Author Topic: After Retirement, why not invest mostly in bonds?  (Read 4815 times)

LongBeachLion

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After Retirement, why not invest mostly in bonds?
« on: February 08, 2014, 06:00:27 PM »
I'm currently close to FIRE.  I do not like my job, but make a good income and am trying to hang on for a little longer.

Currently, I invest most of my money in Vanguard with an 80/20 stock to bond ratio.  As most people have enjoyed, there's been a great return over the last few years, but I've grown a little worried after the strong gains.  I am still relatively young and can deal with some ups and downs, but I was doing some research and thought a higher percentage of bonds may be the answer. 

My current portfolio returns 2.5% in dividends.  This would fund almost half of my expenses, after taxes.

Theoretically, if I invested in some high yield bond funds, I could increase dividend returns to over 4%.  This would allow me to fund more of their expenses through dividends.

Wouldn't this allow one to be less concerned once they decided to retire?

arebelspy

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Re: After Retirement, why not invest mostly in bonds?
« Reply #1 on: February 08, 2014, 06:49:18 PM »
What happens if inflation hits double digits?

Essentially that's your answer: stocks provide enough of a return to last you a long time (give you a 4% real return - you're apparently searching for a 4% nominal return, meaning your stache won't grow to cover inflation, meaning your purchasing power will decline in real terms)

Go run your proposed scenario through www.cfiresim.com to see how your idea would have fared historically.
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Dicey

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Re: After Retirement, why not invest mostly in bonds?
« Reply #2 on: February 08, 2014, 07:04:55 PM »
LOL ARS, you beat me to it. Great response. The bond run has been so long that people have forgotten that bond prices fall when interest rates rise.

foobar

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Re: After Retirement, why not invest mostly in bonds?
« Reply #3 on: February 08, 2014, 07:46:34 PM »
You don't need double digit inflation. You just need the standard 3%.  When you need to suck out 80k in 25 years in order to have the same living standard as today at 40k, you better have doubled your portfolio or your going to drain it pretty quickly. If your 65, going all bonds might make sense as realistically you only need your money to last ~20 years. That is a lot different than the 40 year old looking for 45 years (i.e towards the end you going to be sucking out close to 160k/yr)

Now this approach might be interesting if you could get a TIP or Ibond with a 4% yield+inflation, it might be an interesting strategy. I would be a bit concerned that the inflation adjustment doesn't match real/my inflation rate.

What happens if inflation hits double digits?

Essentially that's your answer: stocks provide enough of a return to last you a long time (give you a 4% real return - you're apparently searching for a 4% nominal return, meaning your stache won't grow to cover inflation, meaning your purchasing power will decline in real terms)

Go run your proposed scenario through www.cfiresim.com to see how your idea would have fared historically.

Nords

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Re: After Retirement, why not invest mostly in bonds?
« Reply #4 on: February 09, 2014, 09:08:49 AM »
Wouldn't this allow one to be less concerned once they decided to retire?
Risk of inflation.
Lack of diversification.
Lack of knowledge --> fear, anxiety, paranoia --> selling at the bottom of the market (or buying at the top).

My parents-in-law have been following an "100% CD" strategy since the early 2000s.  Today they're pushing 80 years old but their genes could lift them past 100.  Their portfolio has not kept up with inflation, so they're shrinking their spending down to within their Social Security benefits.  It's not pretty.

arebelspy

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Re: After Retirement, why not invest mostly in bonds?
« Reply #5 on: February 09, 2014, 09:45:18 AM »
Wouldn't this allow one to be less concerned once they decided to retire?
Risk of inflation.
Lack of diversification.
Lack of knowledge --> fear, anxiety, paranoia --> selling at the bottom of the market (or buying at the top).

My parents-in-law have been following an "100% CD" strategy since the early 2000s.  Today they're pushing 80 years old but their genes could lift them past 100.  Their portfolio has not kept up with inflation, so they're shrinking their spending down to within their Social Security benefits.  It's not pretty.

Ugh.  Sorry Nords.

And that's only after a decade or so.  Imagine if they do make it two more.

