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Recent Early Retiree : Bond Allocation for Glide Path


Goremanghast
Posts: 5
Topic starter
(@goremanghast)
Active Member
Joined: 2 months ago

Hi,

As I have an autistic tendency to be verbose I will start with the problem.  I cannot bring myself to invest in bonds and am seeking a rational explanation as to why I am probably wrong to think cash looks more attractive.  I've never invested in bonds and have been 100% equity until recently and am now 90% equity/5% cash/5% gold however I realise that tools and valuations suggest more ballast!

A little background, I retired a couple of years ago and at 51 things are going okay but I am deeply concerned by equity and bond valuations.  I have a disabled son who may need to inherit and another who may not wish to be abandoned so inheritance is important.  I am in good health.  I am married but my wife has never depended on me and so I don't intend to depend on her unless I face ruin!  All of those points towards a cautious SWR with say <0.5% risk of failure.

I have modest needs, no mortgage, and can live on 18k a year but reckon it would be sustainable to take 24-26k to fund more holidays and home improvements.  Ignore tax, it will be modest.

Income is to be derived from 840k equities , 50k cash, 50k gold.  I have 7.7k index linked income until 67 (possibly 68) when I get an additional 9.3k of index linked income.  This period of low guaranteed income means that I am more susceptible to volatility.

My reading to date has taught me that I should probably be on a glidepath from 60/40 to 90-100% but I am struggling with psychological aversions to bonds.  Partly this is because I know equities so well, partly it is FOMO on equity returns, and largely it's because bonds look so poor when tapering and possibly unwinding of QE are somewhere on the horizon.  If I was working I would welcome these events.  My cash is getting me 0.9% currently.

Here are nominal yields in my market for reference.

Should I build up more ghastly cash as a glidepath or would braving bonds be a better move?  What makes bonds better?

Sorry for this angst ridden overly verbose post but I was much more comfortable sitting in equities accumulating!  

Thanks,

Gormanghast

5 Replies
figuy1
Posts: 40
(@figuy1)
Eminent Member
Joined: 9 months ago

Am I reading this right, it seems like on top of your $940k in Equities/Cash/Gold, you also have $7-9k in income with only ~$25k expenses so you'd be withdrawing about $17k/year from your savings or only a 1.8% SWR?  If that's correct, I think you'd be fine staying heavy with equities.

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3 Replies
earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 231

@figuy1 I second that. You already have an explicit bond allocation in the form of the inflation-indexed income stream (that's what I assume when you write "index linked [sic] income").

If that income already covers your basic needs and you have some flexibility with your withdrawals from the mostly-equity portfolio, then more power to you!

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Goremanghast
(@goremanghast)
Joined: 2 months ago

Active Member
Posts: 5

@earlyretirementnowcom  Sorry I hadn't realised the slight difference in terminology on either side of the Atlantic.  In the UK, Index-linked means adjusted according to the value of a price index (RPI, or one of the CPI indices).  Sadly I only have a few more years of the more generous RPI as our index linked gilts (often called "linkers") will move to having RPI redefined as CPIH (which is the consumer price index including housing) in 2030. 

The inflation-indexed income will cover my basic income at 67 but at the moment it covers half of basic living and 1/3 of the level I aspire to.  I think this is enough as insurance has a cost (in this case, trading long term growth for short term stability).

I am increasingly convinced that my crisis of confidence was a product of too little sleep mixed with natural caution.  

Thank you.
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Goremanghast
(@goremanghast)
Joined: 2 months ago

Active Member
Posts: 5

@earlyretirementnowcom I have been tweaking my two ERN spreadsheets (one with defined benefit incomes and the other just with investments) and have concluded that it makes a huge difference to tweak the final target value (for example down to 50%) which makes sense given how volatile equities are (and even bonds can be) and the Musical Chairs style dramatic end point when the remaining asset values are judged (this end point cannot of course be predicted with precision).  Careful consideration of the distribution of final value tab is a much better way of assessing than just finding a SWR that delivers close to your ideal minimum residual value.  In my case I decided that the 0% can be lived with and the 1% upwards are fine.  Moreover if later in life things look like missing my target Final Value then I can decide if I want to reduce spending to compensate (which many people do anyway).  Yes I know, winging it, but it's not winging it when it is a conscious strategy.  Also at this stage I can consider my younger wife's larger defined benefit income plus other investments.

 

Valuations, the prolonged bull market, cyclical risks all played a part in making me doubt whether the more positive outcomes were as likely as modelled so I also experimented with the CAPE rule which gives a surprisingly supportive answer even with the current CAPE and of course dynamically scales income with market conditions.

I think this is based on 80:20 rather than my 90:10 that I have modelled elsewhere in the tool but I am tempted to apply it.  I need to reread the blog posts on this and think more about it but I am very interested in having a more sophisticated plan than being resilient through changing conditions.  Also this model doesn't use the cash flow assist if I am reading it right but I can deal with that by a bit of fudging 🙂

 

Thanks for all the great tools in the spreadsheet.  I love them all and they are great vehicles for exploring this problem space!

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Goremanghast
Posts: 5
Topic starter
(@goremanghast)
Active Member
Joined: 2 months ago

I'll start by saying thanks for the blog and spreadsheet.  It's an invaluable asset.

That is correct (although it's pounds but that really doesn't matter) £7.7k index linked income rising to £17k of indexed income in 2067 plus £940k portfolio (mainly MSCI World). 

I have tried modelling future bond returns (the default of zero real return for the first decade seems optimistic) but the psychology of buying negative real returns is tough for me.  I have been looking at spending up to 2% SWR although I think safemax is probably slightly lower.  My actual total expenditure including a family holiday and house improvements is on track for £19k this year.  I aspire to spend more but the truth is I don't feel the need for much other than more travel and experiences.

I guess if there was a 50% crash I expect I'd do some variable spending to minimise loss crystallization, use/reinvest cash and still get £9.4k from investments if I applied 2% which gives me £17.1k which I can get by on.  If recovery was slow in coming I'd calculate a new SWR.  

 

I have a second model that includes the indexed incomes and am considering being a little bolder with early years income but current valuations are making me cautious. I would rather find I had excess assets than a paucity.

I don't suppose I really have a problem other than desiring the level of certainty I get at 67 which is my ideal.  The reality is that risk cannot be modelled away completely.   Thank you for your patience.

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