Purpose of Bonds in AA, Particularly if you have a decent pension?

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MrCheapo
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Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

I'm rethinking if I should own *any* bonds in my AA. Right now I'm at 20% bonds.

However, my anticipated pension (COLA adjusted with full rights of survivorship) was recently increased to the point it will cover all my expenses when I retire in a few years at age 55 so there will be little SORR issues (unless there is some extreme event). So the 403/457/Roth accounts will be rarely touched if at all.

If stocks always outperform bonds in the long term, given my situation, what is the purpose of owning *any* bonds in my 403/457/Roth accounts?

The way I see it our pension is effectively a perfectly behaved bond that pays out a yield each year adjusted for inflation with the NAV never decreasing so why hold more of them?
Last edited by MrCheapo on Fri Jun 02, 2023 10:22 am, edited 2 times in total.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Call_Me_Op »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am I'm rethinking if I should own *any* bonds in my AA. Right now I'm at 20% bonds.

However, my anticipated pension (COLA adjusted with full rights of survivorship) was recently increased to the point it will cover all my expenses when I retire in a few years at age 55 so there will be little SORR issues (unless there is some extreme event).

If stocks always outperform bonds in the long term, given my situation, what is the purpose of owning *any* bonds?

The way I see it our pension is effectively a perfectly behaved bond that pays out a yield each year adjusted for inflation with the NAV never decreasing so why hold more of them?
Is your pension perfectly safe (i.e., guaranteed by federal government)?

By the way, there is no guarantee that stocks will outperform bonds over any time period.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by alex_686 »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am I'm rethinking if I should o
If stocks always outperform bonds in the long term, given my situation, what is the purpose of owning *any* bonds?
Yes, stocks outperform bonds in the long run. To extend, we are all dead in the long run. Hopefully you won’t need any cash during the short run of the next 10 to 20 years.

To rephrase, you are saying that you can take on unlimited risk. Are you sure?

On a more practical note, having bonds lowers annual returns and lowers volatility. Lower volatility increases geometric returns. Depending on market conditions this can lead to actual higher returns.

Lastly. I would treat pensions as a bond-like asset.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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MrCheapo
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

Call_Me_Op wrote: Fri Jun 02, 2023 10:07 am Is your pension perfectly safe (i.e., guaranteed by federal government)?

By the way, there is no guarantee that stocks will outperform bonds over any time period.
Not a federal government, but a CA government agency/unit which is well managed. If it helps, the annual 2022 report said the pension scheme was 80+% funded.

Also, I meant on a 10+ year horizon stocks in the last 50 years have outperformed bonds as I see it from charts.
Last edited by MrCheapo on Fri Jun 02, 2023 10:27 am, edited 1 time in total.
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BrooklynInvest
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by BrooklynInvest »

Great question. Your guaranteed income "floor" is where it needs to be. I'd argue for a reduced need for bonds in your supplemental portfolio. The issue would be the degree to which fluctuations in a stock-only portfolio might impact your lifestyle.

If the stock market goes down 40% are you putting vacations, gifts, home renovations etc. on hold that you'd rather not? If so, then perhaps the answer is 70-30 or 80-20 and not 100-0?

Good luck OP - and well done!
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by dbr »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am I'm rethinking if I should own *any* bonds in my AA. Right now I'm at 20% bonds.
20% bonds and 0% bonds are not hugely different asset allocations. For all practical purposes you don't have any bonds now depending on how you make use of them. At 25% bonds you start to see some significance in the holding. At 50% it matters for sure.

Note a pension is not a bond. This does not mean that the existence of a pension may not allow you to hold little in bonds in your portfolio.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by the_wiki »

I'm in the same boat as I will have a pretty solid govt pension.

Two ways of looking at it.

1)You can afford the risk as your pension is your backup plan if stocks plunge at the wrong times or have a bad run.

