How to withdraw from bond funds with long durations

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

How to withdraw from bond funds with long durations

Post by MattB »

I'm writing because I have not seen an important question addressed on this forum, how to withdraw from bond funds with durations longer than one's investment horizon. I've thought about this some recently, given increasing bonds rates (and related capital depreciation in many bond funds), and decided to start this discussion after seeing another forum member, DebiT, faced with the situation. (See DebiT's post here: viewtopic.php?p=6678214#p6678214).

The background is relatively straightforward:

Let's say that you hold Vanguard's total market bond fund, VBTLX, as the only bond fund in a two fund portfolio comprised of total stock and total bond funds. The average duration of the bonds held in VBTLX is about 7 years (https://investor.vanguard.com/mutual-fu ... file/VBTLX). And you either plan to make withdrawls from VBTLX in each of the next ten years, or you might need to do so.

Procedural question:

How should one prepare to decumulate from a bond fund of 5 to 7 years duration?

The common guidance is to manage interest rate risk by matching the duration of one's bond holdings to the timing of one's intended withdrawls. Does that mean one should transition from a two-fund to a three-fund portfolio as they approach decumulation, including a short- or ultra-short term bond fund? Alternatively, might one be best served by transitioning from a bond fund to a treasury ladder with amounts and maturities matched, as closely as possible, to one's planned withdrawls? I'm not really sure. Accumulating holdings in an intermediate term bond fund, say one of 5-7 years duration, is very straightforward. Properly decumulating from one in a rising rate environment seems less so.

Thank you for your time and thoughts.
sailaway
Posts: 8215
Joined: Fri May 12, 2017 1:11 pm

Re: How to withdraw from bond funds with long durations

Post by sailaway »

The whole reason I have a total market bond fund is to just take the punches and withdraw from it when I need cash. In reality, my bond fund is spread across three retirement accounts and I would sell stocks and rebalance if I needed the cash. But I am not fretting over the average duration of total market, because I have already held it several years and I don't get to choose which individual bonds are sold when I am raising cash.
Last edited by sailaway on Sun May 15, 2022 10:10 am, edited 1 time in total.
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to withdraw from bond funds with long durations

Post by livesoft »

How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.

I exchange my bond fund shares into equity fund shares in order to keep the asset allocation of my portfolio close to what I want it to be. That's is a "withdraw from bond funds." That is, I simply keep the percentage bonds (VBTLX, SPAB, BND) of my total portfolio value the same no matter what year it is and no matter what the portfolio value is. If the percentage of bonds (VBTLX, SPAB, BND) of my total portfolio value was too low, then I would exchange from equity fund shares into bond fund shares, too.

As for the strict withdrawal for spending, I sell equity fund shares in our taxable account without worry. Then I do what I described in the preceding paragraph.

BTW, my investment horizon is until I die which could be today or more than 40 years or so from today.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

livesoft wrote: Sun May 15, 2022 10:08 am I exchange my bond fund shares into equity fund shares in order to keep the asset allocation of my portfolio close to what I want it to be. That's is a "withdraw from bond funds." That is, I simply keep the percentage bonds (VBTLX, SPAB, BND) of my total portfolio value the same no matter what year it is and no matter what the portfolio value is. If the percentage of bonds (VBTLX, SPAB, BND) of my total portfolio value was too low, then I would exchange from equity fund shares into bond fund shares, too.

As for the strict withdrawal for spending, I sell equity fund shares in our taxable account without worry. Then I do what I described in the preceding paragraph.

BTW, my investment horizon is until I die which could be today or more than 40 years or so from today.
So you just eat capital losses, more or less as the cost of doing business, if you have to rebalance out of your bond fund in a rising rate environment?
jebmke
Posts: 25475
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: How to withdraw from bond funds with long durations

Post by jebmke »

Re-balancing with losses happens all the time. If you're re-balancing scheme calls for re-balancing, I'd argue that the only time you might drag your feet would be with unrealized gains (but even then ....). I'd rather have losses than gains, all other things equal. The bonds are worth what they are worth regardless of up or down trend, absent the tax drag of gains. Losses just make it an easy decision.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to withdraw from bond funds with long durations

Post by livesoft »

MattB wrote: Sun May 15, 2022 10:24 amSo you just eat capital losses, more or less as the cost of doing business, if you have to rebalance out of your bond fund in a rising rate environment?
Yes.

In reality I have had 3 components of my fixed income portion of my portfolio for a long time:
1. Total US Bond Market Index Fund
2. Short-term corporate bond Index Fund
3. TIAA Traditional annuity paying a guarantee minimum interest rate

I do not withdraw from TIAA Traditional. I just rebalance between #1 and #2 based on my market timing strategy as published previously. And I rebalance between equites and bonds as noted in my previous comment.

As for capital losses, I know my equities go up and down as the market fluctuates and I really don't care about capital losses. So I guess, yes, that is a cost of investing in non-guaranteed assets.

It is all rather Worry-Free if I do say so myself. :)
Wiki This signature message sponsored by sscritic: Learn to fish.
northfork
Posts: 163
Joined: Mon Dec 07, 2020 4:31 pm

Re: How to withdraw from bond funds with long durations

Post by northfork »

My simplistic understanding is that by the time I’m withdrawing from BND I will have been holding BND for decades. Furthermore, I’ll only be withdrawing a tiny percent of it per year. over a long retirement I don’t feel like trying to optimize duration and withdrawal timing will make a large difference and trying to optimize it will open the door to behavioral errors.

Am I wrong?

Maybe a year or two in cash for large, unexpected expenses but I hope just holding an intermediate bond fund forever, if not optimal (which may only be known in retrospect), is at least “good enough”.

I don’t know if I’m OT in this thread since the OP is citing a specific post with this general question. Apologies if so.
sailaway
Posts: 8215
Joined: Fri May 12, 2017 1:11 pm

Re: How to withdraw from bond funds with long durations

Post by sailaway »

MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
First, you need to tell us why you believe that the transition would be better. No one who has answered so far agrees with that premise. Once you have identified why your strategy is better, the road to optimizing that strategy should be clearer.
User avatar
bobcat2
Posts: 6076
Joined: Tue Feb 20, 2007 2:27 pm
Location: just barely Outside the Beltway

Re: How to withdraw from bond funds with long durations

Post by bobcat2 »

Misread OP's post.

