Moved to 65% bonds... feels wrong but...?

General
1

I just shifted all my 401k allocations to 10/25/65 (Total international equity/Large Cap Value/Fixed Income Bond). Edit: (Pimco PIMIX). I wanted my stocks to avoid tech because I think they’re massively overvalued with scary high PE ratios.

Moving this much into bonds just feels off — like I’m missing out on a lot of potential gains. But the fact is, we have enough now, and the biggest risk is losing it all and messing up my (somewhat early) retirement plan.

I’m 57, and we’re about 3 years from retirement when I turn 61. Right now, we have about $680k in my 401k and $10k in a savings account. We’ll be living off investments until I can claim Social Security at 63. Our situation is pretty cushioned by my military retirement and VA benefits of $4300/month, plus $1100 from my wife’s Social Security Disability.

I’ll be converting all my assets to a Roth IRA after retirement, gradually over several years, to keep us under the 12-15% tax bracket and avoid getting slammed by taxes in our 70s.

Once I hit 63 and start collecting Social Security, our military, VA, my wife’s SS, and my SS will cover all our essential expenses and then some, allowing us to handle market drops better. But the next 3 years is where we’re vulnerable.

Edit: The key thing here is: we have enough. More than enough. It seems insane to take on unnecessary risk just for a bit more growth, especially when the downside could wreck our early retirement plans.

The 18-year average yield for PIMIX is 6.4%, which beats inflation handily. We only need $2216/month beyond the military/VA/wife SS to cover routine costs, plus some extras like dining out. Once I hit 63 and SS kicks in, we won’t even need to touch the retirement account except for vacations or big-ticket expenses like a new roof or car. In the long run, drawdowns will increase since COLAs don’t keep up with inflation. The historical average of COLA for military, VA, and SS is only 2.6%, while inflation over the same 20 years averaged 3.1%.

Up to now, I’ve been pretty aggressive with my investments because I didn’t start saving seriously until I was 45, so I had to catch up. It’s been a bumpy ride, but overall it’s worked out.

Edit: I’ve spent at least a hundred hours with tools like New Retirement/Brodin, modeling all sorts of financial scenarios: different expenses, money flows, tax rates, spouse or me dying in a bull or bear market, 2008-like conditions, or even a Great Depression-level downturn. The plan above is what I came up with. This 20-year bull market can’t last forever, and there are too many global factors, like China, which could easily trigger a serious market drop—China does the majority of the planet’s mineral refining, and it’s starting to implode.

I think my plan is the ‘smart’ choice, but I’d love to hear some other opinions on it.

2

I’d avoid bond funds because they can lose principal. With bonds, you get guaranteed interest, and your principal is safe. Go for T-bills.

3

Bond funds only lose principal if rates go up. But if you hold individual bonds and rates rise, you either sell at a loss to get a better one or keep the lower-paying bond and miss out on higher rates. The end result is the same.

4

I’ll probably ladder TIPS after our bridge period before I claim SS at 63, then shift to a higher equity mix when my risk tolerance increases. For now, PIMIX should keep up with inflation while securing our income, even if the market tanks.

5

I think bond funds are better because they’re diversified. Individual bonds can lose principal if you sell early.

6

The problem with bond funds is you’re buying into an open-ended portfolio. You face both principal and interest rate risk. If you need fixed cash flow, buying individual bonds reduces that risk, though you give up some returns. During rate cuts, locking in rates is better, which bond funds can’t do.

7

If you buy individual bonds, you increase default risk. Creating a diversified bond portfolio can be really expensive.

8

Just stick to T-bills. They’re basically risk-free, and the original poster is fine with sacrificing some returns for guaranteed income. T-bills offer guaranteed income with no principal loss risk. Bond funds can lose principal, which is mentioned in the prospectus.

9

They have a fixed income. He isn’t going to sell early.

10

In that case, there’s not much risk holding bond funds. Any value loss would be offset by higher future returns.

11

Is that a sure thing? There’s no guarantee the fund will recover its principal. If the manager gets it wrong, it could mean more losses. BND’s 5-year return is just 0.33%. You’d have been better off buying 5-year bonds.

12

The return of a constant-duration bond fund can be predicted by its yield to maturity (YTM) over its duration. For example, BND has a YTM of 4.43% and a weighted duration of 6 years. So, you’ll get a 4.43% annualized return over 11 years. If bond values drop, it’s because their yields go up, and the lower valuation is offset by higher interest income.

13

PIMIX’s 18-year average is 6.4% with dividends reinvested. It pays a $0.05/share dividend monthly, with shares currently at $10.70. It’s been solid during downturns, and it’s highly diversified across non-equity assets like securitized, high-yield, federal, municipal, and corporate bonds. It’s about as diversified as you can get outside of equities.

14

Yeah, just buy bonds.

15

As I get closer to retirement, my time is super valuable. I prefer bond funds since learning how to buy and manage individual bonds seems like a lot of effort. How much am I losing by not buying actual bonds? I’d have to weigh that against the extra time it takes.

16

If you buy bond funds, you still need to do your research. You can’t go in blind. Buying bonds is pretty simple: you buy, collect interest, and get your money back at maturity. The problem with bond funds is they can lose principal. BND, one of the biggest bond funds, lost 13% in 2022.

BND’s 5-year return is only 0.33%, and this is one of the largest, most diversified funds out there.

17

It’s more complicated than you’re making it seem. Researching an ETF is different than a bond. There are terms like duration, coupon, maturity, and callable status. These are all new to me, and after reading Investopedia, bonds seem way more complicated than stocks or ETFs. Even if I manage to learn all the details, figuring out the right bond strategy feels like a whole other project. I’d probably make mistakes that cost me money.

And the thing is, I’m not even sure bonds are still a good part of retirement plans these days.

18

It’s really not that hard. Just buy a mix of 1, 5, and 10-year T-bills. Collect the interest, and let them mature. T-bills are priced so you don’t need to worry about default. With bond funds, if the manager messes up, you can get burned. Bond funds could outperform, but they can also underperform badly.

BND’s 5-year return is 0.33%.

19

Bonds can lose principal. PV is not equal to FV. $1000 now isn’t necessarily $1000 later.

20

Yeah, but it’s still $1000.