and others make some valid points and want to reevaluate myself. Sharing in case others might benefit as well.
As I listened to Karsten Jeske (aka Big Ern, the earlyretirementnow.com SWD series guy) again here, it is interesting to me that if you pay careful attention to what is actually telling you to do, he differs from Pfau and Kitces a lot.

Number one, his bond tent is much less severe. He talks about starting out at something more like 60/40. If one is more conservative 50/50 perhaps.

Number two, he does not recommend beginning to glide up immediately. You stay 60/40 (or 50/50) unless you get a bad sequence in the first few years of retirement. Only then do you begin to glide up.

It seems to me his version looks much less like a rising equity glidepath (bond tent) and more like a recommendation to retire with a balanced portfolio (with a chunk of less volatile assets aka fixed income) in order to manage sequence risk. With the caveat that if you do get a bad sequence, if you have a stomach for it, historically it has often paid off (better outcome) if after a major event in the stock market (2008/2009 financial crisis) you increase your allocation to equities.
Last edited by loukycpa on Tue Jan 25, 2022 9:54 am, edited 3 times in total.
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martincmartin
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Re: Bogleheads take on bond tent

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Exchme wrote: Tue Jan 25, 2022 9:18 am I think a key point is that markets respond to external events, not just their own rhythms and excesses. Bad events can and do occur at any time, even back to back. So regardless of how a bond tent behaved in historical outcomes, the bond tent hurts in the general case of randomly occurring bad events as illustrated by vineviz 's Monte Carlo simulations.

For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.

Maybe another way to view it is via the willingness, ability and need to take risk viewpoint. The early low stock allocation may increase your need to take risk later, which may leave you needing to take more risk than you are willing and able to emotionally withstand.
This is all true, and is a good point. Whether fixed AA, "age in bonds" or bond tent is better depends on market dynamics, and how they respond to external events. Under the Random Walk Hypothesis, bond tent might have worse outcomes than fixed AA or age in bonds.

The bond tent is premised on the idea that, while stock prices have a speculative component which may dominate day to day and perhaps even year to year performance, that over the course of 20 years or more, the bigger dynamic is the inherent value of the stock market, because owning part of a company gives you a right to part of its profits. Since people will need food, shelter, transportation, clothing, entertainment, etc., the bet is that as stock prices get lower, they become more attractive. As an extreme example, if the price of a stock were equal to one year's dividends, then you could buy the stock, make your money back in a year, then keep getting more money every year. If you buy and hold in this scenario, then not even assuming global GDP rises but just that it stays the same, on average, for 20 years, you'd have a 20x return on your investment.

Under the random walk hypothesis used in Monte Carlo, the price of stocks are as likely to go down in this scenario as they are to go up. Personally, I think that's wrong, and that on the scale of the business cycle and beyond (i.e. decades), the random walk hypothesis is wrong, and in the above scenario, stocks are much more likely to go up than down.

There are other reasons to believe markets have memory on the scale of decades. For example, everyone is "fighting the last war." During the 1970s, the common wisdom was that the Fed's rate didn't affect inflation much, so there wasn't anything they could do about it. Finally, in 1982, Paul Vlocker raised rates, threw the country into recession, put a lot of people out of work which caused a lot of misery, but got inflation under control, which in the long term created a lot more happiness. After that, the Fed was full of "inflation hawks," and the accepted wisdom became the opposite: the Fed can and should keep inflation low.

The point is, the chance of a second bout of stagflation after the first one is small, because institutions have memory and are ready to address it.

Similarly, after a world war, it's unlikely to have another world war in the next decade or two, as everyone has scars and wants to prevent it at all costs.

So, I believe that the data shows that the memoryless assumption is wrong, and e.g. that the CAPE10 is not a random walk, and that therefore the bond tent is the safer approach than a fixed or declining AA. You're certainly welcome to take the random walk hypothesis as a better model, and therefore listen to the Monte Carlo over historical analysis.
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Re: Bogleheads take on bond tent

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Exchme wrote: Tue Jan 25, 2022 9:18 am For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.
I think this is a good way to explain it.

If we knew ahead of time that the sequence of returns is going to be unfavorable for a constant allocation, then we might expect that a rising equity glide path will perform a little bit better. This is the "modest" benefit that bond tent champions have observed in the historical data, and you can force this to be true in simulations if you assume mean reversion of equity returns. "Modest" in this case might mean an increase in SWR of something like 0.1% with plausible mean reversion parameters.

However, this is only one side of the coin. If we knew ahead of time that the sequence of returns is going to be unfavorable for a bond tent, then the don't have symmetrical expectation to the above: in these scenarios the constant allocation would have done a LOT better. "A lot" in these cases might mean the constant allocation SWR exceeds the bond tent SWR by close to 1.5%.
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Re: Bogleheads take on bond tent

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vineviz wrote: Tue Jan 25, 2022 9:58 am
Exchme wrote: Tue Jan 25, 2022 9:18 am For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.
I think this is a good way to explain it.

If we knew ahead of time that the sequence of returns is going to be unfavorable for a constant allocation, then we might expect that a rising equity glide path will perform a little bit better. This is the "modest" benefit that bond tent champions have observed in the historical data, and you can force this to be true in simulations if you assume mean reversion of equity returns. "Modest" in this case might mean an increase in SWR of something like 0.1% with plausible mean reversion parameters.

However, this is only one side of the coin. If we knew ahead of time that the sequence of returns is going to be unfavorable for a bond tent, then the don't have symmetrical expectation to the above: in these scenarios the constant allocation would have done a LOT better. "A lot" in these cases might mean the constant allocation SWR exceeds the bond tent SWR by close to 1.5%.
I also like the Exchme statement quoted. Sometimes the bond tent hurts and sometimes it helps. But the thing is, it helps in the cases that are the threats to your retirement. It hurts in ones that are more likely to turn out ok in spite of the hurt. That is a good trade! Note if you start with 60/40, you still participate in good markets.
Last edited by UsualLine on Tue Jan 25, 2022 10:13 am, edited 1 time in total.
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Re: Bogleheads take on bond tent

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vineviz wrote: Tue Jan 25, 2022 9:58 am
Exchme wrote: Tue Jan 25, 2022 9:18 am For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.
I think this is a good way to explain it.

If we knew ahead of time that the sequence of returns is going to be unfavorable for a constant allocation, then we might expect that a rising equity glide path will perform a little bit better. This is the "modest" benefit that bond tent champions have observed in the historical data, and you can force this to be true in simulations if you assume mean reversion of equity returns. "Modest" in this case might mean an increase in SWR of something like 0.1% with plausible mean reversion parameters.