BobK
Last edited by bobcat2 on Sun May 15, 2022 10:55 am, edited 1 time in total.
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to withdraw from bond funds with long durations

Post by livesoft »

MattB wrote: Sun May 15, 2022 10:22 amLet's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.
Well, if you only withdraw 6% of bond holdings a year, that would leave 94% left for the next year. I am sure you would modify the plan if the 6% in any given year was not enough to pay expenses. Also, I would not think you were withdrawing without looking at the equity side of your portfolio. For instance, if equities rose 15% to 20% in a given year, would you ignore that? Or would you rebalance by exchangng some equities into bonds?
Wiki This signature message sponsored by sscritic: Learn to fish.
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: How to withdraw from bond funds with long durations

Post by Robot Monster »

MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: How to withdraw from bond funds with long durations

Post by dcabler »

MattB wrote: Sun May 15, 2022 9:49 am I'm writing because I have not seen an important question addressed on this forum, how to withdraw from bond funds with durations longer than one's investment horizon. I've thought about this some recently, given increasing bonds rates (and related capital depreciation in many bond funds), and decided to start this discussion after seeing another forum member, DebiT, faced with the situation. (See DebiT's post here: viewtopic.php?p=6678214#p6678214).

The background is relatively straightforward:

Let's say that you hold Vanguard's total market bond fund, VBTLX, as the only bond fund in a two fund portfolio comprised of total stock and total bond funds. The average duration of the bonds held in VBTLX is about 7 years (https://investor.vanguard.com/mutual-fu ... file/VBTLX). And you either plan to make withdrawls from VBTLX in each of the next ten years, or you might need to do so.

Procedural question:

How should one prepare to decumulate from a bond fund of 5 to 7 years duration?

The common guidance is to manage interest rate risk by matching the duration of one's bond holdings to the timing of one's intended withdrawls. Does that mean one should transition from a two-fund to a three-fund portfolio as they approach decumulation, including a short- or ultra-short term bond fund? Alternatively, might one be best served by transitioning from a bond fund to a treasury ladder with amounts and maturities matched, as closely as possible, to one's planned withdrawls? I'm not really sure. Accumulating holdings in an intermediate term bond fund, say one of 5-7 years duration, is very straightforward. Properly decumulating from one in a rising rate environment seems less so.

Thank you for your time and thoughts.
If you're using an ABW-like withdrawal approach, one method is to subtract expected inflation in the 5-7 year out range from the current SEC yield of your bond fund to get the expected real yield. https://www.bogleheads.org/wiki/Amortiz ... withdrawal
Though to be a little more correct, converting SEC yield to an APY type of yield should probably be done: viewtopic.php?p=5491740#p5491740

Expected inflation can be extracted from the difference between current nominal treasury yields and TIPs yields whose duration is in that same ballpark as your bond fund. This can be found on the FRED site.

Or you can assume that we'll soon hit target inflation of 2-2.5% and just use that.

Or you can go to the Cleveland FED site: https://www.clevelandfed.org/our-resear ... tions.aspx

Cheers.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: How to withdraw from bond funds with long durations

Post by marcopolo »

Robot Monster wrote: Sun May 15, 2022 10:48 am
MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration

Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Once in a while you get shown the light, in the strangest of places if you look at it right.
DebiT
Posts: 995
Joined: Sat Dec 28, 2013 12:45 pm

Re: How to withdraw from bond funds with long durations

Post by DebiT »

livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.

I exchange my bond fund shares into equity fund shares in order to keep the asset allocation of my portfolio close to what I want it to be. That's is a "withdraw from bond funds." That is, I simply keep the percentage bonds (VBTLX, SPAB, BND) of my total portfolio value the same no matter what year it is and no matter what the portfolio value is. If the percentage of bonds (VBTLX, SPAB, BND) of my total portfolio value was too low, then I would exchange from equity fund shares into bond fund shares, too.

As for the strict withdrawal for spending, I sell equity fund shares in our taxable account without worry. Then I do what I described in the preceding paragraph.

BTW, my investment horizon is until I die which could be today or more than 40 years or so from today.
How would you modify adjustments on the bond side of your portfolio if you were following McClung’s models of prime harvesting and ECM (extended conservative mortality) withdrawals. This method doesn’t rebalance, other than reinvesting dividends, and would generally have withdrawals only from the bond side.

I ask because I am newly retired, like that approach, am 40/60 stock/bond using mostly BND (some PONAX but let’s not discuss that right now), with 2 years in cash, which I plan to refresh annually for SWAN purposes.My next decision is (1) whether to add a shorter term fund with years 3-5 expenses in it, and if so (2) to just refresh that annually from BND.

I’d appreciate thoughts on that, and hope I am not hijacking this thread in any way, since OP was kind enough to start this one after responding to a post on my thread at https://www.bogleheads.org/forum/viewt ... 4#p6678234. If I am, please respond to me there.
Age 66, life turned upside down 3/2/19, thanking God for what I've learned from this group. AA 40/60 for now, possibly changing at age 70.
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to withdraw from bond funds with long durations

Post by livesoft »

I always thought McClung's method was not simple enough, so I decided to ignore it. I think his method might be helpful to those who are living just below the edge of having enough money to retire. My solution is to live well above that edge. Also I am anti-cash and basically do not have cash around except for a little bit that would last us about 2 weeks.

I also realize that their are people trapped in the Fear of Losses, but I can do nothing to help them overcome their fears.
Last edited by livesoft on Sun May 15, 2022 11:30 am, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
quisp65
Posts: 245
Joined: Wed Apr 10, 2019 7:44 am
Location: San Diego CA

Re: How to withdraw from bond funds with long durations

Post by quisp65 »

I drove myself a little crazy thinking about duration & investment horizon.

I ended with keeping it simple and sticking with an intermediate.

I carry roughly 7-8 years fixed income (FI) and pull from FI during down markets and rebalance into FI at market highs. Since I don't know the future of the market, I have no idea when it could get spent. I do know I will most likely end up with more money in my lifetime sticking with an intermediate.

Isn't this most retiree's situation? They don't know if they will pull from equity or bonds, so intermediate seems best.

If you look at 70s inflation at worst the intermediate & short term funds just swapped places in earnings for a few years. IMO...why go short term & guarantee lower returns to protect from a situation that at worse was just a swap in earning hierarchy for a few years?

Ferri: The Risk Of Short-Term Bond Funds
https://www.etf.com/sections/index-inve ... funds.html
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: How to withdraw from bond funds with long durations

Post by marcopolo »

DebiT wrote: Sun May 15, 2022 11:23 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.

