Retirement investing strategies - Liability Driven Portfolio - income from rotating bonds, rest in stocks/etc. - Is it a good method?

[cargocar123]

Had a financial advisor discuss this method (liability driven portfolio) and wondering if others have done this? Basically, it's continuing to buy bonds so you're covered 5 years out at all times, and put the rest in the market at a more aggressively.

1. Start by buying bonds (actual bonds, not a bond fund) to provide income for the next 5 years.
2. Every year, buy additional bonds to provide income for the 5th year out (so in year 2, you're buying bonds to cover year 6 so to speak). This "secures" your income and shields it from shorter term market fluctuations.
3. If the market drops significantly, hold off on buying bonds for a year or so. Generally the market corrects in 1-1.5 years. Once the market is back up, catch up on your bonds so you have 5 years out covered.
4. The rest of your monies are available to now invest more aggressively as your income is covered.

Thoughts? A good idea?

 

[JDARNELL]

Sounds like you're just building an income ladder to give you time to adjust if the market changes significantly. A lot of people use an approach like this or a bucket approach refilling the income bucket from time to time. I think it would work fine and give you some predictability in income. Inflation risk could be a factor but in theory it bonds are falling and the rates are rising you are locking in higher rates. Of course the opposite is true if binds rise and yields drop. I am helping my seasoned relatives ladder in some income certainty but we are only going out 2 yrs for now.

 

[GravitySucks]

That sounds like a very reasonably safe plan.
I have a 5 year bond ladder (half treasuries/ TIPS, half corporates) that covers all planned spending and years 5 to 10 ladder of mostly TIPS that would cover austerity spending. I also have some bond funds that I plan to use for rebalancing into equities at the next bear correction.

Figure a 60/40 portfolio and a 4% WR equals 10 years of spending covered by bonds. Your 5 year ladder would support 4% at a 80/20 AA.

 

[imjustawarrior]

You could google "bernstein lmp". There are some benefits to a liability matching portfolio. If I was 70+ years old, I would look hard at a TIPS ladder for the rest of my life. As it is, I just stick with low cost index funds. They are really easy to manage.

 

[cargocar123]

Thanks all! The responses are much appreciated. This would be for an elderly friend who is in their 80s so definitely older.