However, this is only one side of the coin. If we knew ahead of time that the sequence of returns is going to be unfavorable for a bond tent, then the don't have symmetrical expectation to the above: in these scenarios the constant allocation would have done a LOT better. "A lot" in these cases might mean the constant allocation SWR exceeds the bond tent SWR by close to 1.5%.
Vineviz, I think at this point, we can agree that (a) if stock prices are a random walk over the course of 20+ years, then bond tent isn't making things safer, and (b) if there is some element of inherent value in stocks, if e.g. discounted cash flow is a reasonable way to look at stocks, then bond tent does make things safer.

It's pretty clear you believe that prices are a random walk, and when I look at the data, I believe in mean revision. I don't think we're going to change each other's beliefs.

Should we just agree to disagree?
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Re: Bogleheads take on bond tent

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vineviz wrote: Mon Jan 24, 2022 7:55 pm Maybe this graphic will help. It plots 1,000 return sequences as matched pairs of SWRs.
I've been largely convinced by your discussion here that bond tents don't help much in bad times and can hurt sometimes, but this graphic doesn't help. You say these are "simulated" returns, but don't explain the simulation, so I'm assuming Monte Carlo of historical returns? If so, then you are erasing (well, making extremely unlikely) the exact sequences that the bond tent was created to deal with - long periods of low equity returns.

You're absolutely right that we should avoid overfitting any particular historical sequence, but simulations that erase long sequences of correlated years are making an even worse mistake.
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Re: Bogleheads take on bond tent

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UsualLine wrote: Tue Jan 25, 2022 10:10 am But the thing is, it helps in the cases that are the threats to your retirement. It hurts in ones that are more likely to turn out ok in spite of the hurt. That is a good trade!
However often it gets repeated, this isn't accurate. It gives you roughly the SAME outcome in the worst cases, and WORSE outcomes in most other cases.

It's NOT boosting the "worst case" outcomes in an appreciable way (and certainly not to a statistically significant degree), merely giving you a slightly different set of equally bad "worst case" outcomes.
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Re: Bogleheads take on bond tent

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Charon wrote: Tue Jan 25, 2022 10:12 am
I've been largely convinced by your discussion here that bond tents don't help much in bad times and can hurt sometimes, but this graphic doesn't help. You say these are "simulated" returns, but don't explain the simulation, so I'm assuming Monte Carlo of historical returns? If so, then you are erasing (well, making extremely unlikely) the exact sequences that the bond tent was created to deal with - long periods of low equity returns.
Nothing was erased. In fact, because the data is NOT trimmed, an implausibly large number of "long periods of low equity returns" appear as tail events.
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Re: Bogleheads take on bond tent

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vineviz wrote: Tue Jan 25, 2022 12:10 pm
UsualLine wrote: Tue Jan 25, 2022 10:10 am But the thing is, it helps in the cases that are the threats to your retirement. It hurts in ones that are more likely to turn out ok in spite of the hurt. That is a good trade!
However often it gets repeated, this isn't accurate. It gives you roughly the SAME outcome in the worst cases, and WORSE outcomes in most other cases.

It's NOT boosting the "worst case" outcomes in an appreciable way (and certainly not to a statistically significant degree), merely giving you a slightly different set of equally bad "worst case" outcomes.
The actual, historical data says otherwise, as does the analysis (SORR, mean reversion, even the spreadsheet model). It's only the random walk Monte Carlo model that shows no benefit. It's fine for you to believe the Monte Carlo model over actual historical data + analysis. However, it's not justified to say that it categorically "gives you roughly the same outcome in the worst case, and worse outcomes in most other cases." That's only true under very simplified assumptions. There are many critiques of the random walk Monte Carlo simulations you rely on for your conclusion.
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Re: Bogleheads take on bond tent

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willthrill81 wrote: Sun Jan 23, 2022 9:03 pm
There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to.
So having more money mitigates SORR?

I'm not trying to be insulting but that's essentially what I see when folks talk about "flexibility".

With sufficient flexibility I don't need any strategy...
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Re: Bogleheads take on bond tent

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nigel_ht wrote: Tue Jan 25, 2022 12:53 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm
There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to.
So having more money mitigates SORR?

I'm not trying to be insulting but that's essentially what I see when folks talk about "flexibility".

With sufficient flexibility I don't need any strategy...
Yes. Remember the definition of success here: not running out of money. In this simplified model, it doesn't matter whether you die with $10 or $10M. Both count as success. If there was a bull market in your first 10 years, so you have 50x you annual expenses, you have a 100% chance of success with any asset allocation (assuming historical returns, etc.) There is no risk of running out of money, even if you get a bad sequence of returns starting at that point.
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Re: Bogleheads take on bond tent

Post by nigel_ht »

vineviz wrote: Mon Jan 24, 2022 7:49 pm
martincmartin wrote: Mon Jan 24, 2022 6:04 pm 2. You're a decade or more into a bear market. Bear markets don't go on forever, so at this point, there's a bull market starting in the next few years. Being 100% equities will result in the best growth for your portfolio. And your balance may be low enough that 100% equities is the best way to ensure you make enough money that you don't run out.
You're asking us to assume that a bull market will always come along at exactly the right time to ensure the bond tent works, then asking us to rely on that assumption as proof that a bond tent works? This is just codifying the error I pointed out earlier, which is generalizing the LAST cycle with a low SWR as representing ALL cycles of low SWR.

It's circular logic at its most pernicious, and relies on a predictability in market returns that doesn't exist.

Hope is not a plan.
When the assumption that "Bear markets don't go on forever" fails then index investing fails. If you don't assume a bull market comes along at the right time (defined as some fraction of an investors lifetime) you might as well stop investing.

Everyone depends on the predictability in market returns. The underlying prediction is over the medium term (ie within your investing lifetime) the market goes up.
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Re: Bogleheads take on bond tent

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martincmartin wrote: Tue Jan 25, 2022 1:01 pm
nigel_ht wrote: Tue Jan 25, 2022 12:53 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm
There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to.
So having more money mitigates SORR?

I'm not trying to be insulting but that's essentially what I see when folks talk about "flexibility".

With sufficient flexibility I don't need any strategy...
Yes. Remember the definition of success here: not running out of money. In this simplified model, it doesn't matter whether you die with $10 or $10M. Both count as success. If there was a bull market in your first 10 years, so you have 50x you annual expenses, you have a 100% chance of success with any asset allocation (assuming historical returns, etc.) There is no risk of running out of money, even if you get a bad sequence of returns starting at that point.
Except that Dr. Bernstein says that anything above 80% certainty really isn't possible, regardless of what your certainty showed to be from backtesting. That being said, I'd rather have 50x than 25x if I was (and am) very concerned about running out of money.
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Re: Bogleheads take on bond tent

Post by vineviz »

martincmartin wrote: Tue Jan 25, 2022 12:35 pm The actual, historical data says otherwise .....
It doesn't, actually. Even the proponents of bond tents and/or rising equity glide paths describe the benefits as "modest" (see Pfau and Kitces, for example).
martincmartin wrote: Tue Jan 25, 2022 12:35 pmHowever, it's not justified to say that it categorically "gives you roughly the same outcome in the worst case, and worse outcomes in most other cases." That's only true under very simplified assumptions.
No, that statement is true in every case we've examined. It's true in the historical record, true under the assumption of i.i.d. returns, and true under assumptions which include mean reversion.