2) You don't need the risk because your pension will cover you if average returns are lower due to a safer portfolio

I thought I was more #1, and really was until recently. But now I'm getting older, we've had some crazy volatile years, and it's really been stressing me out. I'm slowly moving more towards #2
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by dbr »

The thought process of need, ability, and willingness to take risk should continue to work. This is not a formula but a consideration of plans and consequences. In a case of low need and high ability a person can still think through what kind of financial world they want to live in. Objectives can also be re-evaluated. If one needs a tie breaker Swedroe has suggested that risk can be underestimated and ability overestimated, so one takes that into consideration to take no more risk than necessary. In the end you pay your price and take your choice.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

the_wiki wrote: Fri Jun 02, 2023 10:42 am I'm in the same boat as I will have a pretty solid govt pension.

Two ways of looking at it.

1)You can afford the risk as your pension is your backup plan if stocks plunge at the wrong times or have a bad run.

2) You don't need the risk because your pension will cover you if average returns are lower due to a safer portfolio

I thought I was more #1, and really was until recently. But now I'm getting older, we've had some crazy volatile years, and it's really been stressing me out. I'm slowly moving more towards #2
Is yours a federal pension or state pension. One risk I see is my state agency pension faulters. CA is such a boom bust economy that could occur though my agency has been around for 100 years.
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MrCheapo
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

dbr wrote: Fri Jun 02, 2023 10:38 am 20% bonds and 0% bonds are not hugely different asset allocations. For all practical purposes you don't have any bonds now
Interesting perspective. Regarding your last point, you are saying my return on 80/20 over a long period will be the same as the return for 100/0?
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by dogagility »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am The way I see it our pension is effectively a perfectly behaved bond that pays out a yield each year adjusted for inflation with the NAV never decreasing so why hold more of them?
I agree. I see no need to hold bonds in your situation.
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1moreyr
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by 1moreyr »

I guess there is covering your living expenses and covering your 'living expenses"
There is also the question of the long term goal. I know some have watched it grow for so long they want to see it continue to grow. I would prefer to spend down some as I probably have saved too much so far along the way....dying with the most for me is a fail. for others leaving the legacy is important.

There is money that you need for emergencies, hospital stays, last minute cruise deposit or other grand vacations or that wedding for the daughter you never thought would get married. if your bonds/T bills are liability matched or (if unknown) laddered it becomes a plus for anything you choose to do beyond normal living expenses and supplements the income.

I have found with the spare time in retirement, i am spending and travelling more than i ever did. for me, this is the point. Have you thought through incremental spending or just day to day?

I don't like the idea of selling stocks as they plummet or bonds for that matter. Laddered Tbills /take away some of that risk if you can wait for the next maturity Some will say stocks will grow enough to offset any drop if you need to sell. That is true until they don't

The real question is , what are you trying to do? Do you want to die with the most? leave behind the most? or have a little more available to better enjoy the rest of the ride :sharebeer ??


Is the potential "drag" of 20% in bonds is more painful than the safety of it? or are you retiring needing more than you have and are willing to take more risk so that it gets bigger?

all rhetorical questions, just trying to help you think of other parts than just the historical growth of stocks
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by jimkinny »

the_wiki wrote: Fri Jun 02, 2023 10:42 am I'm in the same boat as I will have a pretty solid govt pension.

Two ways of looking at it.

1)You can afford the risk as your pension is your backup plan if stocks plunge at the wrong times or have a bad run.

2) You don't need the risk because your pension will cover you if average returns are lower due to a safer portfolio

I thought I was more #1, and really was until recently. But now I'm getting older, we've had some crazy volatile years, and it's really been stressing me out. I'm slowly moving more towards #2
Well put
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by ruralavalon »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am I'm rethinking if I should own *any* bonds in my AA. Right now I'm at 20% bonds.

However, my anticipated pension (COLA adjusted with full rights of survivorship) was recently increased to the point it will cover all my expenses when I retire in a few years at age 55 so there will be little SORR issues (unless there is some extreme event). So the 403/457/Roth accounts will be rarely touched if at all.

If stocks always outperform bonds in the long term, given my situation, what is the purpose of owning *any* bonds in my 403/457/Roth accounts?

