Middle-age and following a glide path? You will buy more fixed income than you may think.

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SantaClaraSurfer
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Joined: Tue Feb 19, 2019 10:09 am

Middle-age and following a glide path? You will buy more fixed income than you may think.

Post by SantaClaraSurfer »

A 45 yo with a $500,000 portfolio balanced to 80% Equities and 20% Bonds and contributing an additional $50,000 per year (or $1,000,000 total over 20 years) with a glide path moving to 60% Equities and 40% Bonds at age 65, will execute a net purchase of $753,126 in Bonds over those 20 years assuming Fixed Income returns of 3.2% and Equity returns of 5.8% as well as a once annual portfolio rebalancing per the glide path percentage.

That means that fully 75% of this 45 yo's $1,000,000 in net new investment dollars ($50k per year for 20 years), accounting for rebalancing, will ultimately go to purchasing Bonds/Fixed Income.

Also, since the $100,000 in Bonds they currently own represents only 13.3% of the Bonds/Fixed Income that they will purchase going forward over the following 20 years, the vast majority of the 45yo investor's fixed income inputs are ahead of them. By age 50, just five years in to their glide path to 60/40, they will be making a net annual larger investment in Bonds than Equities, after rebalancing. (So long as they do rebalance.)

Making standard assumptions about equity returns being higher than fixed income (the broad historical norm), there is no way to get from 80/20 at age 45 to 60/40 at age 65 without making a net purchase of a much larger amount of Fixed Income (be it Bond Index Funds or Nominal bonds or other Fixed Income vehicles) over the two decades where a retirement investor moves from 80/20 to 60/40 following the traditional glide path.

Even if we extend the glide path further out in the horizon, so as to hit 60/40 at a later date, the increasing net purchase of Bonds/Fixed Income following the standard glide path (plus annual rebalancing) still results in increasing purchases of fixed income along that path at some point.

Given the above, I have two points.

1. Following sound principles, we should strive to accept the market return for both the Fixed Income and Equity components of our portfolios over our investing horizon. That means being level headed about purchasing and rebalancing according to our glide path, and per the market return. (It will hardly ever look as smooth as the model below.) This will likely mean rebalancing from equities to bonds over this time frame.

2. Given the share of net new investments going to Bonds, it's worth thinking about and paying attention to your Fixed Income strategy, as well as your Equity strategy, as you hit your "middle age" years as an accumulator. Paying attention to Fixed Income strategies can pay dividends, especially as Fixed Income will come to represent a substantial share of your overall portfolio and the lion's share of your net new investments. Our model investor, for example, will invest over $25,000 net per year to Bonds starting at age 50, and by age 65 will hold over $1.2 million in the Fixed Income portion of their account. This leaves room for pursuing a thoughtful, diversified, long-term Fixed Income strategy, including options like bond ladders, municipal bonds, or Fixed Income vehicles like I-Bonds or EE-Bonds with annual purchase limits.

Background math: Here are the numbers regarding the increasing purchases of Fixed Income as one glide paths towards retirement.

Annual Contribution: $50,000 per year fixed
Bond Return: hypothetical 3.2%
Equity Return: hypothetical 5.8%
Portfolio Start: $500,000 end of year at age 44.
Glide Path: from 80/20 at age 45 to 60/40 at age 65
Rebalance: One time per year, after which the net annual inputs are calculated
Originally posted as a comment here.