The only reference to a "bond tent" in the academic literature is a 2018 paper that only examined the accumulation phase, not what happens AFTER the date of retirement. That's not to say that references in the popular press or blog posts are wrong MERELY because they aren't peer reviewed, but peer review subjects the methodology to a rigor that is absolutely essential IMHO. I say this because I can see methodological problems in all the unpublished papers and blog articles advocating for a "bond tent".

Estrada (2020) compared two groups of dynamic retirement income strategies: one group kept asset allocation constant and adjusted the withdrawal rate; the other group adjusted the asset allocation and key the withdrawal rate constant. Unsurprisingly (to me, anyway), the author found that "adjusting withdrawals is superior to adjusting the portfolio’s asset allocation".

My tenacity on this topic is proportional the number of people who seem convinced that a rising equity glide path will provide them additional protection from SORR (it won't). Most investors would happily accept a worse expected outcome in exchange from some insurance against a really bad outcome. Unfortunately, a bond tent and/or rising equity glide path deliver the opposite of the desired result.
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Re: Bogleheads take on bond tent

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vineviz wrote: Tue Jan 25, 2022 1:41 pm
Estrada (2020) compared two groups of dynamic retirement income strategies: one group kept asset allocation constant and adjusted the withdrawal rate; the other group adjusted the asset allocation and key the withdrawal rate constant. Unsurprisingly (to me, anyway), the author found that "adjusting withdrawals is superior to adjusting the portfolio’s asset allocation".

My tenacity on this topic is proportional the number of people who seem convinced that a rising equity glide path will provide them additional protection from SORR (it won't). Most investors would happily accept a worse expected outcome in exchange from some insurance against a really bad outcome. Unfortunately, a bond tent and/or rising equity glide path deliver the opposite of the desired result.
It seems to me that it is pretty well established that asset allocation is a weak lever on portfolio survival and withdrawal rate is a strong lever. It would be kind of obvious that if you want to mess with something it would be withdrawal rate and not asset allocation. This is also why buckets schemes don't amount to much.

The problem with messing with spending is that there is actual pain involved, while messing with asset allocation creates visions of free lunches or maybe of comforting things like "tents" under which we will enjoy the free lunch.
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Re: Bogleheads take on bond tent

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vineviz wrote: Mon Jan 24, 2022 7:55 pm

For most sequences, it's a coin toss as to which allocation approach turned out to be the best. The fixed allocation made the best sequences slightly better, but over most of the range the two approaches are statistically indistinguishable.
That isn't too surprising but isn't the whole goal of this stuff to make the WORST cases better. Nobody cares if you could have done a 7% SWR instead of a 6.5% cause no sane person is taking out that much money. Now going from a 3.8% to a 4% is noticeable because sane people are taking about 4% at the start an we have gone from failure to success.


The evidence is the bond tent helps slightly with that at the expense of lower terminal portfolio values. But the differences tend to be pretty marginal. If I was doing a bond tent, I wouldn't be going to the crazy extremes (90%+ stocks). Something like starting off conservative (say 30/70 or 40/60 and going too 60/40 or 70/30)? Sure.
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Re: Bogleheads take on bond tent

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nigel_ht wrote: Tue Jan 25, 2022 12:53 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm
There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to.
So having more money mitigates SORR?

I'm not trying to be insulting but that's essentially what I see when folks talk about "flexibility".

With sufficient flexibility I don't need any strategy...
There's truth in that, but basically the fewer fixed expenses you have, the more you can reduce your withdrawals when your portfolio performs poorly, which reduces SORR.
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Re: Bogleheads take on bond tent

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dbr wrote: Mon Jan 24, 2022 8:04 pm I wonder if people pondering mechanism here take into account that a severe bond tent by its very nature produces a bad sequence of returns, meaning it is a guarantee to get low returns early on.
Sure but getting low returns is better than getting really low returns.:) The whole idea is to chop off both ends of tails (you don't get as much benefit when you retire in bull market where you make 14%+ or lose as much in a bear when you lose -2% for a decade). It works. But when you real all the papers we are talking like 5% differences (i.e. SWR of 4.1% instead of 3.9%) and even that often requires a bit of guessing (start with 30% stock or 40%, end at 60% or 80%, ramp up over 5,7 or 10 years)....
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Re: Bogleheads take on bond tent

Post by vineviz »

randomguy wrote: Tue Jan 25, 2022 1:54 pm
That isn't too surprising but isn't the whole goal of this stuff to make the WORST cases better. Nobody cares if you could have done a 7% SWR instead of a 6.5% cause no sane person is taking out that much money. Now going from a 3.8% to a 4% is noticeable because sane people are taking about 4% at the start an we have gone from failure to success.
Even with favorable assumptions (e.g. including the mean reversion parameter some have clamored for), we're actually talking about have a 10% chance of improving the SWR from 3.44% (for instance) to 3.54%. I would describe that as "modest", especially in light of the overall amount of uncertainty we're considering and the small amount of money it represents (roughly $1k/year on a $1,000,000 portfolio).

Heck, who even things we're accurately estimating inflation to 0.1%?
Last edited by vineviz on Tue Jan 25, 2022 2:41 pm, edited 1 time in total.
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Re: Bogleheads take on bond tent

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dbr wrote: Tue Jan 25, 2022 1:47 pm
It seems to me that it is pretty well established that asset allocation is a weak lever on portfolio survival and withdrawal rate is a strong lever. It would be kind of obvious that if you want to mess with something it would be withdrawal rate and not asset allocation. This is also why buckets schemes don't amount to much.

The problem with messing with spending is that there is actual pain involved, while messing with asset allocation creates visions of free lunches or maybe of comforting things like "tents" under which we will enjoy the free lunch.
Yep, this rings true to me as well.
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Re: Bogleheads take on bond tent

Post by dogagility »

nigel_ht wrote: Tue Jan 25, 2022 12:53 pm
willthrill81 wrote: Sun Jan 23, 2022 9:03 pm
There are many things that can be done to mitigate some of the effects of the risk. The more flexible one's withdrawals are and the lower the amount being withdrawn, the less sequence of returns risk the retiree is exposed to.
So having more money mitigates SORR?

I'm not trying to be insulting but that's essentially what I see when folks talk about "flexibility".