The way I see it our pension is effectively a perfectly behaved bond that pays out a yield each year adjusted for inflation with the NAV never decreasing so why hold more of them?
A pension is not a bond, and is not effectively like a bond.

Asset allocation is a very personal decision which must be based on each individual's own personal ability, willingness and need to take risk.

With a substantial pension covering all or nearly all expected retirement spending, almost any asset allocation might be within the range of what is reasonable.

A pension can increase your ability and willingness to take risk, and can decrease your need to take risk.

But consider the risk that a pension plan may become underfunded and unable to pay the expected benefit. Also consider the risk that your retirement spending needs may turn out to be larger than expected, for example because of permanent disabling injury, or serious continuing illness, or a need for years of long-term care.

Stocks do not always outperform bonds.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by slicendice »

Stick to Ben Graham's advice (written in the midst of a 40 year bond bear market):

Never less than 25% or more than 75% in either stocks or bonds. How about 75:25 stocks:TIPS.

Even if your pension is COLA'd its likely that the COLA is based on a formula related to CPI but under certain conditions (such as we have experienced the last 2 years) ends up being less than CPI. Dig into the fine print on the COLA adjustment. Is it a vested benefit or can it be suspended if the state runs into adverse circumstances, do same for retirement healthcare. There is a decent chance you will be partially reliant on the portfolio at some point, and stocks have been known to have a stinker decade every now and then.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Sagenick48 »

Bonds/cash are like anchors, they hold you back when times are good, and hold you in place when times are bad (yeah, I know we recently had an exception to that).

You should hold enough bonds/cash so you don’t worry about your AA affecting your life. (I can’t remember, is it affecting or effecting?).
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by rgs92 »

The problem is that the state pension may be well-funded and safe, but the COLA adjustment may not be secure. For instance, in NJ, inflation adjustments were permanently terminated several years ago for everyone, so the pension became fixed, a big problem, of course.

So I would have a portfolio with a moderate asset allocation, like 60/40 in a 3-fund form, so you are on the efficient frontier.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Ron Ronnerson »

I’m at about 20% bonds and also expecting a California pension that will fully cover retirement expenses. I keep some bonds to help lower volatility while (hopefully) not giving up too much in returns. I also do it for the sake of diversity since bonds could outperform stocks over a given period of time and my lifespan is finite.

I don’t think it would be a big deal to go with 100% equities but you’ll quite possibly be giving up the peace of mind that comes with lower volatility in exchange for returns that aren’t astoundingly higher over a period as short as a few decades. Now if people lived to age 200 or something…

Also, there is the emotional factor that can come into play with us humans. Seeing a large portfolio decimated shortly after retiring can potentially result in poor decision-making at that time and, at the very least, cause heartache. If you’re willing to accept all that for a very good chance to get higher returns over the long-term, go for it.

I’d frame it this way: Is your goal to optimize or maximize?
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Stinky »

MrCheapo wrote: Fri Jun 02, 2023 1:14 pm One risk I see is my state agency pension faulters. CA is such a boom bust economy that could occur though my agency has been around for 100 years.
Is your state agency pension fully funded by revenues generated by your state agency? And does your pension plan stand alone, not linked to the pensions provided by other California state agencies?

If the answer to either question is "no", then your pension likely has some risk that the terms could be changed going forward by actions of your state government outside of your state agency.

Many private pension plans have been modified for new hires, or for new benefit accruals for existing employees. You might feel that such a risk is less in your government pension plan, but it's still there.

I'd suggest that you hold off on changing your personal asset allocation until you're further down the road and your pension benefits are more fully accrued. Maybe wait until you actually retire.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by dbr »

MrCheapo wrote: Fri Jun 02, 2023 2:23 pm
dbr wrote: Fri Jun 02, 2023 10:38 am 20% bonds and 0% bonds are not hugely different asset allocations. For all practical purposes you don't have any bonds now
Interesting perspective. Regarding your last point, you are saying my return on 80/20 over a long period will be the same as the return for 100/0?
The statistical distributions of possible outcomes overlap so much that as a practical proposition the holdings are the same. To state that the return is the "same" is a statement that is too simple without more characterization of investment behavior. For example you can go here https://engaging-data.com/visualizing-4-rule/ change around the asset allocations and compare the historical ranges of outcomes for different asset allocations. You can then decide on the implications of how different allocations have behaved in the past for what range of uncertainty to assign to your own future prospects.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by goingup »

Jack Bogle once described holding bonds as having an anchor to windward. Which is "a figurative expression, signifying to adopt precautionary or anticipatory measures for success or security", according to the Free Dictionary.

