The Baby Boomer Bond Dilemma

Focus on horizontal risk and you may find that you don’t need to invest more than 30 percent or so in Treasuries.

As an example, let’s say your strategy is to start withdrawing 4 percent of your retirement portfolio a year. Right now you can assume that your bond interest income and dividend payouts from stocks will generate at least 1 percent. That means you would need to withdraw 3 percent of your portfolio each year to get to your 4 percent goal.

“If you want to know you don’t need to touch your stocks for 10 years, that would suggest you want 30 percent of your portfolio in Treasuries,” said Mr. Guyton, who has published influential research on how a flexible approach to annual withdrawal rates can support an initial target withdrawal rate above 4.5 percent.

You might want to own more bonds than that to moderate your overall volatility, but if your goal is a 10-year runway where you won’t need to touch your stocks, starting with a Treasury stake equal to 30 percent or so of your portfolio will suffice. For the record, since World War II, the longest time it took for the S&P 500 to recoup a bear market loss was the nearly six years after the 1973-1974 stock sell off, according to CFRA, an independent research firm.

Historically, a portfolio of Treasuries with a duration of five years has delivered the best risk-reward trade-off for retirees, said Jon Luskin a certified financial planner at Define Financial in San Diego. He recommends splitting a Treasury portfolio between classic Treasuries and Treasury Inflation Protected Securities, or TIPS.

Cash can seem like a legitimate option given that intermediate- and short-term Treasuries currently don’t yield much more than an FDIC-insured savings account. Mr. Luskin cautions that while holding cash indeed means you won’t lose value when stocks fall, “you also aren’t going to make any money, either. Treasuries tend to rally when stocks fall. Cash can’t.”

Another strategy is to ditch bonds altogether, Professor Pfau said.

Right now, the biggest bond headache is their paltry yields. Another risk is that from these very low yields, any increase in rates would cause a different headache: negative total returns as the fall in prices would most likely be greater than the rise in yields. Eventually, higher yields are indeed a very good thing. It’s just that when a retiree is relying on bonds for income, the ride from low to less-low will be a bumpy road where returns could be disappointing.

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