I exchange my bond fund shares into equity fund shares in order to keep the asset allocation of my portfolio close to what I want it to be. That's is a "withdraw from bond funds." That is, I simply keep the percentage bonds (VBTLX, SPAB, BND) of my total portfolio value the same no matter what year it is and no matter what the portfolio value is. If the percentage of bonds (VBTLX, SPAB, BND) of my total portfolio value was too low, then I would exchange from equity fund shares into bond fund shares, too.

As for the strict withdrawal for spending, I sell equity fund shares in our taxable account without worry. Then I do what I described in the preceding paragraph.

BTW, my investment horizon is until I die which could be today or more than 40 years or so from today.
How would you modify adjustments on the bond side of your portfolio if you were following McClung’s models of prime harvesting and ECM (extended conservative mortality) withdrawals. This method doesn’t rebalance, other than reinvesting dividends, and would generally have withdrawals only from the bond side.

I ask because I am newly retired, like that approach, am 40/60 stock/bond using mostly BND (some PONAX but let’s not discuss that right now), with 2 years in cash, which I plan to refresh annually for SWAN purposes.My next decision is (1) whether to add a shorter term fund with years 3-5 expenses in it, and if so (2) to just refresh that annually from BND.

I’d appreciate thoughts on that, and hope I am not hijacking this thread in any way, since OP was kind enough to start this one after responding to a post on my thread at https://www.bogleheads.org/forum/viewt ... 4#p6678234. If I am, please respond to me there.
If you are replenishing the shorter duration (and cash) buckets each year, you are effectively just withdrawing from BND (or wherever you are replenishing from) every year, and simultaneously suffering the cash drag as well.

It is not at all clear what that accomplishes.
Once in a while you get shown the light, in the strangest of places if you look at it right.
rockAction
Posts: 235
Joined: Wed Apr 08, 2020 4:56 pm

Re: How to withdraw from bond funds with long durations

Post by rockAction »

At retirement, I split my bond funds 25/75 between LT and ST, as I settled on having an intermediate duration. I’ve only been selling my ST bonds this year in order to maintain my avg duration (~7 yrs) since my avg duration dropped as LT bonds were dropping. So, I think that if you use a barbell approach and try maintain the same avg duration, you’ll mostly be selling your ST fund when LT bonds are down, and selling LT bonds in years when they are up. I’m not certain, but I believe that if instead of a barbell you just hold BND (which should maintain approx the same avg duration), you are essentially accomplishing the same thing.

In other words, there’s really not much difference (or at least enough to matter) to whether you use a bucket approach, a two-fund barbell, or one fund (BND) as long as you just maintain your preferred intermediate duration.

Maybe someone on here smarter than me can confirm.
40% VT | 20% Global SCV | 20% LTPZ | 10% I-Bonds | 10% Cash
Tamalak
Posts: 1989
Joined: Fri May 06, 2016 2:29 pm

Re: How to withdraw from bond funds with long durations

Post by Tamalak »

sailaway wrote: Sun May 15, 2022 9:56 am The whole reason I have a total market bond fund is to just take the punches and withdraw from it when I need cash.
Same.. the horizon of BND is 7 years, and I often withdraw from BND before a 7 year horizon.. if there are losses involved, I just take the hit.
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: How to withdraw from bond funds with long durations

Post by livesoft »

rockAction wrote: Sun May 15, 2022 12:03 pm .... So, I think that if you use a barbell approach and try maintain the same avg duration, you’ll mostly be selling your ST fund when LT bonds are down, and selling LT bonds in years when they are up.
When holding both ST and LT bond funds, then one has to have a plan when LT bond funds drop more than ST bond funds that one rebalances from ST bond funds to LT bond funds. That is, I do not think it is sufficient to just withdraw from one or the other.
Wiki This signature message sponsored by sscritic: Learn to fish.
rockAction
Posts: 235
Joined: Wed Apr 08, 2020 4:56 pm

Re: How to withdraw from bond funds with long durations

Post by rockAction »

livesoft wrote: Sun May 15, 2022 12:11 pm
rockAction wrote: Sun May 15, 2022 12:03 pm .... So, I think that if you use a barbell approach and try maintain the same avg duration, you’ll mostly be selling your ST fund when LT bonds are down, and selling LT bonds in years when they are up.
When holding both ST and LT bond funds, then one has to have a plan when LT bond funds drop more than ST bond funds that one rebalances from ST bond funds to LT bond funds. That is, I do not think it is sufficient to just withdraw from one or the other.
Good point. Thank you.
40% VT | 20% Global SCV | 20% LTPZ | 10% I-Bonds | 10% Cash
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: How to withdraw from bond funds with long durations

Post by Robot Monster »

marcopolo wrote: Sun May 15, 2022 11:06 am
Robot Monster wrote: Sun May 15, 2022 10:48 am
MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration

Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Guess I'm envisioning a ladder from years 2023 to 2028. It's a way of replicating:

2022: cash
2023: 1yr bond that covers expenses
2024: 2yr bond that covers expenses
2025: 3yr bond that covers expenses
2026: 4yr bond that covers expenses
2027: 5yr bond that covers expenses
2028: 6yr bond that covers expenses

The rest of the money goes in Total Bond Fund. Every year you need to buy a new 6yr bond that covers expenses in the above example, or rebalance if you're using two or more bond funds.

Or is this not a good way to do things? It's always how I envisioned I would "escape" from my bond fund (which happens to be Vanguard Inflation Protected Securities Fund).
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: How to withdraw from bond funds with long durations

Post by marcopolo »

Robot Monster wrote: Sun May 15, 2022 12:34 pm
marcopolo wrote: Sun May 15, 2022 11:06 am
Robot Monster wrote: Sun May 15, 2022 10:48 am
MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration

Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Guess I'm envisioning a ladder from years 2023 to 2028. It's a way of replicating:

2022: cash
2023: 1yr bond that covers expenses
2024: 2yr bond that covers expenses
2025: 3yr bond that covers expenses
2026: 4yr bond that covers expenses
2027: 5yr bond that covers expenses
2028: 6yr bond that covers expenses

The rest of the money goes in Total Bond Fund. Every year you need to buy a new 6yr bond that covers expenses in the above example, or rebalance if you're using two or more bond funds.

Or is this not a good way to do things? It's always how I envisioned I would "escape" from my bond fund (which happens to be Vanguard Inflation Protected Securities Fund).
If you are withdrawing a years expenses from VIPS each year to fill the longest rung on your ladder, I am not sure it is really accomplishing anything.