More colorfully, the Sag Harbor Historical Society writes, "Mooring during threatening winds, experienced sailors cast an anchor to windward - the direction from which the wind is coming - in order to hold fast and keep from being dashed and destroyed upon the shore."

We started holding bonds in a meaningful way in our late 40's. That was so our portfolio might only crater 30% rather than 50%. :shock:
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Outer Marker »

On the one hand, you have more ability to take risk.

On the other hand, you have less need to take risk.

I'd say the two cancel each other out and ignore the pension in deciding your AA.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by pandersfishy »

We are very happy with COLA pension, Social Security, and 100% stocks. We can live very nicely on pension and social security...whatever we get from the stock market goes up and down each year, but it is for extras. It works well for us. Because of my very secure pension in my career, we never owned bonds, and never felt the need to own bonds. Been through plenty of down (and up) markets...just waited them out.

Just one more data point.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by gotoparks »

I don't think it makes a huge difference being 80/20 or 100 stocks. I am 85/15 and will have a federal pension plus SS when I retire. If volatility doesn't bother you then it really doesn't matter.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by zie »

You and I are basically in the same boat then. What is all this extra money for then? If you probably won't need it, what are you going to do with it?

If you don't have an answer for that, then I think you should get some planning going on.

If you DO have an answer for that, then you should invest for that purpose, whatever it is. If it's for your heir(s) and you think you will live another 30+ years, then sure, 100% equities would be reasonable. So would 80%.

There is NO guarantee that stocks will out-perform bonds over the long run, there have been decades long periods where bonds have handily beat equities.

Personally I really dislike the pensions are bonds argument, it just doesn't make any sense. That's like saying Social Security is a bond. It's not, it's an income stream, much more like your pay check than a bond. You effectively have zero control over your SS or pension payments. You can sell your bonds early if you need to. You can not arbitrarily adjust your pension/SS payments next month or even next year if you needed to. Your pension/SS provider will never give you your check early if you needed it for some reason.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by gavinsiu »

As other posters point out, having a pension may grant you flexibility to invest in accordance to your personality. If you can live just on your ss and pension or is at least willing to stop withdraws during the lean years, you can invest in more stock. This also mean you can do the reverse and take little or no risk if you are so incline.

For those who would depend on their portfolio and can’t make ends meet without it, a 100% stock would be a bad idea.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by iim7V7IM7 »

A couple thoughts…

If I look at our retirement income sources at a high level in terms of risks and what percentage the contribute I see the following:

Income Source——-Sequence Risk—-Inflation Risk—-Longevity Risk——% of Income
Portfolio————————Yes————————Yes————-———-Yes—————-———48%
Pension———————-—-No————————Yes—————-———No————————-23%
Social Security————-No———————-—No——————-——No—————————29%

Only Social Security is insulated from the three primary risks during retirement.

My pension is a company pension and is a nominal, 100% joint survivor pension. It is not exposed to sequence or longevity risk, but exposed to inflation risk across retirement. My portfolio needs to address that risk by setting aside assets to supplement the pension across time.

Looking at the portfolio, the function of bonds is in alignment with willingness to withstand market loss. There presence also minimizes the impact of reverse dollar cost averaging when distributing our assets allowing equities longer periods to grow. I also believe that distribution portfolios behave differently from accumulation portfolios and the added variability of equities in too great of an allocation can reduce one’s probability of success. The percentage of bonds becomes more important the higher one’s withdrawal rate.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by suemarkp »

You could add another column -- funding risk. Both pensions and SS could be under funded giving you a haircut from what you expected. Your portfolio could also be under funded, but you have more control over that one with withdraw rate and asset allocation.

