At retirement 70% in bonds seems high

[TopOfDaMornin]

I see that the Vanguard Targeted Retirement funds move into 70% bonds post retirement.

From what I understand that seems high, although I understand it depends on many other factors.

I have read that modern thinking is that 50% in equities and 50% bonds is about right.

For an ‘average’ person wanting a safe investment post retirement, what are people’s views on this?


TDM

[mc2fool]

I see that the Vanguard Targeted Retirement funds move into 70% bonds post retirement.

From what I understand that seems high, although I understand it depends on many other factors.

I have read that modern thinking is that 50% in equities and 50% bonds is about right.

For an ‘average’ person wanting a safe investment post retirement, what are people’s views on this?

Safe? NS&I. Of course, even that's not safe from inflation risk, but that, for the moment at least, is small and relatively predictable.

So there's the first problem: define "safe". It is, of course, very personal.

Quite a few Lemons think that 100% equities is the way to go; it's all very individual circumstance dependent.....

[Dod101]

Even 50/50 in bonds /shares is too high I think in bonds. I have always been at least 80% in shares throughout my retirement and of that 20% there has seldom been more than say 5/10% in bonds.

70% is just silly.

Dod

[kempiejon]

Safe? NS&I. Of course, even that's not safe from inflation risk, but that, for the moment at least, is small and relatively predictable.

So there's the first problem: define "safe". It is, of course, very personal.

Quite a few Lemons think that 100% equities is the way to go; it's all very individual circumstance dependent.....

I was going to say something similar re safeness.
There will be a cash and bond like portion to my asset allocation in retirement planning, hopefully the state pension and I'm lucky enough to have a small defined benefit pension too. Most of my pension investments are and probably will, post working, be equity.
Hopefully hard cash for expenses although prone to being inflated will be able to smooth some stock market volatility allowing my to smooth dips in my investment success.

From what I understand that seems high, although I understand it depends on many other factors.

I have read that modern thinking is that 50% in equities and 50% bonds is about right.

70% seems too high to me too, mine you as does 50%.

[JohnB]

Too high at 67, much too high if retiring earlier. But the product is aimed at the cautious.

[xxd09]

Aged 75 retired 18 years
Been 65% bonds for many years-one fund only-Vanguard Global Bond Index Fund hedged to the Pound
Made enough money so OK with this Asset Allocation-30/65/5-equities/bonds/cash-would not suit everyone
xxd09

[NegevSouth]

I see that the Vanguard Targeted Retirement funds move into 70% bonds post retirement.
From what I understand that seems high, although I understand it depends on many other factors.
I have read that modern thinking is that 50% in equities and 50% bonds is about right.
For an ‘average’ person wanting a safe investment post retirement, what are people’s views on this?

Suppose it's all down to a person's appetite for risk and how one sleeps at night.
The targeted retirement fund however, does have a very high bond proportion.

Between a SIPP and ISA, I'm 48%, 32%, 20% in equities, bonds & cash respectively. The equities are in multi-asset funds, a large chunk of that in Vanguard LS60, L&G Multi-index 5 & Blackrock MyMap 5.

I'm 68, retired and at the moment driving myself mad whether to switch a very sizeable chunk to 100% equities such as Vanguard Global All Cap, DEV World excl UK and/or Fidelity World Index Fund.

[tjh290633]

At 88 I am 100% in equities, plus a cash reserve.

Never did find bonds a useful investment, except for my mother-in-law 40 years ago, who would have been frightened to death by equities. Interest rates in the teens, back then. 8.75% T97 stock bought at 64.5, yielding 13.6%.

Nothing comparable these days.

TJH

[kempiejon]

At my retirement perhaps I'll look at asset allocation, a cash reserve equal to say 10% of the equity pension pot and I'll be 90% equity at retirement. Add in state pension - which I treat as bond-like, ditto my defined benefit occupational pension and that percentage drops again. Perhaps I'll only be 70% equities.

[uspaul666]

Makes sense if you’re buying an annuity on retirement, less so these days.

[AWOL]

Makes sense if you’re buying an annuity on retirement, less so these days.

There is a natural beauty to how well swapping bonds for annuities worked. It's a pity that with annuities a high price is paid for certainty. Still they may be attractive to those not leaving a bequest.

[Myfyr]

I am aiming for 85% equities and 15% cash to pay the income. Adjusted back to target allocation annually.

[hiriskpaul]

I see that the Vanguard Targeted Retirement funds move into 70% bonds post retirement.

From what I understand that seems high, although I understand it depends on many other factors.

I have read that modern thinking is that 50% in equities and 50% bonds is about right.

For an ‘average’ person wanting a safe investment post retirement, what are people’s views on this?


TDM

I don't think this is right. At retirement (assumed to be state retirement age) I think Vanguard target 50% bonds. It then rises to around 70% over the next 10 years and stays there. This does seem overly cautious to me, but it might suit some.

The modern "glidepath" approach now seems to be to reduce the bond allocation with age. The higher allocation earier on in retirement is to mitigate sequence of return risk.

[TUK020]

An earlier poster referred to the risk from inflation as being low and predictable.
What worries me is that you need to think not just about the likelihood of something, but also the impact of it.

While a market crash of equities, and dip in dividend income is pretty like to occur every decade or so, markets do recover.

Even if the risk of 70's style rampant inflation is not likely, the impact of it on a bond portfolio would be absolutely devastating.

I am in the fortunate position of having a DB pension, which I intend to start drawing next year, which will provide for more than half of my income in retirement. It has limited inflation protection, and I regard this as plenty of 'bond like' exposure.

I therefore skew the remainder of my investment portfolio towards equities, with a small portion as a cash buffer, and a small portion in gold & gold miners ETFs as insurance.