This would be no different than holding 6 funds with durations of 1-6 years, never touching them, and just spending from VIPS each year. Is that what you are intending to do?
Once in a while you get shown the light, in the strangest of places if you look at it right.
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: How to withdraw from bond funds with long durations

Post by Robot Monster »

marcopolo wrote: Sun May 15, 2022 12:48 pm
Robot Monster wrote: Sun May 15, 2022 12:34 pm
marcopolo wrote: Sun May 15, 2022 11:06 am
Robot Monster wrote: Sun May 15, 2022 10:48 am
MattB wrote: Sun May 15, 2022 10:22 am

Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration

Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Guess I'm envisioning a ladder from years 2023 to 2028. It's a way of replicating:

2022: cash
2023: 1yr bond that covers expenses
2024: 2yr bond that covers expenses
2025: 3yr bond that covers expenses
2026: 4yr bond that covers expenses
2027: 5yr bond that covers expenses
2028: 6yr bond that covers expenses

The rest of the money goes in Total Bond Fund. Every year you need to buy a new 6yr bond that covers expenses in the above example, or rebalance if you're using two or more bond funds.

Or is this not a good way to do things? It's always how I envisioned I would "escape" from my bond fund (which happens to be Vanguard Inflation Protected Securities Fund).
If you are withdrawing a years expenses from VIPS each year to fill the longest rung on your ladder, I am not sure it is really accomplishing anything.

This would be no different than holding 6 funds with durations of 1-6 years, never touching them, and just spending from VIPS each year. Is that what you are intending to do?
Okay, I had to think that over for a sec...I think I understand what you're saying. So...are you saying it's actually okay to sell a bond fund directly into cash, if done so, perhaps, slowly over a certain period? This part confuses me. I always assumed it would not be desirable to sell something with a duration of several years directly into cash.
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: How to withdraw from bond funds with long durations

Post by vineviz »

MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
BND is already a very short duration bond fund for the investor you describe, so the conventional wisdom of just "roll with it" is probably the best advice that doesn't involve using a completely different fund to begin with.

However, you might find the discussion in this thread helpful: viewtopic.php?t=318412 It covers the basics of managing duration using two bond funds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
JoinToday
Posts: 1110
Joined: Sat Mar 10, 2007 8:59 pm

Re: How to withdraw from bond funds with long durations

Post by JoinToday »

Robot Monster wrote: Sun May 15, 2022 1:17 pm
marcopolo wrote: Sun May 15, 2022 12:48 pm
Robot Monster wrote: Sun May 15, 2022 12:34 pm
marcopolo wrote: Sun May 15, 2022 11:06 am
Robot Monster wrote: Sun May 15, 2022 10:48 am

Money you need this year might be in cash. The money you need in 2023 might be invested in two bond funds that together are weighted to give you an average duration of 1 year...and the money you need for:

2024: average duration of 2 years
2025: average duration 3 years
etc

Using something I wrote in another post:

If you wanted two bond funds together to have an average duration of 8 years, you could combine these funds:

BLV has an average duration of 15.7 years
BND has an average duration of 6.9 years.

To figure out how much to allocate to each, use formula below:
(8-6.9)/(15.7-6.9) = 0.125

This 0.125 or 12.5% gives you how much to allocate to BLV.

Checking my work:
.125*15.7+.875*6.9=8

Formula
X = (D-L) / (H-L)

X = proportion to invest in H
H = high duration amount
L = low duration amount
D = desired duration

Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Guess I'm envisioning a ladder from years 2023 to 2028. It's a way of replicating:

2022: cash
2023: 1yr bond that covers expenses
2024: 2yr bond that covers expenses
2025: 3yr bond that covers expenses
2026: 4yr bond that covers expenses
2027: 5yr bond that covers expenses
2028: 6yr bond that covers expenses

The rest of the money goes in Total Bond Fund. Every year you need to buy a new 6yr bond that covers expenses in the above example, or rebalance if you're using two or more bond funds.

Or is this not a good way to do things? It's always how I envisioned I would "escape" from my bond fund (which happens to be Vanguard Inflation Protected Securities Fund).
If you are withdrawing a years expenses from VIPS each year to fill the longest rung on your ladder, I am not sure it is really accomplishing anything.

This would be no different than holding 6 funds with durations of 1-6 years, never touching them, and just spending from VIPS each year. Is that what you are intending to do?
Okay, I had to think that over for a sec...I think I understand what you're saying. So...are you saying it's actually okay to sell a bond fund directly into cash, if done so, perhaps, slowly over a certain period? This part confuses me. I always assumed it would not be desirable to sell something with a duration of several years directly into cash.
marcopolo is not making any judgement whether it is OK or not to sell a bond fund directly into cash. What he is saying is that having 6 bond funds with duration 1-6 years is no different (no better, no worse) than holding 1 bond fund and selling directly to cash each year.

This is something I struggled with a little. I originally set up 6 buckets, similar to what you have set up. Bucket #0: Current year was all cash. Bucket #1: 1 year away bucket was 20% intermed term bond fund + 80% cash. Bucket #2: 2 year away bucket had 40% intermed term bond fund + 60% cash, etc. ... 5 year was 100% intermed term bond fund.

Each year the buckets would be replenished. At the beginning of the year:
Bucket #1: 20% intermed term bond fund was sold to cash, and that became bucket #0
Bucket #2: 20% intermed term bond fund was sold to cash, and that became bucket #1
Bucket #3: 20% intermed term bond fund was sold to cash, and that became bucket #2
Bucket #4: 20% intermed term bond fund was sold to cash, and that became bucket #3
Bucket #5: 20% intermed term bond fund was sold to cash, and that became bucket #4

20% of a year's expenses are sold each year in each of the 5 buckets; add that up and you can see it is effectively 1 year of intermediate term bond fund is transferred to cash each year. The buckets don't add anything (positive or negative) to the withdrawal method.