For the OP's question, I think you could go 100% stocks if you have a solution for lumpy expenses (e.g. a new roof, car replacement, harm caused to you by others where the $ recovery takes years or just isn't there,...). That money could be in cash or bonds. I lump cash and bonds together and change the weighting based on rates and anticipated need date.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by ruralavalon »

suemarkp wrote: Sun Jun 04, 2023 1:18 pm
. . . . .

For the OP's question, I think you could go 100% stocks if you have a solution for lumpy expenses (e.g. a new roof, car replacement, harm caused to you by others where the $ recovery takes years or just isn't there,...). That money could be in cash or bonds. I lump cash and bonds together and change the weighting based on rates and anticipated need date.
That is saying that 100% in stocks is okay if you don't really have 100% in stocks.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by suemarkp »

ruralavalon wrote: Sun Jun 04, 2023 1:41 pm
suemarkp wrote: Sun Jun 04, 2023 1:18 pm
. . . . .

For the OP's question, I think you could go 100% stocks if you have a solution for lumpy expenses (e.g. a new roof, car replacement, harm caused to you by others where the $ recovery takes years or just isn't there,...). That money could be in cash or bonds. I lump cash and bonds together and change the weighting based on rates and anticipated need date.
That is saying that 100% in stocks is okay if you don't really have 100% in stocks.
But it is a fixed amount versus some fixed percentage of asset allocation -- it could end up being 1% or 50%. I don't count my checkbook as part of my asset allocation. I don't count my gold. I don't count my pensions either. What is and isn't counted in asset allocation can vary.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by watchnerd »

Sometimes bonds do better than stocks.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

iim7V7IM7 wrote: Sun Jun 04, 2023 7:28 am A couple thoughts…

If I look at our retirement income sources at a high level in terms of risks and what percentage the contribute I see the following:

Income Source——-Sequence Risk—-Inflation Risk—-Longevity Risk——% of Income
Portfolio————————Yes————————Yes————-———-Yes—————-———48%
Pension———————-—-No————————Yes—————-———No————————-23%
Social Security————-No———————-—No——————-——No—————————29%

Only Social Security is insulated from the three primary risks during retirement.

My pension is a company pension and is a nominal, 100% joint survivor pension. It is not exposed to sequence or longevity risk, but exposed to inflation risk across retirement. My portfolio needs to address that risk by setting aside assets to supplement the pension across time.

Looking at the portfolio, the function of bonds is in alignment with willingness to withstand market loss. There presence also minimizes the impact of reverse dollar cost averaging when distributing our assets allowing equities longer periods to grow. I also believe that distribution portfolios behave differently from accumulation portfolios and the added variability of equities in too great of an allocation can reduce one’s probability of success. The percentage of bonds becomes more important the higher one’s withdrawal rate.
Thanks the three types of risk are nice. Why do you say your pension has no longetivity risk? Is because it is a federal pension? Mine is from CA, but it is only 84% funded so there is a chance of longevity risk.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by zie »

MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
Over a 10yr time frame there is a 65.0% chance stocks win over bonds. Over 50 years it's a 68.4% chance.

According to this paper(Table 1 page 6): McQuarrie, Edward F., Stocks for the Long Run? Sometimes Yes. Sometimes No. (July 23, 2021). Available at SSRN: https://ssrn.com/abstract=3805927 or http://dx.doi.org/10.2139/ssrn.3805927
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Admiral »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am I'm rethinking if I should own *any* bonds in my AA. Right now I'm at 20% bonds.

However, my anticipated pension (COLA adjusted with full rights of survivorship) was recently increased to the point it will cover all my expenses when I retire in a few years at age 55 so there will be little SORR issues (unless there is some extreme event). So the 403/457/Roth accounts will be rarely touched if at all.

If stocks always outperform bonds in the long term, given my situation, what is the purpose of owning *any* bonds in my 403/457/Roth accounts?

