Why Your Bond Allocation Should Be Measured in Years, Not Percent

How much should you hold in bonds in retirement? Most people answer with a percentage, such as a 60/40 portfolio or the old rule of holding your age in bonds. Those are fine starting points, but I think a retirement bond allocation is more useful when it is measured in years of spending.

This article covers how to measure bonds in years, what sets your number, and how to manage the cushion over time.

Why a bond percentage tells you so little

A percentage tells you something about your portfolio and almost nothing about your life. Knowing a retiree holds 40% in bonds does not tell you how long they can pay their bills without touching their stocks. Two retirees can both be 60/40 while one spends modestly against a large portfolio and the other stretches a smaller one. The percentage is the same and the level of safety is completely different.

How to measure your bond allocation in years of spending

The better question is how many years of spending you want sitting safely in bonds. The spending number here is the gap your portfolio has to fill. Take what you spend in a typical year and subtract reliable income such as Social Security or a pension. If you spend $90,000 a year and Social Security covers $45,000, your portfolio is on the hook for the other $45,000.

I think of bonds as a reservoir of spending money. When stocks are down, you leave them alone, draw from the reservoir, and give your stocks room to recover.

Sequence of returns risk and how long market downturns last

Sequence of returns risk means two retirees can earn the exact same average return over 25 years and still end up in very different places because of the order of those returns. A bad stretch early in retirement, while you are also pulling money out to live, does damage you cannot undo, because the shares you sold at low prices are not there to bounce back. Spending from bonds breaks that chain.

Down markets are normal. There have been more than a dozen since 1945, roughly one every 5 years. For a retiree, the number that matters is how long the market took to reach a new high:

• 2020 COVID crash: down about 34%, recovered in about 6 months.
• 2022 selloff: down about 25%, recovered in about 2 years.
• 2008 financial crisis: down about 57%, recovered in roughly 5.5 years.
• Dot com crash that started in 2000: down about 49%, recovered in about 7 years.

How many years of spending to keep in bonds

No number fits everyone. Four things move it:

1. Portfolio size relative to your spending gap. This is the biggest factor. The quick tell is your withdrawal rate, since pulling 2% a year is a very different situation than pulling 8%.
2. Guaranteed income. More Social Security and pension income means a smaller gap to fund.
3. Temperament. If watching your stocks fall makes you want to sell, you need a bigger reservoir.
4. Spending flexibility. If you can comfortably trim back in a bad year, the reservoir stretches further.

In practice, a lot of retirees land somewhere between 5 and 10 years of spending in bonds. I treat that as a starting point rather than a rule.

An example with two different portfolios

Picture a couple, both 65 and newly retired, with $1.5 million saved and a spending gap of $45,000 a year. A cushion of 5 years is $225,000 in bonds, or 15% of the portfolio, and 8 years is $360,000, or 24%. Had they defaulted to a standard 60/40 portfolio, they would hold $600,000 in bonds, which is more than 13 years of spending. That might be far more conservative than they need, and the drag could cost them growth over a long retirement.

Now take a second couple with the same gap and a $750,000 portfolio. For them, 8 years of cushion is still $360,000, but that is 48% of the portfolio. Their withdrawal rate is 6%, compared with 3% for the first couple. Measuring in years surfaces a real decision: adjust the spending, work a little longer, or think carefully about how much risk to carry.

How to manage the bond reservoir year to year

The reservoir is a working buffer. In a good year, you trim some of your stock gains and top it back up to your target. In a bad year, you leave your stocks alone, live off the reservoir, and let the stocks recover. That gives you a rule for the moment when the headlines are ugly. Treat all of this as a framework for a good conversation rather than a prescription.

Common questions

How many years of expenses should I keep in bonds in retirement?

A lot of retirees land somewhere between 5 and 10 years of the spending their portfolio has to cover.

Is a 60/40 portfolio right for retirees?

It is a fine starting point, but it is incomplete. The same split can mean very different levels of safety depending on spending.

What is sequence of returns risk?

It is the risk of a bad stretch early in retirement while you are also withdrawing money to live.

VDB Wealth is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Picture this. You retire. You finally hit the milestone you spent decades working toward. And twelve months later, the market drops 30%. The money you were counting on for the mortgage, the groceries, the trip you promised the grandkids, a big slice of it just evaporated on paper.

So here's the question that actually matters. Do you sell your stocks while they're down to pay your bills? Or have you set things up so you never have to?

Building a portfolio so you're never forced to sell at the worst possible moment is what this video is about. And the decision that gets you there usually isn't which funds you picked. It's how you think about one piece of your portfolio. Your bonds.

Two quick things before we dive in.

First, who I am. I'm Andy, a wealth manager, and I spend my days helping people build and protect the money they'll actually live on in retirement. This one idea tends to change how they see their whole portfolio.

Second, the plan. A lot goes into getting a portfolio ready for retirement, and we could spend hours on it. So today I'm doing the opposite. One idea.

I'll show you why the usual way people measure bonds has a blind spot, the simple fix, and how to find the right number for you. Because down years aren't rare. They're normal. And the danger was never the drop itself. It's being forced to sell into it.

Let's start with how most people think about bonds. You've heard the rules of thumb. A 60/40 portfolio. Your age in bonds. They're fine starting points. They're just incomplete.

Here's the blind spot. A percentage tells you something about your portfolio. It tells you almost nothing about your life. If I tell you a retiree holds 40% in bonds, you still can't answer the question that actually matters. How long can this person pay their bills without touching their stocks?