I ended up just using intermed term bond fund + MMF. I will sell intermediate term bond fund as needed to keep a small cash bucket for funding expenses. Probably 6 months - 12 months cash at any given time. (work in progress as I think about it; but this is the current plan).
I wish I had learned about index funds 25 years ago
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: How to withdraw from bond funds with long durations

Post by Robot Monster »

JoinToday wrote: Sun May 15, 2022 2:24 pm
Robot Monster wrote: Sun May 15, 2022 1:17 pm
marcopolo wrote: Sun May 15, 2022 12:48 pm
Robot Monster wrote: Sun May 15, 2022 12:34 pm
marcopolo wrote: Sun May 15, 2022 11:06 am


Unless you are planning to build an entire ladder, it is not clear how this really helps very much. With just two or three durations, you essentially just have a "bucketing" approach, then you just run into the same problem in a couple of years, and/or have to make the same decision on how to refill the buckets.
Guess I'm envisioning a ladder from years 2023 to 2028. It's a way of replicating:

2022: cash
2023: 1yr bond that covers expenses
2024: 2yr bond that covers expenses
2025: 3yr bond that covers expenses
2026: 4yr bond that covers expenses
2027: 5yr bond that covers expenses
2028: 6yr bond that covers expenses

The rest of the money goes in Total Bond Fund. Every year you need to buy a new 6yr bond that covers expenses in the above example, or rebalance if you're using two or more bond funds.

Or is this not a good way to do things? It's always how I envisioned I would "escape" from my bond fund (which happens to be Vanguard Inflation Protected Securities Fund).
If you are withdrawing a years expenses from VIPS each year to fill the longest rung on your ladder, I am not sure it is really accomplishing anything.

This would be no different than holding 6 funds with durations of 1-6 years, never touching them, and just spending from VIPS each year. Is that what you are intending to do?
Okay, I had to think that over for a sec...I think I understand what you're saying. So...are you saying it's actually okay to sell a bond fund directly into cash, if done so, perhaps, slowly over a certain period? This part confuses me. I always assumed it would not be desirable to sell something with a duration of several years directly into cash.
marcopolo is not making any judgement whether it is OK or not to sell a bond fund directly into cash. What he is saying is that having 6 bond funds with duration 1-6 years is no different (no better, no worse) than holding 1 bond fund and selling directly to cash each year.

This is something I struggled with a little. I originally set up 6 buckets, similar to what you have set up. Bucket #0: Current year was all cash. Bucket #1: 1 year away bucket was 20% intermed term bond fund + 80% cash. Bucket #2: 2 year away bucket had 40% intermed term bond fund + 60% cash, etc. ... 5 year was 100% intermed term bond fund.

Each year the buckets would be replenished. At the beginning of the year:
Bucket #1: 20% intermed term bond fund was sold to cash, and that became bucket #0
Bucket #2: 20% intermed term bond fund was sold to cash, and that became bucket #1
Bucket #3: 20% intermed term bond fund was sold to cash, and that became bucket #2
Bucket #4: 20% intermed term bond fund was sold to cash, and that became bucket #3
Bucket #5: 20% intermed term bond fund was sold to cash, and that became bucket #4

20% of a year's expenses are sold each year in each of the 5 buckets; add that up and you can see it is effectively 1 year of intermediate term bond fund is transferred to cash each year. The buckets don't add anything (positive or negative) to the withdrawal method.

I ended up just using intermed term bond fund + MMF. I will sell intermediate term bond fund as needed to keep a small cash bucket for funding expenses. Probably 6 months - 12 months cash at any given time. (work in progress as I think about it; but this is the current plan).
That explains things nicely, thank you very much.
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: How to withdraw from bond funds with long durations

Post by Robot Monster »

If I'm understanding, and going by a post in that thread posted by Vineviz, OP might conceivably have a target bond duration of up to 15 years using the below formula, and might have a combination of Vanguard Total Bond Market and Vanguard Long Term Bond ETF (BLV) to average that. But if OP is adjusting down the average duration each year, after ten years the target bond duration would be 5, and a combination of Total Bond and a shorter duration bond fund might be in order at that point? Do I have that right?

Formula

W/2 + T
W: # of years you will be withdrawing for
T: # of years until you begin withdrawing

For OP:
W: 10 (since OP is 50 but will begin withdrawing when you are 60)
T: 10 (withdrawing years between age 60 and 70)
DebiT
Posts: 995
Joined: Sat Dec 28, 2013 12:45 pm

Re: How to withdraw from bond funds with long durations

Post by DebiT »

marcopolo wrote: Sun May 15, 2022 11:35 am
DebiT wrote: Sun May 15, 2022 11:23 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.

I exchange my bond fund shares into equity fund shares in order to keep the asset allocation of my portfolio close to what I want it to be. That's is a "withdraw from bond funds." That is, I simply keep the percentage bonds (VBTLX, SPAB, BND) of my total portfolio value the same no matter what year it is and no matter what the portfolio value is. If the percentage of bonds (VBTLX, SPAB, BND) of my total portfolio value was too low, then I would exchange from equity fund shares into bond fund shares, too.

As for the strict withdrawal for spending, I sell equity fund shares in our taxable account without worry. Then I do what I described in the preceding paragraph.

BTW, my investment horizon is until I die which could be today or more than 40 years or so from today.
How would you modify adjustments on the bond side of your portfolio if you were following McClung’s models of prime harvesting and ECM (extended conservative mortality) withdrawals. This method doesn’t rebalance, other than reinvesting dividends, and would generally have withdrawals only from the bond side.

I ask because I am newly retired, like that approach, am 40/60 stock/bond using mostly BND (some PONAX but let’s not discuss that right now), with 2 years in cash, which I plan to refresh annually for SWAN purposes.My next decision is (1) whether to add a shorter term fund with years 3-5 expenses in it, and if so (2) to just refresh that annually from BND.

I’d appreciate thoughts on that, and hope I am not hijacking this thread in any way, since OP was kind enough to start this one after responding to a post on my thread at https://www.bogleheads.org/forum/viewt ... 4#p6678234. If I am, please respond to me there.
If you are replenishing the shorter duration (and cash) buckets each year, you are effectively just withdrawing from BND (or wherever you are replenishing from) every year, and simultaneously suffering the cash drag as well.

It is not at all clear what that accomplishes.
I thought about it some more, and decided to just skip the short term bond fund completely. I still want to have 2 years in cash at the beginning of each year, which will still create some drag, but so be it.
Age 66, life turned upside down 3/2/19, thanking God for what I've learned from this group. AA 40/60 for now, possibly changing at age 70.
rockstar
Posts: 6326
Joined: Mon Feb 03, 2020 5:51 pm

Re: How to withdraw from bond funds with long durations

Post by rockstar »

I think, you would want to do some duration matching. Start moving your bond fund with a longer duration than you need to individual treasuries bills and bonds that mature when you need them. Of course, with bond funds down right now, this might not be the best approach right now. Otherwise, yes, you're going to take a hit as bond rates go up. The other option is to stay on the short end of the curve and still with bonds that mature within a year or less and keep rolling them over. You'll make less, but you won't lose either. Well, maybe against inflation. Hard to get TIPS with a short duration.
Call_Me_Op
Posts: 9881
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: How to withdraw from bond funds with long durations

Post by Call_Me_Op »

I think the truth of the matter is keeping cash or short-duration assets from which to withdraw is mainly a psychological thing. They cause a drag on the portfolio that more than likely results in a net lower return. In the Op's case, I would simply draw from the portfolio in such a way as to maintain my asset allocation and be done with it.