The way I see it our pension is effectively a perfectly behaved bond that pays out a yield each year adjusted for inflation with the NAV never decreasing so why hold more of them?
If you don't need the performance of either stocks or bonds--since you state your pension will cover your expenses--then why do you care if stocks do or do not outperform bonds? Or vice versa? You should not be holding bonds for their outsize market performance but as ballast during market turbulence and to maintain some base level of spending cash for x number of years. So why chase yield? Does it have to be bonds? No. You could hold some other fixed income which also, over long periods, will likely lag the return of stocks.

There's no rule that you must hold bonds, or any fixed income whatsoever. But it's best to be clear on why fixed income is held in the first place.
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ruralavalon
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by ruralavalon »

MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
And sometimes very similar outcomes are expected.
Morningstar wrote:In Vanguard’s most recent update of its asset-class forecasts, it estimated that a core bond portfolio—as measured by the firm through the Bloomberg U.S. Aggregate Bond Index—would return 3.6%-4.6% a year over the next 10 years. . . .
. . . . .
. . . on U.S. stocks . . . The most recent forecast is for returns of 4.1%-6.1% per year.
Source
Vanguard summary
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Admiral
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Admiral »

ruralavalon wrote: Mon Jun 05, 2023 3:01 pm
MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
And sometimes very similar outcomes are expected.
Morningstar wrote:In Vanguard’s most recent update of its asset-class forecasts, it estimated that a core bond portfolio—as measured by the firm through the Bloomberg U.S. Aggregate Bond Index—would return 3.6%-4.6% a year over the next 10 years. . . .
. . . . .
. . . on U.S. stocks . . . The most recent forecast is for returns of 4.1%-6.1% per year.
Source
Vanguard summary
Does anyone (here on this board or anywhere else) really believe that asset management companies can accurately predict the stock market over ten year periods?
iim7V7IM7
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by iim7V7IM7 »

Perhaps I have overstated “no risk”. I would call it “low risk” because:

- It is a well funded private pension of a large pharmaceutical company
- The nominal pension benefit is 100% joint survivor
- The monthly benefit is less that the Pension Benefit Guarantee Corporation maximum monthly benefit so it is insured by the Federal Government

Image

Image

MrCheapo wrote: Mon Jun 05, 2023 11:13 am
iim7V7IM7 wrote: Sun Jun 04, 2023 7:28 am A couple thoughts…

If I look at our retirement income sources at a high level in terms of risks and what percentage the contribute I see the following:

Income Source——-Sequence Risk—-Inflation Risk—-Longevity Risk——% of Income
Portfolio————————Yes————————Yes————-———-Yes—————-———48%
Pension———————-—-No————————Yes—————-———No————————-23%
Social Security————-No———————-—No——————-——No—————————29%

Only Social Security is insulated from the three primary risks during retirement.

My pension is a company pension and is a nominal, 100% joint survivor pension. It is not exposed to sequence or longevity risk, but exposed to inflation risk across retirement. My portfolio needs to address that risk by setting aside assets to supplement the pension across time.

Looking at the portfolio, the function of bonds is in alignment with willingness to withstand market loss. There presence also minimizes the impact of reverse dollar cost averaging when distributing our assets allowing equities longer periods to grow. I also believe that distribution portfolios behave differently from accumulation portfolios and the added variability of equities in too great of an allocation can reduce one’s probability of success. The percentage of bonds becomes more important the higher one’s withdrawal rate.
Thanks the three types of risk are nice. Why do you say your pension has no longetivity risk? Is because it is a federal pension? Mine is from CA, but it is only 84% funded so there is a chance of longevity risk.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by KlangFool »

MrCheapo wrote: Fri Jun 02, 2023 10:05 am
If stocks always outperform bonds in the long term,
MrCheapo,

What is your definition of long term? 20 years? 30 Years?

Can you guaranteed that the portfolio will not be used in 20 years?