I do worry that out of control inflation is one of the few things that would wipe out my retirement income planning. I am very wary of defining a % allocation to Bonds, without thinking about worst case scenarios.

[hiriskpaul]

An earlier poster referred to the risk from inflation as being low and predictable.
What worries me is that you need to think not just about the likelihood of something, but also the impact of it.

While a market crash of equities, and dip in dividend income is pretty like to occur every decade or so, markets do recover.

Even if the risk of 70's style rampant inflation is not likely, the impact of it on a bond portfolio would be absolutely devastating.

I am in the fortunate position of having a DB pension, which I intend to start drawing next year, which will provide for more than half of my income in retirement. It has limited inflation protection, and I regard this as plenty of 'bond like' exposure.

I therefore skew the remainder of my investment portfolio towards equities, with a small portion as a cash buffer, and a small portion in gold & gold miners ETFs as insurance.

I do worry that out of control inflation is one of the few things that would wipe out my retirement income planning. I am very wary of defining a % allocation to Bonds, without thinking about worst case scenarios.

The thing is, the 70's rampant inflation was also very bad for equities. From the end of 1968 to 1978, long dated gilts lost 56% in real terms, but UK equities lost 30% (divis reinvested) and that was after recovering from a massive drawdown. Short dated bills/cash did relatively well, only losing 23% real. For someone drawing an income 50/50 equities/cash (or short dated bonds) would have been far better than holding a high allocation to equities. 50/50 would have meant an income could have been drawn from cash, dividends reinvested instead of being spent AND cash could have been rebalanced into equities after they crashed.

The (relative) advantage short dated bonds had over equities and long bonds is they did not drop much in nominal terms when inflation was rising and quickly benefited from rising short dated interest rates.

Holding an index linked pension back then would have course have greatly helped sleeping at night!

[AWOL]

While a market crash of equities, and dip in dividend income is pretty like to occur every decade or so, markets do recover.

With half your income from a DB pension and I assume a state pension then you have little to worry about however I fear many people have been conditioned to "buy the dip" or assume that equities bounce back and always win in an acceptable time horizon. Most of us are internationally diversified so it's worth considering what has happened in other markets in other times as the historic worst cases for time to recover are eye opening and longer than anyone's retirement. Although next time it will be different but whether better or worse I cannot say.

I will not for the first time quote a favourite paper of mine

From 1803 to 1857, U.S. equities struggled; the stock investor would have received a third of the ending wealth of the bond investor. Stocks managed to break even only in 1871. Most observers would be shocked to learn there was ever a 68-year stretch of stock market underperformance. After a 72-year bull market from 1857 through 1929, another dry spell ensued. From 1929 through 1949, stocks failed to match bonds, the only long-term shortfall in the Ibbotson time sample. Perhaps it was the extraordinary period of history—The Great Depression and World War II—and the spectacular aftermath from 1950–1999, that lulled recent investors into a false sense of security regarding long-term equity performance.

"For 10-year periods, equities outperform in 71% of the observations, rising to 83% for 20 years."

https://www.etf.com/sections/features/9038-arnott-the-biggest-urban-legend-in-finance.html

It's impossible to know how things will play out and bonds have never looked less attractive but I think some insurance or assurance in the form of guaranteed income, ideally with either indexation or optionality, is a good thing. Equities when successful are likely to produce the greatest return.

I'd be reluctant to hold as much as 70% bonds unless I had an excess of wealth or no pension income expected.

I think that the reason markets have snapped back in recent history has been the accommodative monetary policy (Greenspan Put and successors). WIth the end of this promised all bets are off. I am not sure if ending it is the right thing or not. Keeping doing it risks an inflationary mis-step.

[xxd09]

The main role of bonds in a portfolio is to reduce that portfolio,s volatility
The equities are then free to do the growth for the portfolio with all the volatility that occurs within this type of stockmarket investment
Some growth from the bonds is a bonus for the portfolio
Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) that I now use has averaged 4% pa over the last 10 years
xxd09

[AWOL]

The main role of bonds in a portfolio is to reduce that portfolio,s volatility
The equities are then free to do the growth for the portfolio with all the volatility that occurs within this type of stockmarket investment
Some growth from the bonds is a bonus for the portfolio
Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) that I now use has averaged 4% pa over the last 10 years
xxd09

In principle I agree and they generally do this, but it's the very fact that bonds have had such a remarkably long bull run that makes them more vulnerable to rising yields. It all boils down to whether the central banks can unwind QE gently or if events run away from them, or alternatively monetarism delivers runaway inflation. Past relationships seem to be less reliable.

[TUK020]

The main role of bonds in a portfolio is to reduce that portfolio,s volatility
The equities are then free to do the growth for the portfolio with all the volatility that occurs within this type of stockmarket investment
Some growth from the bonds is a bonus for the portfolio
Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) that I now use has averaged 4% pa over the last 10 years
xxd09

In principle I agree and they generally do this, but it's the very fact that bonds have had such a remarkably long bull run that makes them more vulnerable to rising yields. It all boils down to whether the central banks can unwind QE gently or if events run away from them, or alternatively monetarism delivers runaway inflation. Past relationships seem to be less reliable.

AWOL,
Please excuse me if I am being dense,but please could you explain what the graph is, and the inference you draw from it?
tuk020

[AWOL]

It's a reminder that bonds can also have significant drawdowns and also sometimes fall at the same time as bonds. Generally though, gilts are pretty pedestrian but everything in investing has risk. There's a risk that I am pointing out the surprising drawdowns can bonds can have and this could be followed by equities tanking and bonds rallying. You never know however I think 70% in bonds at a time of negative real returns may be lower volatility but risking real losses. Maybe try nudging up your equity:bond ratio a little and see how you get on.