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Recent Early Retiree : Bond Allocation for Glide Path
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!
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.
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.