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3 fund retirement strategy (self.personalfinance)

submitted 2 weeks ago by root to c/[email protected]

12 comments fedilink hide all child comments

For someone in their 30s, does the following allocations make sense? The goal is to have a fair amount of diversity and to more or less “set it and forget it”

55% VG INST 500 IDX 35% VG INTL STOCK IDX 10% VG TOT BD MKT IDX

I’m wondering if maybe there should be less in International and more in one of the other two, etc

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[–] [email protected] 9 points 2 weeks ago* (last edited 2 weeks ago) (1 children)

You get better long term growth out of stocks. Bonds offer less volatility which is what you want when you are depending on that money.

Until I'm seriously asking myself: "Do I want to retire yet?" I wouldn't put anything in bonds at all. Once I reach that point I'd shift ~5-10% per year into bonds, until I have enough to cover at least 5 years of my retirement. Once retired I'd pull out of whatever's grown the most that year, to live on. In years where stocks outperform bonds, keep shifting more into bonds to maintain that 5 year runway. Even grow it further to 10 years. Then I'd just maintain that 10 years of bond runway. It's highly unlikely I'll ever need more than that.

[–] Num10ck 1 points 2 weeks ago (1 children)

the old school rule of thumb was you put your age in % into bonds. it really depends on your risk tolerance and how from your goals you are. dont take unnecessary risks.

[–] [email protected] 3 points 2 weeks ago (1 children)

That's extremely conservative.

The longer you're in, the more "risk" transforms into volatility.

Any day or year may be up or down, but as years become decades, that up and down becomes background noise to the general march upward.

[–] [email protected] 2 points 2 weeks ago

Agreed. IMO, there's no reason have much of anything in bonds until you're close to retirement. 10% is fine if you want some bonds to even out returns a bit, but the only reasons I can think of to have any significant amount in bonds are:

you have super low risk tolerance - as in, you're likely to panic sell if stocks drop a bunch; it's better to have worse returns than to panic sell at the worst possible time
you need to live off the money - bonds are stable, and if the market tanks, you're guaranteed to always at least have your bond portion available for use

The only bonds I have are part of my emergency fund (half in t-bills, half in money market fund), and I don't intend to buy any more than that until I'm about 10 years from retirement. And even then, I'm considering a bond tent, meaning I'd buy bonds just before retiring (5-10 years) and then draw them down to zero over a longer term (10-20 years) and then be 100% stocks. The idea here is that my stocks will grow enough over that bond tent period that I won't need to worry about sequence of returns risk anymore since the stocks will more than make up for it. But even loading up to 40% or whatever in the 10 years prior to retirement is pretty reasonable (switch contributions to all bonds), if you want that security of a larger bond position.