Picture two retirees, both 60/40. One is spending modestly against a large portfolio. The other is stretching a smaller portfolio to cover the same kind of life. Same percentage. Completely different levels of safety. A percentage anchors to the portfolio. But what you really care about in retirement is time.

So here's the shift I want you to make. Stop asking what percent of my portfolio should be in bonds. Start asking a better question. How many years of spending do I want sitting safely in bonds?

I want to be precise about that spending number, because this part trips people up. It's not your total spending. It's the gap your portfolio actually has to fill. Add up what you spend in a typical year, then subtract your reliable income, Social Security and a pension if you have one. Whatever is left is the gap, and that gap is the job your portfolio has to do.

Let me put numbers on it. Say you spend $90,000 a year, and Social Security covers $45,000. Your portfolio is on the hook for the other $45,000. That's the unit we measure in years.

Now, think of your bonds as a reservoir of spending money. It's cash you can live on for years without selling a single share of stock. When stocks are down, you don't touch them. You drink from the reservoir instead, and you give your stocks room to recover. That's the whole idea. Bonds measured in years of spending give you a margin of safety. They turn a market crash from a crisis into an inconvenience.

Let me show you why buying that time is so powerful.

There's a risk in retirement called sequence of returns risk. The idea is simple. Two retirees can earn the exact same average return over 25 years and still end up in completely different places. What separates them is the order those returns showed up in.

A bad stretch early in retirement, while you're also pulling money out to live, does damage you can't undo. You sold shares at low prices to cover your spending, and those shares aren't there to bounce back when the market recovers. The bond reservoir breaks that chain. In a down market, your spending comes from bonds, so your stocks are never sold low.

So how long do downturns actually last? Down markets are normal. There have been more than a dozen since 1945, roughly one every five years. But the number that matters to a retiree is how long it took the market to climb back to a new high.

The COVID crash in 2020 dropped the market about 34%, and it recovered in about six months. The 2022 selloff fell about 25% and took about two years. The 2008 financial crisis dropped about 57% and took roughly five and a half years. And the dot com crash that started in 2000 fell about 49%, with a recovery that took about seven years.

So you don't get to know in advance whether you're facing a six month dip or a five year grind. A cushion measured in years is what lets you wait it out, either way.

So a few years of spending in bonds. But how many? There's no magic number that fits everyone. Four things move it.

The first, and the biggest, is the size of your portfolio relative to your spending gap. If that gap is a small slice of your portfolio, you've already got a natural cushion, and you can hold fewer years. If it's a large slice, you're leaning hard on the portfolio, and you want a bigger margin of safety. The quick tell is your withdrawal rate. Pulling 2% a year is a very different situation than pulling 8%.

Second is how much guaranteed income you have. More Social Security and pension income means a smaller gap to fund, and the whole question gets easier.

Third is your temperament, and you have to be honest here. If watching your stocks fall makes you want to sell, you need a bigger reservoir, so you're never forced to act on that feeling. The cushion is as much for your nerves as for your numbers.

And fourth is how flexible your spending is. If you can comfortably trim back in a bad year, you stretch your reservoir further.

In practice, a lot of retirees land somewhere between five and ten years of spending in bonds. But treat that as a starting point for a conversation, not a rule.

Let me make this real with actual numbers.

Picture a couple, both 65, retiring this year. They spend $90,000 a year. Their combined Social Security is $45,000. So the portfolio funds the gap, $45,000 a year. And they've saved $1.5 million.

Run the years lens. Five years of cushion is $225,000 in bonds. On a $1.5 million portfolio, that's 15%. Eight years of cushion is $360,000 in bonds, or 24% of the portfolio.

Here's what's interesting. If this couple had just defaulted to a standard 60/40 portfolio, they'd be holding $600,000 in bonds. That's more than 13 years of spending. That might be far more conservative than they need, and that drag could quietly cost them growth over a long retirement.

Now watch what happens when I change one thing. Take a second couple, same $45,000 spending gap, but their portfolio is $750,000, not $1.5 million. Eight years of cushion is still $360,000 in bonds. But now that's 48% of their portfolio. Same dollar amount, completely different picture.

Their withdrawal rate is 6%, versus the first couple's 3%. The years lens makes that strain visible right away, and it surfaces a real decision. Adjust the spending, work a little longer, or think carefully about how much risk to carry.

One last piece. How do you actually run this year to year?

Your bond reservoir isn't something you set once and forget. It's a working buffer. In a good year, you refill it. You trim some of your stock gains and top the reservoir back up to your target. In a bad year, you freeze your stocks. You don't sell a single share. You live off the reservoir and let your stocks recover. Then you refill again.

The real power is that it gives you a rule for the scary moment. When the headlines are ugly and your gut is screaming at you to do something, you already know the plan. Don't touch the stocks. Spend from bonds.

So let's bring it together. Stop measuring your bonds as a percentage of your portfolio. Start measuring them in years of the spending your portfolio actually has to cover. That gives you a margin of safety, so a down market becomes an inconvenience instead of a crisis.

If you're within a few years of retirement, and you're not sure how many years of spending you actually have protected, that's exactly the kind of thing I help people work through. Leave a comment, or send me a message with your questions. I read them, and I'm glad to help.

One important note before you go. This is educational. It is not personalized financial advice. Your situation has details I can't see in a video, so use this as a framework and a starting point for a good conversation, not a prescription.

Thanks for watching. I'll see you in the next one.