Posts tagged Andrew nelson
The Bond Market is Changing Retirement Math
 
 
 

Today's bond market may represent the most important shift in retirement strategy in over a decade. To understand why, we need to start with where equities have been. Over the 15 years ending in September 2026, the Vanguard S&P 500 ETF (VOO) generated an annualized return of more than 15%. For investors approaching or already in retirement, those returns may have helped create a welcome problem: their portfolios are larger and potentially more equity-heavy than they once expected.

Note: The Benchmark here is the S&P 500. Data courtesy of YCharts.

The reason for an investor's portfolio being potentially over-exposed to equities based on their age could be for one of two reasons.

  1. They intentionally selected to be more aggressive based on their comfort level with risk and economic conditions.

  2. They initially invested their portfolio in a more balanced methodology and did not rebalance their portfolio as equity markets grew. Take a portfolio that was invested in 70% equities and 30% fixed income 15 years ago. That portfolio left without rebalancing is now 95% equities and 5% fixed income in 2026. 

That 15% annualized return from the S&P 500 came with real volatility and its share of drawdowns. For many investors, those moments made it easy to avoid rebalancing. Whether it was COVID 19, peak tariff volatility in 2025, or more recently a steep increase in the price of oil with the closing of the Strait of Hormuz, there were plenty of reasons to hold tight.

The point being risk feels very different after you’ve been rewarded for taking it on for more than a decade.

While stocks were soaring, bonds went through a different period

For much of the 2010’s interest rates were low by historical standards. Then during the pandemic Treasury yields fell to extraordinary lows. For someone building a retirement portfolio, this presented a challenge. Imagine your financial plan required roughly a 5% rate of return to be considered “successful”. If high-quality bonds were yielding 1-2%, investors needed to find growth from somewhere else. Stocks were a great source of growth over the last 15 years, but we can never count on markets to repeat themselves.

One lesson our team applied during these years, and one we regularly enforce with clients, is that every financial plan has an implicit return hurdle. The lower the expected return from the conservative portion of a portfolio, the more work the growth portion of the portfolio has to do. Today that equation looks different.

The Bond Market Has Changed Dramatically & It’s Changing Retirement Math

For investors looking to rebalance funds away from equities or cash and into bonds, it’s important to recognize that today’s starting point for the bond market is fundamentally different than it was for much of the past 15 years.  For a retiree, the important takeaway isn't why rates moved from below 1% to above 5%. It's what those higher yields mean for the role bonds can play in a retirement portfolio. Bonds can once again contribute meaningfully toward achieving your financial goals. And importantly, they can do so while playing the traditional roles we'd expect from fixed income: generating income, providing diversification and generally taking less risk than equities.

Data courtesy of YCharts.

How does this change the Math for retirees? Let’s assume that someone has completed their financial plan. After accounting for spending, social security, inflation, taxes, longevity, and other goals the plan indicates that their portfolio needs to earn between 5.25% and 5.5% over the long run for their plan to succeed. This leads to the key question:

“How much risk do I need to take to reasonably pursue the return this plan requires?”

In 2020, answering that question was difficult. With high-quality bonds offering very low yields, a portfolio targeting a moderate return generally needed to rely more heavily on equities for growth.

All numbers used in the above table are examples and should be used as educational material, not advice. (Nerd Wallet)

Today, higher starting bond yields allow us to potentially accomplish two things at once:

  • Use a more conservative expected return assumption for equities rather than relying on the exceptional returns of the recent past.

  • Increase the bond allocation while still maintaining an expected portfolio return consistent with the financial plan.

All numbers used in the above table are examples and should be used as educational material, not advice. (Nerd Wallet)

The point isn't that retirees no longer need stocks. It's that bonds can now contribute considerably more toward the portfolio's return objective, potentially reducing how much equity risk is required.

Today's Higher Yield Also Provides Something Bonds Didn't Have in 2020: A Cushion

As a reminder, when rates rise, existing bond prices fall, and when rates fall existing bond prices rise. That’s why 2022 was such a painful year for bond investors. But there's another part of the equation that sometimes gets overlooked: the income you're receiving from the bond.

In the chart below, Fidelity looks at the Bloomberg U.S. 7–10 Year Treasury Index and estimates the effect of a 100-basis-point (or 1-percentage-point) move in yields. August 2020 shows that if at that time rates went up 1% the index would fall 7.2% and if rates decreased 1% it would return a positive 8.2%.

Compare that to today where the starting yield is 5% where if rates increase 1% the index would decrease 1.9% vs. if rates decrease by 1% the index would increase 11.9%.

This scenario occurs when the investor is starting with considerably more yield. Higher yields don't eliminate interest-rate risk. But they change the starting point. When yields were near zero, there was very little income available to offset falling bond prices. With yields around 5%, investors begin with considerably more income working in their favor. If rates decline, bond investors may benefit from both the income they are receiving and price appreciation.

This is by no means a prediction of where interest rates are heading. The key point is that the starting economics of owning bonds are considerably different today then is was at any point over the last 15 years.