That won't stop me from holding some cash.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
billyt
Posts: 1111
Joined: Wed Aug 06, 2008 9:57 am

Re: How to withdraw from bond funds with long durations

Post by billyt »

I have built an "off ramp" for my Total Market Bond fund. Each year I withdraw a years expenses from my Total Bond Market fund and purchase a 7 year treasury. Because this is a sideways move, you will never take a loss on your bond fund (do the math!). So I have a duration matched ladder of treasuries to meet my regular income needs.

billyt
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

billyt wrote: Tue May 17, 2022 8:02 am I have built an "off ramp" for my Total Market Bond fund. Each year I withdraw a years expenses from my Total Bond Market fund and purchase a 7 year treasury. Because this is a sideways move, you will never take a loss on your bond fund (do the math!). So I have a duration matched ladder of treasuries to meet my regular income needs.

billyt
Thank you for this. I came to the same conclusion, that one of the ways, if not the only way, to eliminate interest-rate risk when decumulating from a bond fund was to step down a bond ladder as you described here.
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

jebmke wrote: Sun May 15, 2022 10:30 am I'd rather have losses than gains, all other things equal.
This is an interesting statement.

To clarify, are you saying that you would rather have $5 with a $7 basis than $9 with a $7 basis? Or that you would rather have $10 with a $15 basis than $10 with a $5 basis?

The former seems ridiculous. Why would you prefer having less money to more? The latter is obvious but of no value to this thread.
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

vineviz wrote: Sun May 15, 2022 2:09 pm
MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
BND is already a very short duration bond fund for the investor you describe, so the conventional wisdom of just "roll with it" is probably the best advice that doesn't involve using a completely different fund to begin with.

However, you might find the discussion in this thread helpful: viewtopic.php?t=318412 It covers the basics of managing duration using two bond funds.
Thank you for the link.
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: How to withdraw from bond funds with long durations

Post by MattB »

vineviz wrote: Sun May 15, 2022 2:09 pm
MattB wrote: Sun May 15, 2022 10:22 am
livesoft wrote: Sun May 15, 2022 10:08 am How to withdraw when VBTLX is your only bond fund? I guess you have no choice, so I am not sure what the question actually is.
Let's say you are 50 years old, your only fixed income holding is BND, and you plan to withdraw 6% of your fixed income holdings each year, in each of the 10 years between age 60 and 70.

Would you be better served by accumulating a shorter duration bond fund as you approach 60, in addition to your holdings in BND, than you would be from continuing to hold BND (and only BND)? I think the answer to that question is yes. And if so, what is an optimal procedure to transition from one bond holding to another?
BND is already a very short duration bond fund for the investor you describe, so the conventional wisdom of just "roll with it" is probably the best advice that doesn't involve using a completely different fund to begin with.

However, you might find the discussion in this thread helpful: viewtopic.php?t=318412 It covers the basics of managing duration using two bond funds.
Thank you for the link.
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: How to withdraw from bond funds with long durations

Post by secondopinion »

Call_Me_Op wrote: Tue May 17, 2022 6:20 am I think the truth of the matter is keeping cash or short-duration assets from which to withdraw is mainly a psychological thing. They cause a drag on the portfolio that more than likely results in a net lower return. In the Op's case, I would simply draw from the portfolio in such a way as to maintain my asset allocation and be done with it.

That won't stop me from holding some cash.
Actually, it helps duration match the expenses which are close to being needed; one is not speculating what will happen with rates because they get the needed money just in time. However, given the OP are talking about the total bond market fund, it really does not help that much to do it.

Of course, I am surprised that the total bond market fund is considered to be of "long duration"; I thought this thread would be about long-term bond funds. In that case, then I would say that the matching of expenses is definitely helped with some short-term fixed-income.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
alluringreality
Posts: 1511
Joined: Tue Nov 12, 2019 9:59 am

Re: How to withdraw from bond funds with long durations

Post by alluringreality »

MattB wrote: Tue May 17, 2022 6:00 pm The former seems ridiculous. Why would you prefer having less money to more? The latter is obvious but of no value to this thread.
I'd take the qualifier to mean that the value would be the same, like the tax advantage of the latter situation. Maybe there are some tax situations where it might make sense to harvest gains yearly, but that's about the best I could come up with for the former.
MattB wrote: Tue May 17, 2022 5:55 pm Thank you for this. I came to the same conclusion, that one of the ways, if not the only way, to eliminate interest-rate risk when decumulating from a bond fund was to step down a bond ladder as you described here.
This is the main way I figured for a practical approach to David Swensen's withdrawl recommendations, so thanks for starting the thread.
Last edited by alluringreality on Wed May 18, 2022 7:06 am, edited 6 times in total.
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: How to withdraw from bond funds with long durations

Post by Artsdoctor »

MattB,

You have a terrific question. There's more than enough written about accumulation of assets but far less written about decumulation.

You can see from the responses above that there's a variety of opinions, most of them valid. The total return approach basically allows you to take assets from any class available to bring your asset allocation back to where you want it. That might involve selling appreciated equity funds instead of bonds. Others might try to extract as many dividends as possible from equity and bond funds first. There are people who have "cash cushions" and there are people who literally have no significant amounts of cash but choose to strategically sell assets whenever necessary.

But you didn't mention what type of account the money is coming from. You can sell anything at any time from a tax-advantaged account but you'll need to sell assets in a taxable account with an eye on tax consequences. Some of the posters above have very shrewd tax planning strategies and can sell taxable assets with little or no consequences; your outcome might be very different.

Some people don't mind holding bond funds with durations exceeding their life expectancy. If that's the case, you'd just siphon off the dividends and any of the principal you want, knowing you could be selling as prices decrease. It's just a matter of how much you're willing to endure. If you want long-duration funds, you'll just have to accept the fact that they will be more volatile. If you can't stomach the volatility, I'd argue you would be better served investing in bond funds with shorter durations.
1moreyr
Posts: 465
Joined: Sun Jan 12, 2020 6:10 pm

Re: How to withdraw from bond funds with long durations

Post by 1moreyr »

I just went through this. 3 months after retiring as of now.

