I'm not sure this is worthwhile, given the short remaining life of this board and your time zone, but here goes anyway.
peteyperson wrote:Here you're talking both of yield-to-maturity and the price bought vs par value. Clearly one would purchase at a price where you were getting your money back - inflation-adjusted - down the line. With I-Bonds one does not buy them on the open market and so there is no issue with par value, yield-to-maturity and so forth. For me, these are more attractive.
How can someone in the UK buy I-bonds? Does a similar product exist there?
The difference with TIPS in the UK is that the inflation uplift is not taxable but the coupon is. With I-Bonds neither inflation nor coupon is taxable but the coupon is 1.05%.
Even you have to admit that 1.05% is a meager return. It's also not true that "neither inflation nor coupon is taxable". It's just tax deferred and taxable on being cashed at full marginal rates. Last, the annual purchase $ limits make them not exactly ideal.
I would rather take the risk of a solid government not repaying me than the risk of an insurance company not being able to continue to pay the annuity. The risks there are totally different. I wouldn't trust any portfolio to a pension provider or insurer running an annuity.
Of course solid governments have AAA credit ratings, unlike most (perhaps all) insurers. In return, you get 1% real returns. It's a trade of return for security and everyone gets to specify what they're comfortable with.
What if life expectancy boosts up to 140? If one only has 20% in TIPS, then you still have 80% in other assets. It is not going to be a disaster.
For someone who is convinced by jwr's numbers, it seems a little odd to me that you would restrict your TIPS fraction to only 1/5 of the portfolio. If jwr is right, then the SWR out of the 80% is ~2.5% and the SWR out of the 20% is ~4%, combining the two gives you an SWR of ~2.8%. That's a substantial haircut when it comes to retirement income. Why would you sit still for that haircut if you are convinced jwr is right?
Please don't think I'm trying to talk you out of a diversified portfolio. 20% in indexed bonds is pretty close to my standard recommendation to my own clients, so I think it's an absolutely brilliant thing for you to be doing. However, I can make that sort of recommendation only because I believe something quite contrary to "only ~2.5% per year is possible out of the equity piece".
I haven't seen anything in your argument that really disputes the claim on living off TIPS or I-Bonds.
Let me try once more then. You buy 1.7% TIPS. JWR's tables say you can take 4%+ a year for 30 years from these TIPS with no problem.
Real rates go to 4% over the next year and stay there. You lose 20%+ of your capital. This part of the portfolio will not survive another 29 years if the withdrawal rate isn't reduced.