Code: Select all

Age	Bond %	EOY Bond 	NetBondInputs	Equity%	EOY Equity	NetEquityInputs	Annual P Total
45	20.00%	$113,520.00	$10,000.00	80.00%	$465,520.00	$40,000.00	$579,040.00
46	21.00%	$136,325.55	$18,578.40	79.00%	$525,764.21	$31,421.60	$662,089.76
47	22.00%	$161,672.86	$20,334.20	78.00%	$587,644.95	$29,665.80	$749,317.81
48	23.00%	$189,726.08	$22,170.24	77.00%	$651,172.25	$27,829.76	$840,898.33
49	24.00%	$220,657.70	$24,089.52	76.00%	$716,353.53	$25,910.48	$937,011.22
50	25.00%	$254,648.90	$26,095.11	75.00%	$783,193.41	$23,904.89	$1,037,842.30
51	26.00%	$291,889.85	$28,190.10	74.00%	$851,693.50	$21,809.90	$1,143,583.34
52	27.00%	$332,580.06	$30,377.66	73.00%	$921,852.16	$19,622.34	$1,254,432.22
53	28.00%	$376,928.73	$32,660.96	72.00%	$993,664.29	$17,339.04	$1,370,593.02
54	29.00%	$425,155.08	$35,043.24	71.00%	$1,067,121.07	$14,956.76	$1,492,276.15
55	30.00%	$477,488.70	$37,527.76	70.00%	$1,142,209.71	$12,472.24	$1,619,698.41
56	31.00%	$534,169.92	$40,117.81	69.00%	$1,218,913.23	$9,882.19	$1,753,083.15
57	32.00%	$595,450.18	$42,816.69	68.00%	$1,297,210.14	$7,183.31	$1,892,660.32
58	33.00%	$661,592.40	$45,627.73	67.00%	$1,377,074.19	$4,372.27	$2,038,666.59
59	34.00%	$732,871.33	$48,554.24	66.00%	$1,458,474.11	$1,445.76	$2,191,345.44
60	35.00%	$809,573.97	$51,599.57	65.00%	$1,541,373.26	-$1,599.57	$2,350,947.23
61	36.00%	$891,999.92	$54,767.03	64.00%	$1,625,729.39	-$4,767.03	$2,517,729.31
62	37.00%	$980,461.76	$58,059.93	63.00%	$1,711,494.29	-$8,059.93	$2,691,956.05
63	38.00%	$1,075,285.48	$61,481.54	62.00%	$1,798,613.49	-$11,481.54	$2,873,898.98
64	39.00%	$1,176,810.86	$65,035.12	61.00%	$1,887,025.92	-$15,035.12	$3,063,836.78
65	40.00%	$1,285,391.82	-		60.00%	$1,976,663.59	-		$3,262,055.41	
Total				$753,126.85				$246,873.15		
Hebell
Posts: 963
Joined: Wed Aug 12, 2020 1:56 am
Location: Boca Raton, FL

Re: Middle-age and following a glide path? You will buy more fixed income than you may think.

Post by Hebell »

Having been through this transition, yes I can say you might buy a whole hell of a lot more fixed income than you ever thought.

Particularly if you achieve your retirement goals early.

It's a really sobering moment when you have that reality hit you. In a low interest rate world you might sell a bunch of appreciated equities, and buy MYGAs or place the money in stable value funds. In a higher interest rate world, you will ladder tips, t-bills, notes, and even I bonds and ee bonds. In either world, you may consider defined maturity ETFs, for corporate and municipal bonds that mature in the same year. You'll keep your good rental properties and sell off your troublesome ones and put the money in the bonds.

During that transition, I went from knowing almost nothing about individual bonds, to being a voracious reader of all things bonds. I wanted to be thoroughly comfortable in buying bonds at auction, or on the secondary market. I rebuilt spreadsheets that were discussed by others here on this form about how bond prices were set, and how one computed yield to maturity.

I wanted to understand what impacts the price of an ETF or mutual fund, which led me to feeling much more comfortable with buying individual bonds.

Never in my life did I think we would have this much fixed income. I was absolutely sure I would follow a Guyton- Klinger model (withdrawals using guardrails), when instead I moved into a fixed income laddering strategy akin to a LMP portfolio with a large (separate) chunk dedicated to stocks which may grow without rebalancing.

I will say that we, by happenstance, were placed in this situation about a half year before covid struck. So I am tickled pink we made that transition at that time, though what we are doing now with higher inflation and higher interest rates is different than what we did in 2019, as described above.

P.s. the negative real yields were no great joy to experience in 2021 but they've made me a better investor, and made me a patient investor.
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