With sufficient flexibility I don't need any strategy...
Going into retirement realizing you may need to reduce your budget should a pronounced market decline be encountered is the flexibility needed.
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Re: Bogleheads take on bond tent

Post by LilyFleur »

martincmartin wrote: Sun Jan 23, 2022 8:29 pm
Svensk Anga wrote: Sun Jan 23, 2022 4:12 pm
My problem with the constant asset allocation is that it is emotionally very difficult to sustain in times of market turmoil.
Yeah, I think it's strange that stocks are the one thing people are eager to buy more of when overpriced, but then when they go on sale, are afraid to buy. That's the opposite of retail goods.
Most people watch too much TV news, too.

Most people aren't on this forum and don't even know who Jack Bogle was.
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Re: Bogleheads take on bond tent

Post by SnowBog »

First, I want to thank everyone in this thread! I've found it highly informative!

I'm late getting to this thread, so my apologies if I'm repeating some ground here.

Maybe I'm over generalizing, but what I think I've gotten thus far boils down to - in general bond tents over a lifetime:
  • May not have a meaningful difference vs. a comparable SWR, at least not one with that is statistically different (accounting for current reality)
  • There is a fallacy of "removing" or "reducing" SORR - as in essence - all you are doing is shifting when that SORR risk may show up
  • But there may be a time limited benefit, reducing risk for a specific period of time (trading off that risk for "later" and potentially a lower overall outcome
In particular, these comments stood out to me:
vineviz wrote: Mon Jan 24, 2022 3:59 pm You're missing the important part, I think, which is that a bond tent will result in trading less SORR now for MORE of it later. It's myopic to employ a strategy that trades risk reduction TODAY for an equally large risk increase later. Or, at least, it's incorrect to believe that you've reduced your risk when you've merely shifted it in time.
Exchme wrote: Tue Jan 25, 2022 9:18 am For every sequence of returns that the bond tent fixes by lowering stock exposure early, there is another possible outcome where the bond tent's slower initial growth and eventual higher stock allocation gives you more risk later. When you face that later storm, the bond tent means you have fewer assets at the start of the storm and more stock exposure, so can end up worse than just keeping everything at your average allocation and sailing the stormy seas as best you can.
That said, I'd like to propose a more specific scenario, which in my mind benefits from that "shift in risk" and is OK reducing the overall outcome so long as it improves the initial years.

Below is a simplification of my own situation - and one where I had [perhaps incorrectly] assumed a "bond tent" type approach may be useful.
  • Married, Age 45, within 1-2 years of FI, but planned retirement not for another 5-7 years (so we'll likely have more than we need - which may make the rest moot)
  • My job is volatile, could easily end up being laid off basically at any point; assuming I'm past FI I'd like the option to simply "retire" at that point vs. finding new employment (so I feel particularly concerned about surviving a potentially "unplanned" start date to my retirement)
  • Even based on leaving workforce earlier than expected, our delayed pensions & social security will cover the vast majority of our retirement expenses (current modeling says we'll need < 1% WR at age 70+)
  • Combined, I feel particularly exposed for the first 15-25 years of retirement (granted that could be mitigated by continuing to work, etc. - but if there's a way I could structure things to not have to work if I don't want that would be my preference).
In other words, I'd be quite happy "shifting risk" from my early retirement years to my later retirement years. If our plan works for "early retirement" without going broke, given our strong pensions & SS income, we can "afford" the risk in our later years (worst case we leave less for our heirs).

To add further context, if we limit to a SWR model, obviously our initial years will succeed - but we'll have massive unspent wealth. And since our 70+ years will require a < 1% WR, we should be able to spend more during those early years than a 4% type model would allow.

Our plan is to follow VPW which dynamics accounts for our delayed pension & SS, and assuming markets are doing well, we can spend more than typical SWR (provided we can/will cut back when markets aren't cooperating [we can]).

We are additionally trying to build up I & EE Bonds to approximate roughly 50% of our deferred pension/SS income. Conceptually this is more DIY Annuity, but we consider the I & EE Bonds as part of our AA.

Since we are nearing FI, and within 10 years of RE, and have "far more to lose than we need to gain" we've moved our AA to 60/40 (also accounting for growing I & EE Bonds). Our thinking - influenced by the "bond tent" concept - was having a lower initial AA as we near retirement may help. In particular, we currently don't have the need or willingness to take on more risk.

Maybe it's more our greed and/or "wanting our cake and eating it too", but I'm also convinced that once we are past those initial retirement years, we'll have the ability & willingness to take more risk (although arguably still no need). So, the idea of raising our AA during retirement (aka "bond tent") seems logical, especially as we think of potentially a 50+ year retirement.

In reality, we'll likely have "enough" either way... Models show that if we make it through the first 15 years or so, our portfolio will grow - so if it grows "quicker" I guess it won't matter to us... Maybe that just means 60/40 is "good enough" and leave the rest alone...

Would this change the considerations, benefits, or lack thereof regarding "bond tents"? I don't presume this is "generically beneficial" - but I view this as a situation where "shifting risk" is exactly what we want - and we'll happily accept that risk later in our life (when our reliance on the portfolio is minimal).
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Re: Bogleheads take on bond tent

Post by 2pedals »

I don't completely understand all the comments here. Too many different approaches and goals.

I look at it this way, as I age (currently at age 62) in retirement and each year goes by I get closer to collecting social security at age 70. I project that all my non-discretionary expenses with be paid for with my pension and social security income. My willingness to take more stock allocation risks for legacy reasons could increase over time for this reason alone. In four years at age 66, I will be halfway toward that goal and could possibly sleep well at night with a higher allocation than I have now. I may not want a high allocation of fixed income. While at the same time I may not need to take these additional risks.
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Re: Bogleheads take on bond tent

Post by Svensk Anga »

It seems to me this thread is somewhere between the "safety first" and the "probability based" retirement planning camps. The safety first folks can't stand the idea that any market gyration could upset their plan and are willing to sacrifice potential upside to get guaranteed stable income. The probability folks look at what the history of financial markets have been able to support and implicitly assume via the 4% rule that the future will look no worse than the past. Or they hedge their bets and use a 3.5% SWR. The probability folks like the chances that they won't draw one of those worst case limiting retirement years and the upside could support their choice of lavish late retirement spending, support for heirs, or funds for charities.

The bond tent folks are somewhere in the middle, trying to get some of that safety without sacrificing the upside. It can work well if you "luck" onto a bad retirement date. It can work poorly if stocks return well for a time post retirement. Nobody knows nothing, so going in its a crapshoot which way it will work.