KlangFool
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ruralavalon
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by ruralavalon »

Admiral wrote: Mon Jun 05, 2023 3:29 pm
ruralavalon wrote: Mon Jun 05, 2023 3:01 pm
MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
And sometimes very similar outcomes are expected.
Morningstar wrote:In Vanguard’s most recent update of its asset-class forecasts, it estimated that a core bond portfolio—as measured by the firm through the Bloomberg U.S. Aggregate Bond Index—would return 3.6%-4.6% a year over the next 10 years. . . .
. . . . .
. . . on U.S. stocks . . . The most recent forecast is for returns of 4.1%-6.1% per year.
Source
Vanguard summary
Does anyone (here on this board or anywhere else) really believe that asset management companies can accurately predict the stock market over ten year periods?
The point is that OPs premise ("If stocks always outperform bonds in the long term") is incorrect.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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grabiner
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by grabiner »

The purpose of holding bonds is to reduce the risk, and the pension does the same thing.

Suppose that you are planning to generate $80K per year from your portfolio. The year you retire, your portfolio is 50% stock. If the stock market loses half its value, you have lost 25% of your portfolio, and you can now get only $60K, so you have a 25% decline in your standard of living.

But suppose you instead plan to retire on $80K per year, but $40K per year is coming from a pension or annuity. You now take on the same risk as above if your portfolio is 100% stock; if the portfolio loses half its value, you can still retire on $60K.

(Note: most withdrawal models assume withdrawals growing with inflation. If your pension is not inflation-adjusted, then it is not replacing half your retirement needs even if it covers half your income in the first year.)

In the OP's example, the pension will cover all the retirement expenses. This means that their portfolio is not needed during their own retirement. Instead, it is invested for their children's retirement, and their grandchildren's and great-grandchildren's college funds; since these are all far in the future, 100% stock is reasonable.
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MrCheapo
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by MrCheapo »

KlangFool wrote: Mon Jun 05, 2023 6:50 pm
MrCheapo wrote: Fri Jun 02, 2023 10:05 am
If stocks always outperform bonds in the long term,
MrCheapo,

What is your definition of long term? 20 years? 30 Years?

Can you guaranteed that the portfolio will not be used in 20 years?

KlangFool
The only way I'd touch this portfolio is if I need it for LTC which is going to be in 20+ years at the earliest.
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by KlangFool »

MrCheapo wrote: Mon Jun 05, 2023 10:29 pm
KlangFool wrote: Mon Jun 05, 2023 6:50 pm
MrCheapo wrote: Fri Jun 02, 2023 10:05 am
If stocks always outperform bonds in the long term,
MrCheapo,

What is your definition of long term? 20 years? 30 Years?

Can you guaranteed that the portfolio will not be used in 20 years?

KlangFool
The only way I'd touch this portfolio is if I need it for LTC which is going to be in 20+ years at the earliest.
Can you predict how long you are going to live?

Unless you can predict your future, how do you know that you don't need LTC earlier?

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watchnerd
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by watchnerd »

MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
In the past, have been a few decades where bonds have outperformed stocks.

2001-2009 was one of them.

Bonds crushed stocks during the lost decade:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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watchnerd
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by watchnerd »

MrCheapo wrote: Mon Jun 05, 2023 11:19 am
watchnerd wrote: Sun Jun 04, 2023 5:54 pm Sometimes bonds do better than stocks.
Of course, some times, but in the long term (think 10+ years) are bonds likely to out-perform a broad based index fund like SP500?
Here is another one, a 30 year period where stocks underperformed bonds:
The popular belief that there’s never been a 30-year period in which stocks had lower returns than bonds is false. As recently as 2011, bonds had earned higher returns than stocks over the prior 30 years (long-term Treasury bonds, 10.7% annually; U.S. stocks, 10.4%).
https://www.wsj.com/articles/sometimes- ... 1541176880

Your original premise:

"If stocks always outperform bonds in the long term"

is incorrect.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Scubadude
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Scubadude »

Stinky wrote: Sat Jun 03, 2023 6:56 am
MrCheapo wrote: Fri Jun 02, 2023 1:14 pm One risk I see is my state agency pension faulters. CA is such a boom bust economy that could occur though my agency has been around for 100 years.
Is your state agency pension fully funded by revenues generated by your state agency? And does your pension plan stand alone, not linked to the pensions provided by other California state agencies?

