But first is this quick write up about how well the FolioBeyond Rising Rates ETF (RISR) has done this year as bonds have been crushed. This chart offers context.
RISR has a few moving parts but basically is hedges interest rate risk via a negative duration. WisdomTree used to have one or two negative duration ETFs too but I can't find them, maybe they closed. I did throw in a short treasury ETF and a 2x short treasury ETF to add a little extra color.
Hedging bond funds is trickier than hedging equity exposure IMO for a few reasons. Guessing what interest rates will do is more difficult than guessing what stocks will do because if nothing else, stocks will broadly stop going down and eventually go back up. Interest rates don't have that sort of dynamic. Longer term they look more like a channel than something that typically goes from the lower left to the upper right. If it takes decades for interest rates to go back down once this event is over then bond funds might not recover, they have no par value to return to.
I've been making the observation that I think bonds have become a source of unreliable volatility in terms of the diversification benefits against stocks. Barron's profiled a former trader at the Fed who made a similar comment. I continue to favor allocating the traditional 40% (or whatever fixed income number we're talking about) to income sectors that avoid or minimize interest rate risk, one or two absolute return funds and strategies that offer more hedging protection than bonds do.
Let's check in on Social Security. Barron's had a short column with an update of the troubles Social Security is facing. The article was a nice nudge to check my Social Security account online to see where our numbers stand. I continue to want to take my payout at 70 so that if I die young, my wife will get the biggest possible survivor benefit. I'm gravitating to the idea though that my wife doesn't need to wait until her spousal benefit maxes out at 67. My age 70 amount now stands at $4006/mo in today's dollars, these numbers go up with inflation. If my wife takes at the same time as me, she'd be 64 and two months, hers would be $1229. That total plus our rental income is our plan A plus I hope to be nowhere close to done managing money at that age. Our savings in this scenario would be for emergencies and large one-off expenses.
That all looks pretty good from here but I'd want to devote time to understanding what happens if some of the predictions about the future bare out like reductions in payouts. I don't know if people at our current ages, 56 and 50, would get caught up in reductions but we all know the number being kicked around is a 23% cut. People in lower income/savings quintiles are very unlikely to face benefit cuts but if there is means testing, I think it will come down to income/savings levels much lower than anything being talked about now. Even if you disagree, that is the worse outcome and I want to prepare for what can go wrong, not what can go right.
A 23% haircut means we'd only be getting $3084 and $946. What do your numbers look like with a 23% haircut? Can your plan work in that scenario? If not, what can you do to mitigate the consequence of a 23% haircut? Now repeat the same exercise with a 33% haircut. Our numbers would drop to $2684 and $823. Can your retirement plan work under a 33% haircut, a haircut larger than anyone is talking about? If not, start figuring out your back up plan now. At 50, I don't think you need to have every last detail sorted out by any means but I might have some sort of framework and I would suggest starting to work on improve optionality like figuring out how to monetize a hobby or monetize what might start out as a volunteer endeavor or create a part time solution from your full time career.
Betting on "them" to "fix it" is not a bet I want to be overly reliant on. If I'm working back up plans that I never need and we actually get $5200/month, great, no harm no foul but betting only on what can go right does not make for robust planning.
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