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Beyond the 4% Rule: Smarter Strategies for Financial Independence with Karsten Jeske
All the Hacks with Chris Hutchins
Understanding the Bond Tent Strategy for Retirement Planning
The Bond Tent strategy is a two-phase approach to managing investment allocation as one approaches and moves through retirement. It suggests increasing bond allocation as retirement nears, reducing exposure to sequence of return risk during both the accumulation phase and retirement. Initially, maintaining a high percentage in equities is advisable due to substantial future contributions acting like long bonds. As retirement approaches, bonds are added to the portfolio to compensate for diminishing human capital and future income. In retirement, cash withdrawals mimic a bond position, requiring a higher bond allocation to hedge against cash flow needs. Gradually reducing bonds in retirement can then be employed to optimize returns, addressing the financial realities that retirees face. Mathematical principles and empirical results support this strategy, yet it remains underrepresented in target date funds, which often divert from the recommended bond allocation adjustments post-retirement.
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