TIPS Baselines and Opportunities

Research on Safe Withdrawal Rates

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TIPS Baselines and Opportunities

Post by JWR1945 » Wed Feb 04, 2004 5:35 pm

Expanded Baselines and Opportunities

I made these baseline runs using what I call the JanSz-Chips Deluxe V2.0A version of my modified Retire Early Safe Withdrawal Calculator.

I did not use either of the special features. I set the capital gain percentage to 0% (the JanSz modification). I set dividend reinvestments to 100% (the Chips feature).

I made extensive use of my early data reduction features.

I used allocation switching with TIPS as the component other than stocks.

I looked at 30-year Historical Database Rates. I set expenses to 0.20%. I limited my examination to retirements begun in 1921 to 1980. Otherwise, I used default settings.


HDBR50T has 50% stocks and 50% TIPS.

HDBR80T has 80% stocks and 20% TIPS.

The 100% TIPS portfolio consists only of TIPS.

The Switching portfolio has stock allocations of 100%-50%-0% depending upon P/E10. The lower P/E10 threshold is 11. The higher P/E10 threshold is 21. These settings represent a starting point with thresholds similar to those chosen for the stock / commercial paper combination.

Historical Database Rates

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Portfolio  interest rate  Historical Database Rate
HDBR50T                0%                     3.7%
HDBR50T                1%                3.9%
HDBR50T                2%                4.2%
HDBR50T                3%                4.5%
HDBR50T                4%                4.7%
HDBR80T                0%                3.7%
HDBR80T                1%                3.8%
HDBR80T                2%                3.9%
HDBR80T                3%                4.0%
HDBR80T                4%                4.1%
100% TIPS             0%                2.8%
100% TIPS             1%                3.3%
100% TIPS             2%                3.8%
100% TIPS             3%                4.3%
100% TIPS             4%                4.9%
Switching               0%                4.3%
Switching               1%                4.6%
Switching               2%                4.9%
Switching               3%                5.3%
Switching               4%                5.6%

Notice that a balanced portfolio (50% stocks) is better than a high stock portfolio (80% stocks) whenever the (real) interest rate on TIPS exceeds 0%.

Notice that the 100% TIPS portfolio needed a 1% (real) interest rate for its Historical Database Rate to equal 1/(30 years). That is because there is a slight offset between the bond coupon, which is based upon the prior year's inflation, and withdrawals, which are based upon the current year's inflation.

Interpolating, a 100% TIPS portfolio is superior to a high stock portfolio (HDBR80T with 80% stocks) whenever the (real) interest rate is 2.3% or higher. Today's long-term TIPS on the secondary market are in this range.

Interpolating once again, a 100% TIPS portfolio is superior to a balanced portfolio (HDBR50T with 50% stocks) whenever the (real) interest rate is 3.5% or higher.

Switching with TIPS at 0% (real) interest outperforms a high stock portfolio (HDBR80T) even when the TIPS in the high stock portfolio have a 4% (real) interest rate. That is, a switching portfolio with TIPS consistently outperforms a portfolio with a fixed, high (80%) stock allocation regardless of rates.

Switching with TIPS is better than a balanced portfolio (HDBR50T with 50% stocks) which receives an interest rate that is 2% higher.

Switching with TIPS at 0% interest is equivalent to having 100% TIPS at 3% interest. Switching with TIPS at 2% interest is equivalent to having 100% TIPS at 4% interest.

Stated differently, by introducing switching, today's long-term TIPS are equivalent to having purchased TIPS at their peak interest rate of 4%. Needless to say, if you already have 4% TIPS, switching magnifies these benefits even more.

Remember that the switching allocations were not optimized. Nor were the thresholds. Further benefits can be expected by improving the allocations and threshold settings.

Cautionary Note

These results are in terms of Historical Database Rates.

Today's stock market is outside of the range of the Historical Database. I have made no adjustment for valuations and dividends. Safe Withdrawal Rates with today's stocks should be lower than these Historical Database Rates.

Have fun.

John R.

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