There is another nuance here of the SS bridge fund. It makes all kinds of sense these days to spend down bonds that return on the order of -1% real in order to delay claiming SS which I understand is worth about 2.9% real. In our mental accounting (I know, another behavioral trap), we can hold a constant AA portfolio at our choice of risk level plus the SS bridge fund. Over time we essentially trade the bridge fund for a higher SS benefit. At our chosen SS start date, we are down to our constant AA portfolio plus a SS benefit swelled by delayed retirement credits. I don't see this case as the same as the bond tent. The bond tent is an arbitrarily long dodge of market risk. In those early retirement years, the withdrawal rate will be higher than if one had claimed SS early. This would exacerbate exposure to SORR for the fixed allocation portfolio to the extent that the withdrawal rate exceeds a sustainable 4%. The SS bridge is trading one safe asset for another so not really changing the retiree's total resource risk level. (How safe SS turns out to be is the topic of many other threads. Let's ignore that here.)

Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
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Re: Bogleheads take on bond tent

Post by willthrill81 »

Svensk Anga wrote: Tue Jan 25, 2022 3:52 pm Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
I don't know that anyone has disputed that. I certainly agree that it's not a bond tent as put forth by Kitces and Pfau.

Those who espouse the bond tent approach would likely be much better served with a liability matching portfolio strategy.
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Re: Bogleheads take on bond tent

Post by abc132 »

A bond tent is appropriate for the type of person that might buy an annuity. It provides guaranteed income at the time they will use it. If it also provides +0.1% SWR, that is just icing on the cake. In the same way 30 year old investors do not need bonds, older people don't need bond tents. Both may be financially negative, but behaviorally positive.

It is an option for some that won't choose an annuity. Do it only if you can afford to.
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Re: Bogleheads take on bond tent

Post by randomguy »

vineviz wrote: Tue Jan 25, 2022 2:34 pm
randomguy wrote: Tue Jan 25, 2022 1:54 pm
That isn't too surprising but isn't the whole goal of this stuff to make the WORST cases better. Nobody cares if you could have done a 7% SWR instead of a 6.5% cause no sane person is taking out that much money. Now going from a 3.8% to a 4% is noticeable because sane people are taking about 4% at the start an we have gone from failure to success.
Even with favorable assumptions (e.g. including the mean reversion parameter some have clamored for), we're actually talking about have a 10% chance of improving the SWR from 3.44% (for instance) to 3.54%. I would describe that as "modest", especially in light of the overall amount of uncertainty we're considering and the small amount of money it represents (roughly $1k/year on a $1,000,000 portfolio).

Heck, who even things we're accurately estimating inflation to 0.1%?
Sure you can run with a range of inflation numbers and return estimates and look for trends. In general the bond tent/rising equity paths have always provided positive outcomes. But as you say they have historically been very minimal. It looks great when you can say you went from 5% failure rate to 2.5% with the new scheme but in the real world historically the difference is more like running out of money in 29.5 years versus 30.1 years...

Nobody has come up with a decent way of dealing with SORR. Bond tents, rising equity glide paths, buckets, and so often squeak out minimal gains in a case or 2 but nobody is getting even 10% (i.e. something like 4% to 4.5%) by messing around with this stuff. It sort of comes across as complexity that you sell to a client too show how smart you are and it comes across well until you think about it. How many threads have we had were people say their 5 years of cash will isolate them from SORR because market corrections are only like 5 years?

One thing I will say is that they probably aren't going to hurt you. If you start with a reasonable AA and end with a reasonable AA, all this mucking around is unlikely to hurt.
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Re: Bogleheads take on bond tent

Post by randomguy »

2pedals wrote: Tue Jan 25, 2022 3:32 pm I don't completely understand all the comments here. Too many different approaches and goals.

I look at it this way, as I age (currently at age 62) in retirement and each year goes by I get closer to collecting social security at age 70. I project that all my non-discretionary expenses with be paid for with my pension and social security income. My willingness to take more stock allocation risks for legacy reasons could increase over time for this reason alone. In four years at age 66, I will be halfway toward that goal and could possibly sleep well at night with a higher allocation than I have now. I may not want a high allocation of fixed income. While at the same time I may not need to take these additional risks.
I don't think anyone would object to you having an 8 year Liability matching portfolio (i.e. CD ladder) and then invest the rest of the money however you want. In some ways that looks like a bond tent/rising equity glide path. But it is a bit different in that it is designed to support large spending early which the bond tent doesn't do explicitly. What is sort of questionable is if you want to be holding 80%+ stocks in a portfolio that you want to be spending money from.
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Re: Bogleheads take on bond tent

Post by UsualLine »

vineviz wrote: Tue Jan 25, 2022 2:34 pm
randomguy wrote: Tue Jan 25, 2022 1:54 pm
That isn't too surprising but isn't the whole goal of this stuff to make the WORST cases better. Nobody cares if you could have done a 7% SWR instead of a 6.5% cause no sane person is taking out that much money. Now going from a 3.8% to a 4% is noticeable because sane people are taking about 4% at the start an we have gone from failure to success.
Even with favorable assumptions (e.g. including the mean reversion parameter some have clamored for), we're actually talking about have a 10% chance of improving the SWR from 3.44% (for instance) to 3.54%. I would describe that as "modest", especially in light of the overall amount of uncertainty we're considering and the small amount of money it represents (roughly $1k/year on a $1,000,000 portfolio).

Heck, who even things we're accurately estimating inflation to 0.1%?
Yes, agreed, modest gains. Maybe 4-5% increased consumption if you even get the bad sequence.
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Re: Bogleheads take on bond tent

Post by Svensk Anga »

willthrill81 wrote: Tue Jan 25, 2022 3:57 pm
Svensk Anga wrote: Tue Jan 25, 2022 3:52 pm Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
I don't know that anyone has disputed that. I certainly agree that it's not a bond tent as put forth by Kitces and Pfau.

Those who espouse the bond tent approach would likely be much better served with a liability matching portfolio strategy.
Appreciate the confirmation. I put in my post because I thought the thread was scaring people away from the SS bridge fund, which I think is useful, but which could be mistaken for the bond tent.

I had set up our own retirement using Bernstein's LMP ideas. It turned out that a bridge to SS claiming was all we needed to assure meeting essential expenses. This thread was making me concerned that I had made an error doing so. As it turns out, retiring 6 years ago, we may have been better off with a fixed allocation, given the generous stock returns since then. However, our plan was very comfortable during gyrations like late 2018 and March 2020. It did not matter much what stocks did in the near or even intermediate term as we were spending down that bridge fund. But a sub-optimal result does not prove that the strategy was ill conceived. It may have been the best choice in most alternative histories. SORR cuts both ways.

