How Much Do You think You Need to Retire? What Age Will You/Spouse Retire? Investment and General Retirement Issues (Part 3)

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In my opinion, bonds serve and important purpose in a portfolio that is not well duplicated by other asset classes. It’s not so much like/dislike as compliment to achieve overall portfolio and financial goals.

If held to maturity, a reliable bond will pay the rate specified in the bond contract, which you know before you purchase. Bonds didn’t do well in certain recent years because the buyer’s purchased bonds at a low contracted rate. For example, suppose you bought a 5-year treasury 5 years ago, in late 2020. At the time the contracted rate was approximately 0.3%/year. If held to maturity, you’d get a constant 0.3%/year. It should not come as a surprise that these bonds did not do well and only had an annualized return of ~0.3%/year if held from 2020 to present.

If not held to maturity and sold on secondary market prior to maturity, bonds may be worth more or less than original purchase price if the federal funds rate and corresponding market demand for bonds of that duration and rate changes from previous expectations. In general if fed rate increases more than market expects, secondary market prices go down. And if fed rate decreases more than market expects, secondary market prices go up. With the 2022 inflation and rapid change in fed rate from ~0% to ~5%, bond value on secondary market shot down rapidly. Instead of getting the +0.3% rate listed in the contract, if sold prior to maturity, the bond holder might have had a net loss. Historically, severe market crashes are more likely to go in the opposite direction – fed decreases rate to stimulate economy, increasing value of previously purchased bonds, if sold on secondary market prior to maturity.

The previous 0.3%/year return is not especially relevant to whether current and future bonds will “do poorly” because the contracted rate is no longer 0.3%/year . New 5-year treasury is contracted to pay ~3.7%/year. Other durations and other bond types pay other rates. Whether this is good/bad depends on how important it is to you have a fixed rate of return that isn’t well correlated with performance of stock market or other assets.

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We don’t use a financial advisor but we have recently started working with an estate attorney. He has been terrific in helping us make decisions now that will benefit us and our children. He is also giving us guidance on direction and decisions we make going forward on our family business. He along with a new CPA have been invaluable.

We have most of our retirement accounts at Charles Schwab. They assigned us an advisor but we don’t use him for advice. I just moved my rollover IRA from Morgan Stanley to Schwab as it’s less expensive.

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We have certainly some bonds within our portfolio, but we have not chosen them.

We don’t select bonds to compliment/achieve overall portfolio and financial goals. Our risk analysis has us at a risk level we are comfortable with.

Our annuity contracts spell out what we gain, and the choices we have along the way - which our FA has guided us on.

As I said, I don’t want to deal with buying/selling T bills or other things. I don’t want to become expert enough in to deal with it.

Others on this thread can learn from what you say about it and decide if they want to learn more about it.

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And your FA probably received a good commission on that annuity. I’ve heard of as high as 10% commission, although closer to 5% is more common. Annuity fees can cut in to your return, to a far greater extent that occurs with typical bonds. Bonds are also more liquid and more flexible, without surrender penalties/fees or other gotcha type things in contract that a buyer might not realize. That said, I agree with the earlier comments about investing with what you understand and are comfortable with.

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The graph below shows relative cash / bonds / stock allocation by income quintile and age, according to Survey of Consumer Finances. In this review, there is not a dramatic difference in relative stock/bond balance by income quintile. The difference is instead in relative portion kept in cash. In general, the higher the income, the larger portion that is invested rather than kept in cash.

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It’s true that at very high incomes, such as top 1%, there is a substantial increase in munis over other income groups. However, I expect this primarily relates to higher income brackets more benefiting from munis being tax exempt and generally being more knowledgeable about their availability, rather than munis inherently being a better choice for the general population than other types of bonds. This is particularly true for persons who are not in an especially high marginal tax bracket.

For a large portion of not top x% by income/wealth Americans, buying bonds is automatic and largely invisible. Under SECURE 2.0 401ks are required to default to opt in, >90% of 401ks have their default investment set to a target date, and targets dates generally have a glide path to majority fixed income. Vanguard’s target dates end at ~70% fixed income (including both bonds and TIPS). So for many persons in US, working and not bothering to change anything from their employer’s form defaults leads to a portfolio with a good portion bonds in retirement.

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Good points, @CFP. Completely agree on the fees. Many folks starts with 1%. Sort of, but they immediately charge less for a bond portfolio. My RIA started with less, I believe. They charge me a flat fee every year, but that fee has gone up over time. My wirehouse wealth manager made a bid to take over all of my assets and offered a bit below 58 basis points. When I chose someone for my MIL, we agreed to set the fees at 50 basis points.

