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When should I start to add bonds to my portfolio? Do I even need to when I’m older?

So bonds are in a rough spot right now to invest in. In addition, there are several historical rules I’ve encountered when discussing bonds with clients. Some examples are:

  • Having a percentage of bonds equal to your age, so something like 60% by age 60
  • 20% in your earning years, 30% as you transition to retirement, and 50% in retirement

While these “rules” trend in the right direction for investors, they miss an important point and none of them take into account the amount of money you have, and the income requirements of the money. 

You should have more stability and less volatility as you need to count on that income as the sole source. But the amount of income you need will vary throughout retirement, the prevailing returns you get from bonds will change, and the duration of your bond might hinder the overall success of the portfolio.

Here are a couple of things to focus on instead that will give you a better idea of how much you need to have in bonds, and at what age you should start

  1. How much money do you need your investments to produce? For example – if you have $1m in the bank and require $40,000 in income annually, you only need a 4% return. You can achieve that post-tax income from a 40/60 split in the current environment. An incredibly conservative portfolio. Begin with the end in mind. 
  2. How much up and down in the portfolio can you tolerate without taking action? Some money in bonds will inevitably lower the volatility, and lower the total return
  3. Do you have the capacity to earn money from employment? This can provide cash flow to add new equity positions in down markets, like the income from bonds, do.
  4. What other sources of income are available to you? Rental income, royalties, insurance payments, etc. The more options you have to evaluate that generate an income not reliant on the equities market, the less you need bonds.

Bonds are really not a cut and dry issue. To figure out how much, and which to own is absolutely a science that will be worked out with a financial plan. Knowing the income needs today, tomorrow and in the future is key. Knowing exactly what you are trying to replace with your investments why we spend so much time on spending, and cash flow parts of the InSight-Full® plan. 

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