This post at the Oblivious Investor site lays out what I think is a very practical way to arrange one's finances for retirement: https://obliviousinvestor.com/an-ideal- ... -strategy/ I keep linking it, but it never seems to gain much traction. It includes the SS bridge fund to delayed claiming plus a (usually) fixed AA portfolio. It calculates a withdrawal amount that varies with portfolio performance and with remaining life expectancy. Given the bridge fund and then the maxed out SS benefit, variabiIity in the portfolio withdrawal amount should not be too painful. Longevity risk is reduced by having the maximum of CPI adjusted SS coming in. I would have planned this way but it came out 2 years into my retirement. What I am doing is really not far off.
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Re: Bogleheads take on bond tent

Post by djm2001 »

Svensk Anga wrote: Tue Jan 25, 2022 6:32 pm I had set up our own retirement using Bernstein's LMP ideas. It turned out that a bridge to SS claiming was all we needed to assure meeting essential expenses.
What comprises your SS bridge fund? Bond fund(s)? Or a duration-matched non-rolling bond ladder?
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Bogleheads take on bond tent

Post by Darwin »

dbr wrote: Sun Jan 23, 2022 11:16 am
vineviz wrote: Sun Jan 23, 2022 11:15 am
abuss368 wrote: Sun Jan 23, 2022 11:09 am That is definitely one perspective and viewpoint. But if cash flow issues arise, a dividend strategy and maybe crowdfunded real estate are options. Jack Brennan updated his book and has done a lot of interviews and podcasts over the past year stressing US & International Total Market funds with High Dividend funds. Bond yields being in the toilet.
I don't pay much attention to what Jack Brennan says about asset allocation. And if it makes you feel better to own high dividend companies then whose going to stop you from doing so? Not me.

The good news about strategies that don't make a difference in outcomes is that, except for fees and taxes, following them doesn't tend to do much damage.
Now that is a very perceptive observation.
Hence the saying "Don't just do something, stand there!"
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Re: Bogleheads take on bond tent

Post by randomguy »

Svensk Anga wrote: Tue Jan 25, 2022 6:32 pm
This post at the Oblivious Investor site lays out what I think is a very practical way to arrange one's finances for retirement: https://obliviousinvestor.com/an-ideal- ... -strategy/ I keep linking it, but it never seems to gain much traction. It includes the SS bridge fund to delayed claiming plus a (usually) fixed AA portfolio. It calculates a withdrawal amount that varies with portfolio performance and with remaining life expectancy. Given the bridge fund and then the maxed out SS benefit, variabiIity in the portfolio withdrawal amount should not be too painful. Longevity risk is reduced by having the maximum of CPI adjusted SS coming in. I would have planned this way but it came out 2 years into my retirement. What I am doing is really not far off.
The issue is always in the details. Can you handle the volatility of using RMDs to calculate how much you get to spend? If you are 100% stocks from 60-70 and 100% stocks, would you be happy with using RMDs (not sure exactly how they are handling being <70)? In normal times, it works out well and you get a steady increase in spending and you save some of the good years gains to smooth out spending. But if you retire in a poor time like 2000, you are setting yourself up for decade of declining spending at exactly the time when most people want to be spending more. Maybe you would be better off with a bond tent and be able to live it up from 60-70 without the risk of market volatility crippling your retirement dreams. Of course the cost for that is that you will likely end up with lower terminal portfolio values or even income later in life....
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Re: Bogleheads take on bond tent

Post by Svensk Anga »

djm2001 wrote: Tue Jan 25, 2022 6:52 pm
Svensk Anga wrote: Tue Jan 25, 2022 6:32 pm I had set up our own retirement using Bernstein's LMP ideas. It turned out that a bridge to SS claiming was all we needed to assure meeting essential expenses.
What comprises your SS bridge fund? Bond fund(s)? Or a duration-matched non-rolling bond ladder?
The first five years was a CD ladder. I figured inflation couldn't hurt too much in only five years and from 2016 to 2020 I was right. Beyond that, I assembled over several years a non-rolling ladder of TIPS, some bought at auction, some in the secondary market to get rungs every year. I managed to get an average real yield of 0.4%. Seemed puny at the time, but it would look good now.

My wife and I both have small pensions. Mine has no COLA and hers has a fixed COLA. I figured we should have TIPS rather than nominal bonds in case inflation trashed our pensions. According to Tipswatch.com, nominal treasuries have beaten TIPS for most of this period though. See https://tipswatch.com/2022/01/19/a-10-y ... nvestment/
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Re: Bogleheads take on bond tent

Post by dbr »

Svensk Anga wrote: Tue Jan 25, 2022 8:57 pm
My wife and I both have small pensions. Mine has no COLA and hers has a fixed COLA. I figured we should have TIPS rather than nominal bonds in case inflation trashed our pensions. According to Tipswatch.com, nominal treasuries have beaten TIPS for most of this period though. See https://tipswatch.com/2022/01/19/a-10-y ... nvestment/
What "beat" what is irrelevant if the purpose of the investment was a fallback if inflation trashes your pensions. It probably makes sense to have your bonds free of inflation risk if you don't have CPI indexed pensions, but more likely the only asset that outruns inflation by enough to compensate is stocks. TIPS have been kind of irrelevant when inflation has been low. It might be noted that the TIPS fund return for 2021 was 5.56% and that for total bond was -1.67%. But the ten year returns were 2.87% and 2.86%.
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Re: Bogleheads take on bond tent

Post by SnowBog »

willthrill81 wrote: Tue Jan 25, 2022 3:57 pm
Svensk Anga wrote: Tue Jan 25, 2022 3:52 pm Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
I don't know that anyone has disputed that. I certainly agree that it's not a bond tent as put forth by Kitces and Pfau.

Those who espouse the bond tent approach would likely be much better served with a liability matching portfolio strategy.
Interesting... I guess I'll have to go read the formal definition of a bond tent...

To my layman's view, they seem very similar, in that they both result in a higher bond % leading up to retirement and a lowering % after retirement.

For example, our current plan includes purchasing > $500k combined of I & EE Bonds to help bridge, which obviously will be a good chuck of our bond AA at retirement. When they are spent, we [likely] won't replace.

By the time they are spent, we are coincidentally past what I view as our "riskiest" years, and so we'd let our AA be more aggressive (aka not rebalance to replace the spent I & EE Bonds).

The net result - to this layman anyway - seems a lot like a bond tent...

But if the concensus is extra bonds or LMP approach (or in my case a quasi LMP) to bridge years between retirement and delayed retirement income isn't a horrible idea, that works for me. :beer (I thought I was making some mistake I didn't understand!)
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Re: Bogleheads take on bond tent

Post by randomguy »

SnowBog wrote: Tue Jan 25, 2022 9:54 pm
willthrill81 wrote: Tue Jan 25, 2022 3:57 pm
Svensk Anga wrote: Tue Jan 25, 2022 3:52 pm Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
I don't know that anyone has disputed that. I certainly agree that it's not a bond tent as put forth by Kitces and Pfau.

Those who espouse the bond tent approach would likely be much better served with a liability matching portfolio strategy.
Interesting... I guess I'll have to go read the formal definition of a bond tent...

To my layman's view, they seem very similar, in that they both result in a higher bond % leading up to retirement and a lowering % after retirement.

