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