@Knowsstuff, I spent 6 years working in the NY investment office of a wealthy family and dealt with the top tax partners at Deloitte. They were outstanding in figuring out clever (and legal) ways to reduce taxes as part of a transaction. Most tax folks that I had worked with are reactive (and think their job is to say no). So, if I ask whether I can get capital gains tax treatment from a transaction, they say no. If pressed, they say, you can’t because you needed it to be a “that.” I say, “How about if make the following change and we call this a that, can I get cap gains treatment?” They say no and explain the conditions under which this could be a that. I say “Oh. So if we set up a company that owned this asset, then the shares of that company would be a that?” Yes. And if I then transferred the shares in the following way I could get cap gains treatment? Yes. I always felt I was doing their job for them. The Deloitte folks were proactive, offering suggestions for how to do things that saved millions of dollars. When I stopped working with this and moved from NY, I asked a number of entrepreneurs if they could recommend a creative, proactive tax advisor. Several people suggested the same guy. As I mentioned, his advice saved me a fair bit. When a problem or a choice arose, he would lay out options and the risks associated with each and say, “My aggressive clients do X. I wouldn’t recommend it as I think it is risky. Some of my clients do Y, which I recommend. My most conservative clients do Z, which I think is leaving money on the table. I highly recommend asking around the entrepreneurial community who gives them creative solutions and who proactively comes to them with ideas. (Incidentally, I look for the same in all professional service providers ).

Also, FAs doing a financial plan start by asking how much do you need (and I had no idea) because they want to do a Monte Carlo analysis to see the probability that you exceed you stated annual goal over the number of years you specify that you are going to live. The second question “How much can I have per month?” probably means your money is going to outlast you.

I started with Fidelity years ago and I think I did fine. But my life got very complex. If I ever retire while I am still cognitively able, I would consider managing my own money. I am very financially literate (worked on Wall Street, helped set up a quant hedge fund) but the problem is time. And, as long as I am cognitively able, I think I will continue to work – a mix of for pay and pro bono with an increasing fraction of my time to pro bono.

@CFP, how long have SLATs been around?

@esobay, there are strategies for contributing your stock to a pool with others in a similar situation so that you all get a) cap gains tax treatment and b) some diversification. If you had a large enough block of stock, you could probably create a derivative security (some kind of swap) that in effect trades your exposure for part of the block to exposure to the S&P or Russell 2000 or other index. There might be a simpler way to do it.

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Not sure but they became really popular around 2012 because of the “fiscal cliff” - the estate tax exemption in 2013.

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You’re hired! Lol. I have a meeting Tuesday with said financial advisor. Our situation really isn’t that complex. I have met with several. This guy’s reputation is pretty good. Overall low fees. Then the following year $350/hour to review your plan and make changes. That’s it. I hope he’s a real live person on Tuesday introduction call.

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If you’re making 4-4.5% on a tax free bond, why would you pay anyone to manage that - especially a half point ? It’s easy on your own.

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An, “exchange fund,” I believe. This was mentioned by our FA at one point to us as we are concentrated in one particular stock.

My recollection is you must have a large amount ($1 to $5 million) and the money is, “locked up,” fur 7 years. But don’t quote me in that!!!

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Good question,@tsbna44. The fees that we are charged for managing bonds for bonds are much lower than 50 bp. There is a broader question that you are implicitly asking: Why should I pay anything for people to manage my money when it is not that hard (especially to pick high quality bonds and hold them) when I have enough expertise to do the job myself? There is a little more complexity in terms of what we do. In one of my companies, we use short-term munis to keep excess cash around until year-end. In general, I don’t even know what fixed income instruments I hold. So, I’m paying an overall fee to (hopefully) ensure that they are making good choices on equities, mutual funds, bonds, and alternative investments.

At one level, this is a choice about how I value my time/attention. It is something I need to consciously evaluate, as the fees I pay are not small. But then again, neither are the fees I charge. And, I get a lot more intellectual satisfaction and sense of purpose from the work than I get from managing money.

At another level, I have another reason for using FAs. If I were to become incapacitated or die, my wife would be able to get help and guidance from people she’s known for years. In principle, ShawSon who has an MBA (as does his wife) could help my wife but both have very, very busy careers in tech. The FAs have also been very helpful to ShawD, who is learning quite a bit but does not have any finance training. If both ShawWife and I were to become incapacitated or die, the FAs would be helpful to both kids but more so to ShawD.

@Hoggirl, yes. I was alluding to exchange funds. I could be wrong, but I don’t think there is any legal requirement for the lockup to be 7 years. I can imagine constructing other strategies as well – working with the smart tax guys I mentioned above – if that were my problem.

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Using a financial advisor is somewhat similar to going to a restaurant. There are some amazing restaurants that are specialized and incredible. And for those people who want that experience, they choose to pay. For some people, they have complex situations that they want help or the financial advisor has a CFA, tax or legal background that is just beyond the normal skill level.

But most restaurants are below avg to good. In many cases, if you buy the right ingredients, and research, you can make something similar in quality and save some money but will require effort. Do you want to outsource that or do it yourself?