For example, our current plan includes purchasing > $500k combined of I & EE Bonds to help bridge, which obviously will be a good chuck of our bond AA at retirement. When they are spent, we [likely] won't replace.

By the time they are spent, we are coincidentally past what I view as our "riskiest" years, and so we'd let our AA be more aggressive (aka not rebalance to replace the spent I & EE Bonds).

The net result - to this layman anyway - seems a lot like a bond tent...

But if the concensus is extra bonds or LMP approach (or in my case a quasi LMP) to bridge years between retirement and delayed retirement income isn't a horrible idea, that works for me. :beer (I thought I was making some mistake I didn't understand!)
The nuance is in the spending plan. Imagine you have another 500k to invest. If you plan on taking out 40k for life, you have a bond tent. Over 12 years or so you spend down the bond tent, and then live on the other 500k. On the other hand if you plan on taking out 70k for 10 years (50k from bonds, 20k from the portfolio) and then 20k til you die, you have a liability matching portfolio and a risk one.

In the first case, you could get the same results by holding a fixed AA portfolio. In the second case, you need that rising equity path because the higher spending early requires you not to take much risk early on..
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Re: Bogleheads take on bond tent

Post by SnowBog »

randomguy wrote: Tue Jan 25, 2022 10:45 pm The nuance is in the spending plan. Imagine you have another 500k to invest. If you plan on taking out 40k for life, you have a bond tent. Over 12 years or so you spend down the bond tent, and then live on the other 500k. On the other hand if you plan on taking out 70k for 10 years (50k from bonds, 20k from the portfolio) and then 20k til you die, you have a liability matching portfolio and a risk one.

In the first case, you could get the same results by holding a fixed AA portfolio. In the second case, you need that rising equity path because the higher spending early requires you not to take much risk early on..
In my modeling, my spending isn't that simple due to variations on medical, travel, etc. during retirement.

But overly simplified, I guess I'm doing more LMP than I imagined.
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Re: Bogleheads take on bond tent

Post by dknightd »

Svensk Anga wrote: Tue Jan 25, 2022 6:32 pm

This post at the Oblivious Investor site lays out what I think is a very practical way to arrange one's finances for retirement: https://obliviousinvestor.com/an-ideal- ... -strategy/ I keep linking it, but it never seems to gain much traction.
This is essentially what we plan to do, and what we're doing.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Bogleheads take on bond tent

Post by nigel_ht »

dknightd wrote: Wed Jan 26, 2022 5:14 am
Svensk Anga wrote: Tue Jan 25, 2022 6:32 pm

This post at the Oblivious Investor site lays out what I think is a very practical way to arrange one's finances for retirement: https://obliviousinvestor.com/an-ideal- ... -strategy/ I keep linking it, but it never seems to gain much traction.
This is essentially what we plan to do, and what we're doing.
That’s what we’re planning as well but I was using a rate lower than SWR (3-3.5%) instead of RMD to leave behind more.
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Re: Bogleheads take on bond tent

Post by 2pedals »

randomguy wrote: Tue Jan 25, 2022 4:22 pm
2pedals wrote: Tue Jan 25, 2022 3:32 pm I don't completely understand all the comments here. Too many different approaches and goals.

I look at it this way, as I age (currently at age 62) in retirement and each year goes by I get closer to collecting social security at age 70. I project that all my non-discretionary expenses with be paid for with my pension and social security income. My willingness to take more stock allocation risks for legacy reasons could increase over time for this reason alone. In four years at age 66, I will be halfway toward that goal and could possibly sleep well at night with a higher allocation than I have now. I may not want a high allocation of fixed income. While at the same time I may not need to take these additional risks.
I don't think anyone would object to you having an 8 year Liability matching portfolio (i.e. CD ladder) and then invest the rest of the money however you want. In some ways that looks like a bond tent/rising equity glide path. But it is a bit different in that it is designed to support large spending early which the bond tent doesn't do explicitly. What is sort of questionable is if you want to be holding 80%+ stocks in a portfolio that you want to be spending money from.
It is not clear to me what the difference is. A LMP as a bridge to social security income will usually result in a rising equity glide path. A bond tent is used to reduce SSOR. Both are ways to limit exposure to risks and help people sleep well at night. They seem like twin brothers or twin sisters to me, at least in my case.
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Re: Bogleheads take on bond tent

Post by nigel_ht »

2pedals wrote: Wed Jan 26, 2022 9:49 am
randomguy wrote: Tue Jan 25, 2022 4:22 pm
2pedals wrote: Tue Jan 25, 2022 3:32 pm I don't completely understand all the comments here. Too many different approaches and goals.

I look at it this way, as I age (currently at age 62) in retirement and each year goes by I get closer to collecting social security at age 70. I project that all my non-discretionary expenses with be paid for with my pension and social security income. My willingness to take more stock allocation risks for legacy reasons could increase over time for this reason alone. In four years at age 66, I will be halfway toward that goal and could possibly sleep well at night with a higher allocation than I have now. I may not want a high allocation of fixed income. While at the same time I may not need to take these additional risks.
I don't think anyone would object to you having an 8 year Liability matching portfolio (i.e. CD ladder) and then invest the rest of the money however you want. In some ways that looks like a bond tent/rising equity glide path. But it is a bit different in that it is designed to support large spending early which the bond tent doesn't do explicitly. What is sort of questionable is if you want to be holding 80%+ stocks in a portfolio that you want to be spending money from.
It is not clear to me what the difference is. A LMP as a bridge to social security income will usually result in a rising equity glide path. A bond tent is used to reduce SSOR. Both are ways to limit exposure to risks and help people sleep well at night. They seem like twin brothers or twin sisters to me, at least in my case.
Yah, I agree…it seems like a distinction without a lot of difference in the end.
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Re: Bogleheads take on bond tent

Post by dbr »

2pedals wrote: Wed Jan 26, 2022 9:49 am

It is not clear to me what the difference is. A LMP as a bridge to social security income will usually result in a rising equity glide path. A bond tent is used to reduce SSOR. Both are ways to limit exposure to risks and help people sleep well at night. They seem like twin brothers or twin sisters to me, at least in my case.
You are sort of right. But in this discussion people keep setting the LMP bridge aside because it addresses the special case of needing to spend at a high rate for a short time. The bond tent as such is supposed to enable a higher withdrawal rate at a similar rate of failure or a lower rate or degree of failure at a same withdrawal rate when the withdrawal rate is mostly constant through the retirement. The former is probably an effective tactic but the latter is dubious for sure.

It is also possible to consider the role of diverting assets into an annuity or a long term LMP in the same context as the latter above. The effectiveness of doing that is a discussion but may be more valid than the bond tent idea. That is particularly true for someone who has a motivation to insure longevity risk with an SPIA. The dilemma in all such planning is now to manage inflation risk.

