Deep Dive: Target-Date Retirement and Bond Funds | Cody Garrett

He isn't taking about a fixed bond allocation, he is taking about bond funds that mature and liquidate every year. By having cash delivered (by the maturing funds each year) to your settlement account it greatly reduce sequence of return risk. If stocks are doing great and you want to buy more bonds for the future, go for it, but the crux of his argument is to let bonds mature and have an increasingly smaller bond allocation almost like a bond tent.

I would love to hear Cody do a deeper dive on this.

Me too.

I never liked the idea of bonds, but understood any them maturing and paying out.

Fund administration falls under HR/payroll/accounting, but in smaller companies it is often the owner that makes the decision. It was the controller at my old company. Start by researching the funds the investment company has (say the 401k is through State Street, look at all State Street funds). It may be easier to convince the boss to add one fund if you have researched what you want. Convincing them to switch to a different management company may be harder. The funds that have the lowest rates often have a minimum investment, and your company may not be able to meet that. Our plan is with a big bank, and .4% and higher is not uncommon for our choices.

My opinion is bond ladders are silly. People like them because they don't "lose" principal, even though the value of their bonds actually does fluctuate just the same until they mature. Bond funds do the same thing essentially if you keep them for their stated duration. Way less hassle.

Yes, you would need to sell shares of another asset each time you want to create another rung of the bond ladder. That's why a bond ladder is really just a psychological crutch and not a magic lever you can pull to avoid selling investments. There's a lot of good discussion about this in the comments.

The best practice is to treat cash/short term bonds like any other asset. Assign an allocation to it (under 10% to protect the long-term growth of your overall portfolio) then naively rebalance your portfolio as needed.

My premise is that you don't replace the bucket or ladder when the market is down (from a year ago). In most down years, this would mean a several month delay. When the market tanked in 2022, the selling stock/replacement ladder would happen around November 2024 (for amounts vesting in 2022, 2023 and 2024). For a person with a 3 year ladder, they would be nearly empty at this point, for someone with a 5 year ladder, there would be 2 years left at replenishment. 90% of recessions rebound within 3 years. I suppose this means there is a 10% chance someone with a 3 year reserve would not have a chance to rebalance in time (but a 10% cash reserve would have just run out). Cash flow would need to be considered in replacement timing, as it is off. THIS MAY NOT BE A GOOD PLAN FOR SOMEONE WHO HAS NO EXPERIENCE SELLING STOCK ON REGULAR BASIS. It's not about beating the market, it's about not selling at rock bottom/trying to avoid a loss. I agree with you I don't like bond rates, I am opting for MYGA annuities. Bought a 3 year with 5.9% interest B++ rating, and a 5 year with 6.3%. But that would need to be evaluated each time to see what I want the money in. I'm a fan, but it is more decisioning and effort than most people realize.

I think this goes back to Cody's statement, "once you understand target date funds you don't need one".

I have about 5% of my 401k in a target date fund, and it's mainly out of laziness. The target date fund is around 20% bonds right now, which nicely rounds out my total portfolio allocation to 5% bonds and cash, which is what I want. One of these days I'll get around to ditching the target date and just getting a proper bond fund.

That 0.1% extra is the program management and administration fees charged for the 529 plan itself. That fee may be split between the account custodian (Vanguard) and the state agency that administers the 529 plan.

😅 The target audiences for RPR and CFI really don't overlap all that much. CFI is DIY levels 1-3 and RPR takes over from there with levels 3-4 (RPR E513). I do think this is fine and good. We don't start learning math with discrete mathematics, we start with the basics and build from there. Plus I see plenty of member posts from level 3 investors recognizing the limits of level 3 and looking for what to learn next. So people who graduate from CFI get funneled into RPR.

BUT I do struggle to understand why advisors insist on promoting psychological tricks instead of just educating on best practices. A bond ladder is just an allocation to bonds, but made complicated! Each year you're forced to ask yourself, "what do I do if this a bad year to buy another rung?", instead of just naively rebalancing then going about your life. I think this fact is proven out by the comments in this thread asking exactly that.

I guess I do understand why this is—advisors are running a business and need to give customers what they want and what they want is a sense of security. Techniques like buckets and bond ladders provide that. This does mean though that a level 3 investor needs to unlearn some things to move to level 4.

Wondering the same.

I assume in a “normal” year where stocks are up you’d sell stocks to buy another bond fund 7 years out. In a stocks down year you wouldn’t sell, hoping that the stocks recover and you carry on before you burn through all 7 years of bonds.Would love to hear if that’s @Cody Garrett, CFP® ‘s vision! This almost makes it a more simplified version of rebalancing yearly with a regular 80/20 style portfolio.

Right, this a core mathematical/logic problem with all Ladder/Bucket strategies…. Refilling Bucket #2 inevitably means selling equities at WHATEVER price they're at. In a stable burn rate, Year 7 funds are just time-waiting 1st year Bonds. This very well would mean selling Equities (unnecessarily) in a down market. It very much appears to be a psychological crutch vs a meaningful portfolio diversification (or higher Safe Withdrawal Rate) strategy. Happy to hear how I'm missing the math.

Conversely, doing the math to determine how much spending would be done from the portfolio in the next 5-7 years, determining your portfolio allocation to a Bond fund holding Bonds of that average-year duration. Then, you spend whatever in your portfolio is "overweight" to target allocation. If Equities are up (they usually are), then that's what you liquidate, hold on the Bonds. If Equities plummet more than Bonds, sure, then you liquidate Bonds.

so I'm trying to figure out how I could keep this going without selling some equities to fund the bond ladder going forward.

This part sounds like "I want money coming in without selling stocks in retirement". A very real part of the plan underlying things like "the 4% guideline" et. al. is selling stocks over time to fund your lifestyle!

Rebalancing takes a total of 15 minutes, using a reusable spreadsheet where current holdings are downloaded and dropped into the "input" side. That's the total time to leisurely login, download, paste, transact.

Shannon's Demon is real.

Unexpected Returns: Shannon's Demon & the Rebalancing Bonus – Portfolio Charts

A lesser-known phenomenon called Shannon's Demon creates a positive rebalancing bonus in portfolios with multiple assets. Here's how it works.

Portfolio Charts

If you're in the accumulation phase, you can rebalance by buying rather than selling. If stocks have been on a tear and your allocation of bonds is too low, direct your contributions towards bonds. No tax impact. It does make it more of a moving target though.