1. I transferred 100k VBTLX to VTSAX (within a 401K ) for re balancing purposes and as I was heavy cash (as I went into retirement) I created a treasury Bill ladder similar to the one shown previously. The T bills don't kick of taxes of interest until they mature and are matched to my need. I have no plans on selling them before maturity.

2. I will use the tiers of T bills annually as the remainder of my VBTLX recovers to its duration.
3. Had I been thinking 5 years before retirement about bond duration. I would have built the ladder annually going into retirement. Of course with the interest rates over the last 3 years it probably wouldn't have been any more helpful than selling from VBTLX as required.

so since we all know nothing..
ColoradoMan
Posts: 29
Joined: Thu Feb 01, 2024 10:58 am

Re: How to withdraw from bond funds with long durations

Post by ColoradoMan »

What happens to funds in VBTLX after 7 years?
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: How to withdraw from bond funds with long durations

Post by dcabler »

ColoradoMan wrote: Tue Feb 06, 2024 2:33 pm What happens to funds in VBTLX after 7 years?
The question isn't clear. Do you mean what happens to money invested in VBTLX after 7 years?
It will have either grown in value or dropped in value. Meanwhile, some of the underlying bonds, those with less than 1 year till maturity, will have been sold and new bonds, subject to construction rules for the index that VBTLX tracks, will have been purchased.

The same will be true after 8, 9, 10, years, etc...

Cheers.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: How to withdraw from bond funds with long durations

Post by sycamore »

ColoradoMan wrote: Tue Feb 06, 2024 2:33 pm What happens to funds in VBTLX after 7 years?
A phenomenon known as the 7 year itch sets in for the VBTLX shareholder. Tired of the "same old, same old" staying the course and being content with market returns, the shareholder is captivated by the siren song of certainty voiced in other parts of the forum: "two percent real, two percent real..."

Persistent thoughts begin to creep in while eating breakfast or reviewing last year's annual returns... "Hmm, why not? It's just a bit more complex than a single fund." Or "now I can explain to all my friends how sophisticated my fixed income is!"

And soon the shareholder kicks the former queen of the bond ball, VBTLX, to the curb, taking the withdrawn funds into the thrilling embrace of a 20 year TIPS ladder.
ColoradoMan
Posts: 29
Joined: Thu Feb 01, 2024 10:58 am

Re: How to withdraw from bond funds with long durations

Post by ColoradoMan »

dcabler wrote: Tue Feb 06, 2024 6:18 pm
ColoradoMan wrote: Tue Feb 06, 2024 2:33 pm What happens to funds in VBTLX after 7 years?
The question isn't clear. Do you mean what happens to money invested in VBTLX after 7 years?
It will have either grown in value or dropped in value. Meanwhile, some of the underlying bonds, those with less than 1 year till maturity, will have been sold and new bonds, subject to construction rules for the index that VBTLX tracks, will have been purchased.

The same will be true after 8, 9, 10, years, etc...

Cheers.
What is the negative of selling a day before 7 years?
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: How to withdraw from bond funds with long durations

Post by dcabler »

ColoradoMan wrote: Tue Feb 06, 2024 8:09 pm
dcabler wrote: Tue Feb 06, 2024 6:18 pm
ColoradoMan wrote: Tue Feb 06, 2024 2:33 pm What happens to funds in VBTLX after 7 years?
The question isn't clear. Do you mean what happens to money invested in VBTLX after 7 years?
It will have either grown in value or dropped in value. Meanwhile, some of the underlying bonds, those with less than 1 year till maturity, will have been sold and new bonds, subject to construction rules for the index that VBTLX tracks, will have been purchased.

The same will be true after 8, 9, 10, years, etc...

Cheers.
What is the negative of selling a day before 7 years?
There's nothing magical about 7 years or any number of days or years before or after, except for frequent trading restrictions.

Why the interest in 7 years?

Cheers.
ColoradoMan
Posts: 29
Joined: Thu Feb 01, 2024 10:58 am

Re: How to withdraw from bond funds with long durations

Post by ColoradoMan »

SO what does the avg maturity of the bonds in the fund mean to the investor?
User avatar
typical.investor
Posts: 5263
Joined: Mon Jun 11, 2018 3:17 am

Re: How to withdraw from bond funds with long durations

Post by typical.investor »

MattB wrote: Sun May 15, 2022 9:49 am I'm writing because I have not seen an important question addressed on this forum, how to withdraw from bond funds with durations longer than one's investment horizon.
Sorry for the late response, but I think the answer is actually in the wiki

See https://www.bogleheads.org/wiki/Individ ... _bond_fund
MattB wrote: Sun May 15, 2022 9:49 am Procedural question:

How should one prepare to decumulate from a bond fund of 5 to 7 years duration?

The common guidance is to manage interest rate risk by matching the duration of one's bond holdings to the timing of one's intended withdrawls. Does that mean one should transition from a two-fund to a three-fund portfolio as they approach decumulation, including a short- or ultra-short term bond fund? Alternatively, might one be best served by transitioning from a bond fund to a treasury ladder with amounts and maturities matched, as closely as possible, to one's planned withdrawls? I'm not really sure. Accumulating holdings in an intermediate term bond fund, say one of 5-7 years duration, is very straightforward. Properly decumulating from one in a rising rate environment seems less so.

Thank you for your time and thoughts.
Let's assume a duration of six years. Six years before expected spending need, sell the amount you will need. Purchase a zero-coupon bond whose maturity equals the duration of the fund ,or in this case, six years. Since the duration of the zero-coupon bond matches it's maturity, prior interest rate movement doesn't matter. You are changing six year duration for six year duration so it doesn't matter if there is NAV loss because you are buying a bond with the same NAV loss. And subsequent interest rate movement is irrelevant as well since the zero coupon will have a par value at maturity.

Similarly, you could purchase an individual bond with the same six year duration. This is a little more tricky because the coupon on the bond will affect the duration calculation. So a six year treasury paying 5%, will have a shorter duration that a six year treasury paying 1%. The duration and maturity won't exactly match. And if you need spending in six years, you may have no choice but to choose an individual bond that doesn't exactly match the duration of the fund you are selling. So it's possible your six year fund has an NAV loss for example, but if you buy an individual bond with a six year maturity, It's actual duration may be shorter and you are effectively selling low to buy something not so low.