Also, it is not a rising equity glide path because an LMP is an explicit conversion of assets to an income stream, at which point that asset is no longer a consideration in asset allocation. Yes, while converting income streams to assets is not very helpful, converting assets to income streams for the purpose of having an income stream makes all kinds of sense. The above mentioned SPIA would be a pure form of that, and so would buying increased SS benefits by delayed claiming.
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Re: Bogleheads take on bond tent

Post by willthrill81 »

SnowBog wrote: Tue Jan 25, 2022 9:54 pm
willthrill81 wrote: Tue Jan 25, 2022 3:57 pm
Svensk Anga wrote: Tue Jan 25, 2022 3:52 pm Can we agree that a SS bridge fund is not necessarily a bond tent and that it is an acceptable planning tool?
I don't know that anyone has disputed that. I certainly agree that it's not a bond tent as put forth by Kitces and Pfau.

Those who espouse the bond tent approach would likely be much better served with a liability matching portfolio strategy.
Interesting... I guess I'll have to go read the formal definition of a bond tent...

To my layman's view, they seem very similar, in that they both result in a higher bond % leading up to retirement and a lowering % after retirement.
At first glance, they may look similar, but they are actually radically different.

There is never any rebalancing between the LMP and the remaining funds, referred to as the risk portfolio (RP). The idea is that even if the RP disappeared completely, the LMP would remain to cover at least the retiree's essential spending needs. Note that the LMP only needs to cover the essential spending that is not covered by other guaranteed income sources, such as SS benefits.

For instance, if a retiree had $50k of essential spending needs, $30k of SS benefits, and planned for a 30 year retirement, then an LMP would be needed to cover the $20k annual difference between the essential spending needs and SS benefits, costing $600k if the real yield of TIPS was 0% (since their yield is negative now, the actual cost now would be over $600k). Any funds the retiree had above the $600k would become part of the RP and could be invested however the retiree wished.

There is no mathematical certainty that the retiree with an LMP will have a larger total allocation to bonds earlier in retirement than later. If the RP is largely spent down through the early stages of retirement, the retiree's total bond allocation would be higher in the later stages of retirement. But the percent allocated to bonds is actually irrelevant to the LMP investor; it just is whatever it is.
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lostdog
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Re: Bogleheads take on bond tent

Post by lostdog »

I'm nowhere near as smart as members in this thread.

What I got from ERN's article is the simple fixed allocations of 75/25 to 80/20 for a retirement over 30 years will suffice. The equity glide path seems much too complicated.
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2pedals
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Re: Bogleheads take on bond tent

Post by 2pedals »

dbr wrote: Wed Jan 26, 2022 10:00 am
2pedals wrote: Wed Jan 26, 2022 9:49 am

It is not clear to me what the difference is. A LMP as a bridge to social security income will usually result in a rising equity glide path. A bond tent is used to reduce SSOR. Both are ways to limit exposure to risks and help people sleep well at night. They seem like twin brothers or twin sisters to me, at least in my case.
You are sort of right. But in this discussion people keep setting the LMP bridge aside because it addresses the special case of needing to spend at a high rate for a short time. The bond tent as such is supposed to enable a higher withdrawal rate at a similar rate of failure or a lower rate or degree of failure at a same withdrawal rate when the withdrawal rate is mostly constant through the retirement. The former is probably an effective tactic but the latter is dubious for sure.

It is also possible to consider the role of diverting assets into an annuity or a long term LMP in the same context as the latter above. The effectiveness of doing that is a discussion but may be more valid than the bond tent idea. That is particularly true for someone who has a motivation to insure longevity risk with an SPIA. The dilemma in all such planning is now to manage inflation risk.

Also, it is not a rising equity glide path because an LMP is an explicit conversion of assets to an income stream, at which point that asset is no longer a consideration in asset allocation. Yes, while converting income streams to assets is not very helpful, converting assets to income streams for the purpose of having an income stream makes all kinds of sense. The above mentioned SPIA would be a pure form of that, and so would buying increased SS benefits by delayed claiming.
Okay, thanks for the clarification. I don't think I have a pure LMP, since a lot of the fixed income in the portfolio does not match a known liability yet but it does help me sleep well at night. I expect most of the money will not be used for spending. I have set aside a dollar amount that should be more than enough to help bridge the time before social security income. I am not trying to create a bond tent but I believe my approach will result in rising equity allocation. How different would the end result be anyway? It's hard for me to see the distinction.
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Re: Bogleheads take on bond tent

Post by randomguy »

willthrill81 wrote: Wed Jan 26, 2022 10:21 am At first glance, they may look similar, but they are actually radically different.
I am not sure the definitions are formal enough so that we can say that a LMP portfolio with a risk portfolio isn't a bond tent or a rising equity glide path. BUT historically pretty everyone talking about bond tents (or rising equity) has also added the constraint of a a somewhat constant withdrawal scheme (4% rule, VPW,....) and not some scheme with a big cliff in x years. If someone wants to talk about using a bond tent to deal with front loaded expenses, I wouldn't argue about if that is a bond tent or not. But ff you want to use bond tent slightly differently than how the community in general uses it, you will need to clarify how you are using it because most people are going to expect that you want to compare it to fixed AA with common withdrawal rule.
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Re: Bogleheads take on bond tent

Post by dbr »

2pedals wrote: Wed Jan 26, 2022 10:47 am
Okay, thanks for the clarification. I don't think I have a pure LMP, since a lot of the fixed income in the portfolio does not match a known liability yet but it does help me sleep well at night. I expect most of the money will not be used for spending. I have set aside a dollar amount that should be more than enough to help bridge the time before social security income. I am not trying to create a bond tent but I believe my approach will result in rising equity allocation. How different would the end result be anyway? It's hard for me to see the distinction.
It is certainly debatable as to whether buying an SPIA, setting up a long term LMP, setting up a buckets scheme, and so on actually accomplishes anything all that helpful. Probably buckets and the LMP are more mental accounting than anything else. The SPIA has the significant difference of pooling longevity risk. Whether that is worth the cost is a different question, and, of course, the SPIA leaves no legacy unless you specifically choose an option for that.

Today, at low interest rates both SPIAs and TIPS LMPs are very expensive. Whether they are more expensive than the alternative of relying on a portfolio at low interest rates is a different question.
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willthrill81
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Re: Bogleheads take on bond tent

Post by willthrill81 »

randomguy wrote: Wed Jan 26, 2022 10:49 am
willthrill81 wrote: Wed Jan 26, 2022 10:21 am At first glance, they may look similar, but they are actually radically different.
I am not sure the definitions are formal enough so that we can say that a LMP portfolio with a risk portfolio isn't a bond tent or a rising equity glide path.
I certainly think that we can say just that. An LMP strategy is not concerned about rebalancing or starting with a high bond allocation that then glides to a lower bond allocation. As I noted, an LMP strategy can end with a higher bond allocation than it started with.
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