So, What Now?

A few closing thoughts for investors considering what this changing environment means for their portfolio.

This post is not a call to get out of stocks. My hope is that this post allows investors to review their portfolio and take inventory of their allocation. Reducing risk because you think the stock market is about to fall is market timing. Reducing risk because your financial plan no longer requires you to take as much risk is financial planning. This post is asking you to consider the latter.

For individuals nearing or already in retirement, the consequences of investment risk are also different than they were earlier in life. For someone who is 35 and accumulating assets, volatility can actually be useful. They're continuing to buy investments and have decades before they'll need the money. The equation changes as retirement approaches. A significant market decline during the first few years of retirement can be particularly damaging because an investor may simultaneously be experiencing investment losses and withdrawing money from the portfolio to fund their lifestyle. That's when the amount of risk you take and the risk you actually need to take, becomes increasingly important.

Don’t start with your investment allocation; start with your plan. We have an amazing team of CFP’s at Human Investing who remind me of this frequently.

Instead of starting with questions like:

"Should I own 60% stocks?"

"Should I move from 70/30 to 60/40?"

"Are bonds attractive?"

"Is the stock market overvalued?"

Start with one step earlier: What does my money need to accomplish, and what rate of return does my financial plan require to get me there?

Once you understand that number, many of the other questions become easier to answer.

The goal of retirement investing isn't to earn the highest return possible. It's to earn the return necessary to accomplish your goals while taking an appropriate amount of risk along the way.

After 15 years of strong equity returns and a dramatic change in the bond market, this may be an especially good time for pre-retirees and retirees to revisit that calculation.

 
 

Disclosure: Human Investing is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. This content is for informational and educational purposes only and does not constitute personalized investment advice or a recommendation. Past performance is not indicative of future results. All investments carry risk, including potential loss of principal. Readers should consult with a qualified professional regarding their specific financial situation.

 

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Setting Your Mind Toward Savings
 
Highway 212 by Matt Duncan

Highway 212 by Matt Duncan

While working with employees at retirement plans over the years, one thing I’ve realized is that being disciplined to save for retirement is challenging and there are many obstacles to doing it successfully. For those living the northwest, saving for retirement can be particularly hard due to the average wage vs. the cost of housing.

Income vs cost of living

When thinking about specific clients that truly save well, regardless of income, a theme that I see is all of these people have a specific mindset towards saving and understand how to achieve short term and long term goals. Over the past month I’ve had a few things cross my life about perspective and goal setting that I wanted to pass along:

First order vs. Second order consequences

A book that I’m in the middle of listening to is by a famous investor Ray Dalio who is the founder of Bridgewater Investments, the largest hedge fund in the world at 160 billion. Dalio, is one of the most successful investors of our time and has some truly unique ways of managing his team and thinking through problems. One passage that really stuck out to me is:

“I’ve come to see that people who overweight the first order consequence of their decisions and ignore the effects of second-and-subsequent-order consequences rarely reach their goals. This is because first-order consequences often have opposite desirability’s from second order consequences resulting in big mistakes in decision making. For example, the first order consequence from an exercise plan (pain and time spent) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable.”

This principle holds true for investing towards retirement as well. By saving a $100/month for their future, a person is giving up something today (coffee, vacation, entertainment) in order to have a more desirable retirement. In other words, this is a first-order consequence and second order consequence type of decision. While this concept is not a unique one, I’d never heard it explained this way and it resonated with how I view decision making.

What’s your “This” in order to get “That”

A friend of mine made the comment a few weeks back “Has your company done the whole let’s set goals for 2018 and never check back in on them again movement?” Unfortunately, corporate goal setting has that stereotype. Often, because it’s true. Luckily our company has Jill, a mother of four and a low tolerance for time wasting activities. She recently implemented a quarterly system for goal setting and tracking. Our team has high hopes for this new system and we’ll ultimately see how it goes. My big takeaway from our time talking about goals was the video she presented by Dr. Henry Cloud called “Start Small”. In this video he speaks to how we all want to get to the big goal but have a hard time setting and sticking to smaller goals.

For some of the guys in our office this meant going on the TB12 diet plan to prepare for our upcoming middle aged athletic endeavors (for me my city league basketball team starting in late January. Wish me luck!).

For you, similar to the Dalio piece, maybe this means looking at what your long term goals is (i.e. having X amount of money at retirement) and shrinking that down to what do I need to do this month/this week in order to get a little closer to that goal.

At the end of the day, the phrases “mindset” and “goal setting” can sound really cheesy, and when done poorly can lead to nothing. However, when we look at our collective social circles and see people who have reached their goals (whether those be physical, business or relationships) often times they are using mindsets like the ones Dalio and Cloud are talking about. Hopefully these can be somewhat inspirational when it comes to putting away additional funds towards your savings goal.

If you have questions or would like to have a conversation about your retirement plan, please don’t hesitate to email or call our team!

 

 
 

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