Yes, I manage my own muni portfolio but it’s a pain to find really good yield relative to risk and then balance out when it may get called and deal with the reinvestment on coupons, especially in a falling interest rate environment.

It’s a matter of choice. However, just as there are mediocre restaurants, there are a lot of mediocre advisors.

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In essence, you should be using a money market fund in this case, whether taxable or tax fee, if you have everything maturing year end.

@Data10 i think there’s a difference between high income and high asset people. High asset people will live off their fixed income. They’ve stopped working. High income people are different.

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Interesting analogy. I only buy stuff with long calls so I can avoid the reinvestment risk. So today I’m buying 2034/35 calls.

On the other hand it is tempting to buy things with short calls. If I were to buy one with a call anytime or two year call, and am paying 88 or 90, I’ve gotten a nice gain to make up for a lower rate tomorrow.

I guess I don’t find it difficult but like you note, I can’t make a good sauce for the steak. Schwab does a great job emailing calls/maturities and I check each month to validate my interest was posted - so easy to run a search for calls or check next maturities.

Listen, I don’t fix toilets. I call a plumber. I guess it’s the same. Lots of ways to save or make money.

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It’s hard to know what your tax rate will be in 10 years. If you get laid off with no job, then your tax equivalent yield will not be great. And if inflation starts going up and you’re locked in with a very non liquid muni, that’s not great either.

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When I looked at it, we are getting a higher return net of fees than a money market fund. But I should look again to see if that is still true.

@CFP, I agree. Some are great – creative and with different ways of thinking that I value. Others basically say the same thing to everyone – these are folks who can do an OK hamburger but not the burger you can get from Daniel Boulud, let alone osso bucco or poached pears in creme anglaise. Interestingly, the fees are probably not all that different (except in a hedge fund or PE setting) despite the quality differential, although the minimum investments are likely to be. My own situation has some partially self-inflicted complexity (which creates opportunities as well as problems). Both the tax guy and the FAs have been helpful above and beyond being there for ShawWife and ShawD.

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Correct. The fee structure is almost universal. The only difference is negotiating the fee and what different advisors are willing to accept.

I’ll use the real estate agent analogy on fee structure. You pay the same (or very similar) real estate commissions whether it’s a good realtor or a bad realtor.

Most advisors dont manage assets themselves. They’re not really qualified to do so. They use a manage money program and have investment experts/ portfolio managers do it. There are exceptions. And if they do manage the portfolio themselves, what are their qualifications? Do they have a CFA?

However, when you present your fact pattern, most advisors will try to come up with the financial planning strategies themselves or at least try to even if they use a para planner to actually construct the actual plan. IMO, this is where the advisor can be really good or really bad and most are mediocre.

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I’m buying income. The goal is to create more income than I need and use excess to buy more income. When covid was here and rates deflated, I bought a bond at 2.875 at par. Sucks but needed the income. It’s prob 70 in my account. Oh well. It will pay 100.

When you have that many millions, when you’re retired, you use munis or bonds as a pension.

You’re not worried about what you bring up. And I know of very few, if any, munis, that are illiquid. Everything I’ve ever asked for a bid on gets one. But I rarely sell - maybe twice in my life because I paid less and the bid was near 100 so I swapped.

But I don’t worry about these things.

I worry I am making $100k and my expenses are $60k. Then I’ll take that $40k excess and next year make $101.6k, etc.

If you have that much $$, then you are risk free for life if you can afford a boring strategy. And people have been predicting higher tax rates forever. Yet mine, I’m guessing will be lower. I’ll have my 401k withdrawals, social security, some dividends and that’s it. This income will be tax free.

For all everyone keeps predicting higher rates, we’ve seen anything but.

But as long as we stay progressive, someone loaded with tax free will be low. If it’s just a part of their portfolio and rates go up, than their TEY will be more.

For someone older and with say $3 million ( depending on their desired annual expenses), it’s near risk free. You’re not growing and getting wealthy. Nope. You’re simply living without ever having to check the market. I’ve done enough tossing and turning on stocks to like to be able to sleep at night.

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I love your analogies like the one above. The one CFP we liked until now is also a CPA. She had a regional podcast and liked what she had to say. She’s local to me in Chicago but the fees. She does a lot more then just FP and that’s probably why. Finding a balance is key for me. I don’t have the knowledge that lots of you have. Just need some common sense strategies. We are like 97%equity now and the x is going to hit the fan at some point. I think it’s either late first or second quarter 2026. Just need to rebalance. The Merrill people seem to just decrease my stock position some and that’s it. I feel that I need a whole new way of thinking moving forward. Enjoying reading many of your posts. Learning is always a good thing.

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Im not going to debate you on the use of munis but there’s a reason why people in the 12% tax bracket dont buy munis. Also, understand that even with $3 million assuming 4% withdrawals, youre at $120k (assuming standard deduction, jt filer) and still in the 12% marginal bracket.

You have your own strategy and beliefs but there are reasons professionals pick certain investments.

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