Should retired people with with bond heavy target date retirement funds change?

[RusticBohemian]

Retired people with bond heavy target date funds have been hammered since 2021, even as stocks have done very well, since bond funds have lost a lot of value.

Bond have yet to recover even as the Federal Reserve has cut interest rates, perhaps because taxes are expected to be cut and debt to increase, driving inflation.

Should older retired people get out of bonds? If so, what should they shift to?

[Fru-Gal]

You should not be in target date funds, they are suboptimal and have higher fees. They are sort of an “easy mode” for retirement, but if you have the discipline to stay the course it’s better to be in index funds. You need the discipline because stock index funds will be more volatile and scary at times.

Personally am FIRE and 100% stock index funds (VTSAX/equivalent). T-bills might be an alternative to bonds. If you carry a mortgage, that’s like a bond equivalent with a better return.

[Heckler]

https://investor.vanguard.com/investment-products/etfs/profile/bnd#performance-fees

BND (NAV):
1 year 10.49%   
3 year -2.19%
inception 2.97%

is it bonds or target date funds that haven't recovered?

[RusticBohemian]

Target date funds are full of bond funds when in "fully retired mode."

[RusticBohemian]

You should not be in target date funds, they are suboptimal and have higher fees. They are sort of an “easy mode” for retirement, but if you have the discipline to stay the course it’s better to be in index funds. You need the discipline because stock index funds will be more volatile and scary at times.

Personally am FIRE and 100% stock index funds (VTSAX/equivalent). T-bills might be an alternative to bonds. If you carry a mortgage, that’s like a bond equivalent with a better return.

For me? Yes. For an elderly relative without a lot of risk tolerance, no. They won't tolerate huge swings, but weren't expecting bonds to lose so much value and stay low for so long.

[Heckler]

Should older retired people get out of bonds? If so, what should they shift to?

https://www.bogleheads.org/wiki/Risk_and_return:_an_introduction#Asset_allocation

Sorry, but Asset Allocation needs to be carefully assessed before you're asking this question. 

My 80 y.o mom also asked the same in 2022, and bought GIC's (CD's), and has not participated in the gradual recovery of her high bond allocation.

[Heckler]

https://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/

here's a Canadian take on holding a bond fund for the duration.  It also depends on what the person's "duration" will be.

the key message for investors: as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital.

and if you really want to dig deep:
https://www.bogleheads.org/wiki/Bonds:_advanced_topics#Duration

[RusticBohemian]

What sort of time horizon is there for the bond holdings of a target date fund? If someone is already in retirement and taking mandatory distributions, they're being sold off piecemeal. So how would you approach this?


Which leads us to the key message for investors: as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital.

https://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/

here's a Canadian take on holding a bond fund for the duration.  It also depends on what the person's "duration" will be.

the key message for investors: as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital.

and if you really what to dig deep:
https://www.bogleheads.org/wiki/Bonds:_advanced_topics#Duration

[Heckler]

Consider Total Return (Capital + Income), not just the Capital.  I say make a well diversified plan and stick with it.  If VTWNX was the plan in 2020, it’s not a bad choice for simplicity, global diversity and medium balanced risk level.  However, I am not a financial adviser.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwnx

2022: -14%
2023: +12.5%
YTD: +9%

The Duration of the bonds held within should be able to be found as part of the underlying funds, I wouldn't be surprised to find 8-12 years.  Do they have that long to wait for recovery?  Recall the standard assumption is a 65 yo 2020 retiree will live till ~2035 or beyond.

The point of fixed income is to not experience the -50% short term losses that equity can and will have. 

[Heckler]

https://investor.vanguard.com/tools-calculators/etf-fund-comparison-tool?Ticker=vtwnx,vtbix,vtilx

6 & 7 years Duration for two of the underlying funds (see Fixed Income Characteristics).  I’ll let you try to find VTAPX, please let us know its Duration.

[Heckler]

Seems to me it’s performing exactly as described.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwnx

Risks associated with moderate funds

Vanguard funds classified as moderate are subject to a moderate degree of fluctuations in share prices. This price volatility may be due to one of several factors: 1) a fund may hold longer-term bonds, which are subject to wide swings in value as interest rates rise and fall; 2) a fund may hold income-oriented common stocks; and 3) a fund may hold a balance of both stocks and bonds. In general, such funds are appropriate for investors who have a relatively long investment horizon (more than five years), are able to tolerate moderate-to-high short-term fluctuations in price, and wish to achieve some combination of current income and modest growth potential.

[RusticBohemian]

Helpful. Thanks.

Consider Total Return (Capital + Income), not just the Capital.  I say make a well diversified plan and stick with it.  If VTWNX was the plan in 2020, it’s not a bad choice for simplicity, global diversity and medium balanced risk level.  However, I am not a financial adviser.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwnx

2022: -14%
2023: +12.5%
YTD: +9%

The Duration of the bonds held within should be able to be found as part of the underlying funds, I wouldn't be surprised to find 8-12 years.  Do they have that long to wait for recovery?  Recall the standard assumption is a 65 yo 2020 retiree will live till ~2035 or beyond.

The point of fixed income is to not experience the -50% short term losses that equity can and will have.

[ATtiny85]

Hammered since 2021? That is a really short time. I buy/bought investments for use in ten, twenty, fifty, even seventy years. Not going to worry about three to seven years.

Full disclosure, I am in my last few months of accumulation. My view might change soon.

[MustacheAndaHalf]

You should not be in target date funds, they are suboptimal and have higher fees.

Vanguard Target Retirement funds have only 0.08% expense ratio, which costs 1.6% over 20 years (versus 0.6% for VTI)

Target date funds are full of bond funds when in "fully retired mode."

By "full of bond funds", do you mean 100% full?

Vanguard Target 2020 holds 38% stocks, gradually lowering that towards the 30% stock allocation of Vanguard Target Retirement Income Fund.
https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwnx#portfolio-composition

[Heckler]

it’s better to be in index funds.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwnx

Agreed 100%.   Be aware though this low cost mutual fund is made up entirely of index funds.  So they are already “in index funds”.

@RusticBohemian

It seems a common thread is to understand and write down the individuals IPS, including age and income considerations as well as understanding what they are invested in, and why.  A financial planner could create income, expense and networth longer term projection, including tax implications.

https://www.bogleheads.org/wiki/Investment_policy_statement

[GilesMM]

VBTLX is up over 10% the past year.

[SilentC]

I think target dates are fine if you don’t want to think about investing.  Otherwise there are two camps, one camp thinks it’s stupid to own anything other than S&P 500/US stocks because of American exceptionalism and 15 years of strong outperformance of this strategy.  The other camp, which I’m in, looks at long run history and thinks that a diversified portfolio resulted in a superior risk-adjusted outcome, and thinks US stocks will not do as well over the next 15 years as the past 15 based on starting point valuation.  Choose your camp.

Re bonds specifically, they are great if you use them right.  It seemed silly pre-Covid that you were getting paid 4%-5% yield to loan money for 5-10 years for risky companies, and ~2% to the government.  Now you can make 7% loaning to risky companies and 4.3% to the government.  It doesn’t feel as silly.  4.5% on the US 10 year feels about right so +/- fair value.  Corporate bonds look overvalued but so do stocks so your pick.