Hope that answers the OP's question.  :)

I think a COLA'd annuity (if you can find a reasonable one) is the best way to go if you can't ride out the low times.  You'll give up a lot of upside, and limit yourself to a lower annual spending than you might otherwise, but it's better than going broke (assuming the insurance company itself doesn't).
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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Tyler

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Re: After Retirement, why not invest mostly in bonds?
« Reply #6 on: February 09, 2014, 10:39:53 AM »
The biggest problems with the idea are:

1) 4% won't cover inflation in addition to the interest you're living on.
2) "High yield" is Wall Street code for "high risk of default".

That said, I similarly would not recommend 100% stocks, and bonds are a great addition to a diversified portfolio.  Read up on asset allocation, and perhaps even study how very good income funds like VWINX do what they do.

LongBeachLion

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Re: After Retirement, why not invest mostly in bonds?
« Reply #7 on: February 09, 2014, 03:20:27 PM »
Wouldn't this allow one to be less concerned once they decided to retire?
Risk of inflation.
Lack of diversification.
Lack of knowledge --> fear, anxiety, paranoia --> selling at the bottom of the market (or buying at the top).

My parents-in-law have been following an "100% CD" strategy since the early 2000s.  Today they're pushing 80 years old but their genes could lift them past 100.  Their portfolio has not kept up with inflation, so they're shrinking their spending down to within their Social Security benefits.  It's not pretty.

Ugh.  Sorry Nords.

And that's only after a decade or so.  Imagine if they do make it two more.

Hope that answers the OP's question.  :)

I think a COLA'd annuity (if you can find a reasonable one) is the best way to go if you can't ride out the low times.  You'll give up a lot of upside, and limit yourself to a lower annual spending than you might otherwise, but it's better than going broke (assuming the insurance company itself doesn't).

This definitely answers my question.  Thanks a lot for the responses!  I guess I still need to work a little longer, haha.  With that said, I don't think my expenses will increase at the same pace as inflation, similar to most on this website.  If inflation is 3% and my current expenses are $50,000/year, I highly doubt I'm going to need $100,000/year in 25 years.  Point still taken and I will continue on my current path. 

mxt0133

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Re: After Retirement, why not invest mostly in bonds?
« Reply #8 on: February 09, 2014, 04:03:54 PM »
I'm in a pretty similar position as my current expenses are about $45k a year, however they were much higher before and have been coming down slowly but surely.  I have been able to lower my expenses while growing our family, two boys 3 and 1 years old. 

You say that you do not like your job but will work longer because your expenses are X amount.  Why not get them down, lowering expenses does not mean lowering your standard of living.  For me it's just learning new skills and implementing them.  Another thing to consider is your expense can go down once you actually stop working, less commute, eating, required clothes, more time to do things yourself instead of paying someone else to do them. 

What do you plan to do when you retire?  I myself can't imagine doing absolutely nothing, I intend to be somewhat productive and earn 20-30% of my expenses.  So if you really do not like your job as much I do, and want to spend more time with family.  There are other ways to retire early than just working longer so your stash covers your current expenses.

Good luck!

arebelspy

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Re: After Retirement, why not invest mostly in bonds?
« Reply #9 on: February 09, 2014, 05:06:51 PM »
What do you plan to do when you retire?  I myself can't imagine doing absolutely nothing, I intend to be somewhat productive and earn 20-30% of my expenses.  So if you really do not like your job as much I do, and want to spend more time with family.  There are other ways to retire early than just working longer so your stash covers your current expenses.

I don't intend to do absolutely nothing either, but I also don't want to count on getting paid for the stuff that I do do.  So I'm planning to have all of my expenses covered, and then any money I do make will be an extra bonus to the charitable giving part of my budget.

I hate to FIRE with not enough, counting on making some side income, and have that not work out. But I can see why others do that.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

ShortInSeattle

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Re: After Retirement, why not invest mostly in bonds?
« Reply #10 on: February 09, 2014, 05:39:07 PM »
There is a lot of middle ground between 20% bonds and 100% bonds. Perhaps your asset allocation is somewhere in the middle? I recommend Rick Ferri's book "All About Asset Allocation" to help you make an informed choice.