If the answer to either question is "no", then your pension likely has some risk that the terms could be changed going forward by actions of your state government outside of your state agency.

Many private pension plans have been modified for new hires, or for new benefit accruals for existing employees. You might feel that such a risk is less in your government pension plan, but it's still there.

I'd suggest that you hold off on changing your personal asset allocation until you're further down the road and your pension benefits are more fully accrued. Maybe wait until you actually retire.
It’s a mistake to compare state pensions (public) to private pensions- completely different set of dynamics. Public pensions are extremely influential in local politics and have many -many different funding mechanisms based upon political alignment. My state just added 600 million to my public pension plan - 100% based upon current political parties in office. I was just notified that I’ll be receiving 10 years worth of back compensation due to “too small” of COLAS -
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ruralavalon
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by ruralavalon »

MrCheapo wrote: Mon Jun 05, 2023 10:29 pm
KlangFool wrote: Mon Jun 05, 2023 6:50 pm
MrCheapo wrote: Fri Jun 02, 2023 10:05 am
If stocks always outperform bonds in the long term,
MrCheapo,

What is your definition of long term? 20 years? 30 Years?

Can you guaranteed that the portfolio will not be used in 20 years?

KlangFool
The only way I'd touch this portfolio is if I need it for LTC which is going to be in 20+ years at the earliest.
The need for long-term care is an unknown, and can be a huge cost if eventually needed. Long-term care is the biggest uncertainty in retirement planning. This is a major issue, not a minor concern.

70% of people turning age 65 who will need some type of long-term-care services in their lifetimes. 15% of people turning age 65 who will spend more than two years in a nursing home.

$105,850: Median annual nursing-home cost, private room, 2020. $142,254: Expected median annual nursing-home cost, private room, 2030 (assuming 3% inflation rate). $256,926: Expected median annual nursing-home cost, private room, 2050 (assuming 3% inflation rate).

Source

Further nearly half of retirees say that they retired vearlier than expected. Of those 60% retired earlier than expected because of reasons like health or disability, need to care for a relative, downsizing, closures, skills no longer matching job requirements, etc.

Source
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Stinky
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Stinky »

Scubadude wrote: Tue Jun 06, 2023 6:36 am
It’s a mistake to compare state pensions (public) to private pensions- completely different set of dynamics. Public pensions are extremely influential in local politics and have many -many different funding mechanisms based upon political alignment. My state just added 600 million to my public pension plan - 100% based upon current political parties in office. I was just notified that I’ll be receiving 10 years worth of back compensation due to “too small” of COLAS -
You may be completely correct.

But one could have made generally similar comments about the security of corporate defined benefit plans about 30-40 years ago. And look at what’s happened since that time.

If I were actively employed by a governmental entity that has a defined benefit plan, I’d feel pretty secure in being able to continue to accrue benefits until I retire. But I wouldn’t be fully confident, because things can always change.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Purpose of Bonds in AA, Particularly if you have a decent pension?

Post by Scubadude »

Stinky wrote: Tue Jun 06, 2023 8:58 am
Scubadude wrote: Tue Jun 06, 2023 6:36 am
It’s a mistake to compare state pensions (public) to private pensions- completely different set of dynamics. Public pensions are extremely influential in local politics and have many -many different funding mechanisms based upon political alignment. My state just added 600 million to my public pension plan - 100% based upon current political parties in office. I was just notified that I’ll be receiving 10 years worth of back compensation due to “too small” of COLAS -
You may be completely correct.

But one could have made generally similar comments about the security of corporate defined benefit plans about 30-40 years ago. And look at what’s happened since that time.

If I were actively employed by a governmental entity that has a defined benefit plan, I’d feel pretty secure in being able to continue to accrue benefits until I retire. But I wouldn’t be fully confident, because things can always change.
Its shocking actually - Public pension have little (any?) independent oversight.

https://minnesotareformer.com/briefs/bi ... 0to%207%25.
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