Still, the duration between a bond fund and an individual bond that doesn't exactly match the duration but matches your spending date will be much closer than if you sell an intermediate fund to purchase a short term fund with a duration of two years.

For example, consider these two bonds that mature in about six years. There is only 13 days difference in maturity between them and they are priced such that one yields 4.069% and the other yields 4.072%. Very close.

However, one of them has a modified Duration of 5.623 years, while the other has a Modified Duration of 5.284. This is as the first one has a lower coupon than the second. The price on each is adjusted to they yield about the same, but there is a difference in duration.

In any case, either of those would be better choices than moving from a fund with a six year duration than moving to a short fund with a two or three year duration. The closer the duration match when switching the better!
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: How to withdraw from bond funds with long durations

Post by dcabler »

ColoradoMan wrote: Tue Feb 06, 2024 9:01 pm SO what does the avg maturity of the bonds in the fund mean to the investor?
Average maturity of the bonds in the bond fund is related to average (aka effective) duration of a bond fund. And duration can give you an idea of the sensitivity of the bond fund's NAV to changes in yield. The longer the duration, the more sensitivity there is to changes in yield.

https://www.bogleheads.org/wiki/Individ ... _bond_fund
https://www.blackrock.com/fp/documents/ ... ration.pdf
dcabler
Posts: 4543
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: How to withdraw from bond funds with long durations

Post by dcabler »

MattB wrote: Sun May 15, 2022 9:49 am I'm writing because I have not seen an important question addressed on this forum, how to withdraw from bond funds with durations longer than one's investment horizon. I've thought about this some recently, given increasing bonds rates (and related capital depreciation in many bond funds), and decided to start this discussion after seeing another forum member, DebiT, faced with the situation. (See DebiT's post here: viewtopic.php?p=6678214#p6678214).

The background is relatively straightforward:

Let's say that you hold Vanguard's total market bond fund, VBTLX, as the only bond fund in a two fund portfolio comprised of total stock and total bond funds. The average duration of the bonds held in VBTLX is about 7 years (https://investor.vanguard.com/mutual-fu ... file/VBTLX). And you either plan to make withdrawls from VBTLX in each of the next ten years, or you might need to do so.

Procedural question:

How should one prepare to decumulate from a bond fund of 5 to 7 years duration?

The common guidance is to manage interest rate risk by matching the duration of one's bond holdings to the timing of one's intended withdrawls. Does that mean one should transition from a two-fund to a three-fund portfolio as they approach decumulation, including a short- or ultra-short term bond fund? Alternatively, might one be best served by transitioning from a bond fund to a treasury ladder with amounts and maturities matched, as closely as possible, to one's planned withdrawls? I'm not really sure. Accumulating holdings in an intermediate term bond fund, say one of 5-7 years duration, is very straightforward. Properly decumulating from one in a rising rate environment seems less so.

Thank you for your time and thoughts.
1. A bond ladder will give you the most deterministic income stream and, usually, the least amount of maintenance.
2. If you're going to use funds, the best way is to use 2 funds at a time. One can start with a long and intermediate bond fund and adjust the ratio of the two of them to match your investment horizon. Update each withdrawal period until the investment horizon you're trying to match is below the duration of the intermediate bond fund. Once that happens, switch to an intermediate and short bond fund and continue. This method has similar overall results to a ladder. I would not recommend simply using 1 long duration bond fund and 1 short duration bond fund for this for the entire time - it simply deviates too far from the current yield curve.
vineviz's explanation of investment horizon: viewtopic.php?p=7623171&sid=1afa3959bea ... 6#p7623171
3. You can also use 1 bond fund at a time. Start with long, then move to intermediate, then to short, and then maybe to ultrashort. The key is to make the transition before the number of years remaining in your planning is less than the duration of the bond fund you're currently using. There will be some interest rate risk at each transition point and the income stream produced from this method is going to be noisier than either #2 or #1. This also works if you just want to hold a single intermediate duration bond fund. Just know that once the remaining number of periods is less than the effective duration of the bond fund, the withdrawals will begin to vary more. That may or may not matter to an individual investor.

As far as how to withdraw from something like #2 or #3, the answer is to amortize using Excel's PMT function
Withdrawal % = PMT (rate, # remaining periods, -1, 0, 1).
rate is the effective rate of the weighted yield of the bond funds you're holding if #2 above or just the yield of the current bond fund you're holding if #3
# remaining periods is remaining number of periods you have remaining in your plan for income.

As far as rate is concerned, for either #2 or #3
1. If you're making nominal withdrawals using nominal bond funds, the best answer is the weighted average of the nominal yields of the 2 bond funds you're holding. YTM (if that's reported from your bond fund) or SEC yield (if that's all they're reporting) both are fine
2. If you're making real withdrawals using nominal bond funds, then you should geometrically subtract expected inflation from the nominal yield using the formula: real_yield = (1 + nominal yield)/(1 + expected inflation) -1
You can find expected inflation for any duration from 1 to 30 years from the Cleveland FED, which is reported on both their site and on FRED.
Cleveland FED's website (with downloadable spreadsheet): https://www.clevelandfed.org/indicators ... pectations
FRED link as an example for 5 year expected inflation (just change the 5 at the end for whatever year you're interested in: https://fred.stlouisfed.org/series/EXPINF5YR
You can either choose the year that's closest to the duration/investment horizon you're shooting for or if you want to get fancy, you can interpolate between the 2 nearest points.
3. If you're making real withdrawals using TIPS bond funds, then you should use real yields and durations calculated based on real yields. Most TIPS funds do not report report either of these. But #cruncher has a running thread where he calculates and reports the real yield of indexes that track the most popular TIPS funds. He updates this every Friday. Once a quarter, he will also update the latest duration for these (Use Macaulay duration).
viewtopic.php?p=7623171&sid=1afa3959bea ... 6#p7623171

For #2 or #3, you can make withdrawals as frequently as you like. Annual is pretty common. I'm currently doing #2 with TIPS, and I make my withdrawals/rebalances quarterly. The amount of time it takes me to do the calculations and make the withdrawals/rebalance each quarter is only a couple of minutes longer than the calculations I make for my stock withdrawals. Having a pre-defined spreadsheet helps.  In a few years, I'm going to switch the entire thing over to an actual ladder as I'm reasonably sure that my DW will have no interest in this, so I want to make it as hands-off as possible for her.

Hope this helps some.
Cheers.
Last edited by dcabler on Wed Feb 07, 2024 5:25 am, edited 2 times in total.
Post Reply