Just to provide you with one example, my portfolio is at 65/35.  I don't see myself ever dropping below 50% equities for the reasons others mentioned.


simonsez

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Re: After Retirement, why not invest mostly in bonds?
« Reply #11 on: February 10, 2014, 09:23:20 AM »
If inflation is 3% and my current expenses are $50,000/year, I highly doubt I'm going to need $100,000/year in 25 years.  Point still taken and I will continue on my current path.

Is this because you think your expenses are going to decrease ceteris paribus?  Or is it because you think 50k/yr @3%/yr for 25 years is still less than 100k 25 years from now?  If the latter, Rule of 72 says 50k/yr would double to 100k/yr after about 24 years (23.45). So you would need a little MORE than 100k/yr in 25 years if inflation is 3% to equal your 50k in expenses now.

LongBeachLion

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Re: After Retirement, why not invest mostly in bonds?
« Reply #12 on: February 10, 2014, 06:34:03 PM »
I'm in a pretty similar position as my current expenses are about $45k a year, however they were much higher before and have been coming down slowly but surely.  I have been able to lower my expenses while growing our family, two boys 3 and 1 years old. 

You say that you do not like your job but will work longer because your expenses are X amount.  Why not get them down, lowering expenses does not mean lowering your standard of living.  For me it's just learning new skills and implementing them.  Another thing to consider is your expense can go down once you actually stop working, less commute, eating, required clothes, more time to do things yourself instead of paying someone else to do them. 

What do you plan to do when you retire?  I myself can't imagine doing absolutely nothing, I intend to be somewhat productive and earn 20-30% of my expenses.  So if you really do not like your job as much I do, and want to spend more time with family.  There are other ways to retire early than just working longer so your stash covers your current expenses.

Good luck!

I live in a great apartment in Long Beach.  Huge balcony, walkable to the water and lots of restaurants.  My wife and I love where we live, the weather is awesome, but it's $2500/month.  I'm kind of embarassed to even admit that expense on this board. 

Moving to this area gave me a huge increase in salary so we've still saved a great deal over the last year as our other expenses are extremely low.  One car, much of our entertainment is outdoor activities (beach, hiking, etc...).  I have no idea what we'll do when I stop working, but there's a lot of savings that I could make in rent.  If we moved back to where we're from, a great place would go for $1,000 or less although it would be difficult to go back to the cold weather.  Being close to family would be the added bonus.

LongBeachLion

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Re: After Retirement, why not invest mostly in bonds?
« Reply #13 on: February 10, 2014, 06:39:22 PM »
If inflation is 3% and my current expenses are $50,000/year, I highly doubt I'm going to need $100,000/year in 25 years.  Point still taken and I will continue on my current path.

Is this because you think your expenses are going to decrease ceteris paribus?  Or is it because you think 50k/yr @3%/yr for 25 years is still less than 100k 25 years from now?  If the latter, Rule of 72 says 50k/yr would double to 100k/yr after about 24 years (23.45). So you would need a little MORE than 100k/yr in 25 years if inflation is 3% to equal your 50k in expenses now.

It's hard for me to imagine our expenses increasing at the same pace as inflation every year for 24 years to equal 100,000.  Quite frankly, that expense level blows my mind, haha.

LongBeachLion

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Re: After Retirement, why not invest mostly in bonds?
« Reply #14 on: February 10, 2014, 06:41:51 PM »
What do you plan to do when you retire?  I myself can't imagine doing absolutely nothing, I intend to be somewhat productive and earn 20-30% of my expenses.  So if you really do not like your job as much I do, and want to spend more time with family.  There are other ways to retire early than just working longer so your stash covers your current expenses.

I don't intend to do absolutely nothing either, but I also don't want to count on getting paid for the stuff that I do do.  So I'm planning to have all of my expenses covered, and then any money I do make will be an extra bonus to the charitable giving part of my budget.

I hate to FIRE with not enough, counting on making some side income, and have that not work out. But I can see why others do that.

I agree.  If I'm right at the FIRE line and am still making a good income, I'd rather hang on a little longer than rush into retirement.  Some days are better than others and although I want to quit at times, generally, it's still tolerable.