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TIPS drawdown at staggered coupon rates
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peteyperson
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PostPosted: Mon Mar 21, 2005 11:46 pm    Post subject: TIPS drawdown at staggered coupon rates Reply with quote

John,

Could you run the numbers for up to 50 years on 1.7% coupon please?

This seems to be quite common at the 10-year TIPS term across many developed TIPS markets.

In fact. I'm gonna drive you nuts, John.

French Oati is now down to 1.4% for 10-year TIPS. What we really need (when you have the time) is the 5 to 50 year grid on returns in 5 basis point increments! 2.00%, 1.95% and so on down.

One has to be able to work with the numbers for TIPS from different countries and they are all different rates. You keep needing to change the rate you're working with. I suggest you make it fluid and use a table applying the nearest interest rate and the term the investor requires so you can just refer readers to a single thread with the numbers in. I say this also cos I've been trying to track down the TIPS numbers in a mass of threads and came up dry! So that data needs to have clearer access on TIPS drawdown and then you could make it a new sticky post!

Thanks,
Petey


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Norbert Schlenker
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PostPosted: Tue Mar 22, 2005 6:45 am    Post subject: Reply with quote

peteyperson wrote:
French Oati is now down to 1.4% for 10-year TIPS. What we really need (when you have the time) is the 5 to 50 year grid on returns in 5 basis point increments! 2.00%, 1.95% and so on down.

One has to be able to work with the numbers for TIPS from different countries and they are all different rates.

Not to rain on your parade and perhaps I've just missed it because I only joined recently, but what's with the fascination for foreign indexed bonds? How is a US resident going to be protected against domestic inflation - which is what TIPS do for you - by owning securities tied to some foreign inflation rate?



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peteyperson
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PostPosted: Tue Mar 22, 2005 7:07 pm    Post subject: Reply with quote

Norbert Schlenker wrote:
peteyperson wrote:
French Oati is now down to 1.4% for 10-year TIPS. What we really need (when you have the time) is the 5 to 50 year grid on returns in 5 basis point increments! 2.00%, 1.95% and so on down.

One has to be able to work with the numbers for TIPS from different countries and they are all different rates.

Not to rain on your parade and perhaps I've just missed it because I only joined recently, but what's with the fascination for foreign indexed bonds? How is a US resident going to be protected against domestic inflation - which is what TIPS do for you - by owning securities tied to some foreign inflation rate?

Hi Norbert,

You are correct. For a US citizen planning to live in the US upon retirement foreign TIPS make little sense.

In my case I allow for the possibility that I may live and travel abroad in my "retirement" years rather than remain just in the UK. So my spending will be in a variety of countries and the inflation I experience will be varied too. So for me it makes more sense to have TIPS from a mix of countries and linked to various inflation indicators.

In addition to this, if one planned to hold a more significant stake in TIPS for the healthy 3% returns drawn down over 40 years, then diversification away from domestic country issuance makes some sense too. I would want to protect that whilst living in SE Asia or Latin America or Canada, that the British pound didn't collapse and take my investment income stream along with it (pounds converted to Thai Baht, Canadian dollars provide reducing income in those currencies).

Petey


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Norbert Schlenker
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PostPosted: Wed Mar 23, 2005 7:45 am    Post subject: Reply with quote

peteyperson wrote:
In my case I allow for the possibility that I may live and travel abroad in my "retirement" years rather than remain just in the UK. So my spending will be in a variety of countries and the inflation I experience will be varied too. So for me it makes more sense to have TIPS from a mix of countries and linked to various inflation indicators.

Thank you for the clarification.

Quote:
In addition to this, if one planned to hold a more significant stake in TIPS for the healthy 3% returns drawn down over 40 years,

What does this mean?



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peteyperson
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PostPosted: Thu Mar 24, 2005 3:47 am    Post subject: Reply with quote

Norbert Schlenker wrote:
peteyperson wrote:
In my case I allow for the possibility that I may live and travel abroad in my "retirement" years rather than remain just in the UK. So my spending will be in a variety of countries and the inflation I experience will be varied too. So for me it makes more sense to have TIPS from a mix of countries and linked to various inflation indicators.

Thank you for the clarification.

Quote:
In addition to this, if one planned to hold a more significant stake in TIPS for the healthy 3% returns drawn down over 40 years,

What does this mean?

If one draws down principal over 30 years, that is 3.33% each year of principal (100/30). The remainder is the partial interest as you get the full sum in the first year and declining amounts of interest as the capital declines. This compares very favorably to a 75/25 S&P 500/Bond Index mix which has only given 4% itself over 30 years with considerably more risk to capital, risk of lower returns and volatility accepted. TIPS are held to 10-year maturity and so volatility is moot.

One can also get a little over 3% on 40 year payout which I think suits my perspective of retirement at 60, poss. 40 year payout (one hopes).

The only way the system works where you intentionally spend the capital is if it can cover your likely lifespan (this exceeds actuary estimates at age 65) and if the capital value can be determined ahead of time. If you hold 10-year TIPS to maturity in a ladder form with say a 20% allocation, 2% would come due each year, plus interest. One would spend the capital and reinvest some of the net interest as one does not use all of it in the early years to provide enough in the latter years as capital declines. This is a very tax-efficient asset allocation (79% of return is return of capital) so is unaffected by poss. hiked tax rates as boomers retire causing a strain on public finances, and any fall in coupon rates on TIPS doesn't have much affect on return as the majority of return when drawing down over 30- or 40-years is not from interest.

You will likely have more than enough left in stocks, real estate, etc., to give to charitable causes, family & friends and so on. Has to be individual TIPS though, a fund won't do. The trick is the automatic redemption each year providing guaranteed cash flow in wide market declines, as well as increased returns from bonds that has been typical in the past.

Petey


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JWR1945
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PostPosted: Thu Mar 24, 2005 11:03 am    Post subject: Reply with quote

For peteyperson:

Here are the numbers that you asked for (and a few others). The payments from 1.4% I-Bonds produce a withdrawal rate of:
1) 10.78% for 10 years or
2) 7.43% for 15 years or
3) 5.77% for 20 years or
4) 4.77% for 25 years or
5) 4.11% for 30 years or
6) 3.63% for 35 years or
7) 3.28% for 40 years or
8 )3.01% for 45 years or
9) 2.79% for 50 years.

Here are the numbers that you asked for (and a few others). The payments from 1.7% I-Bonds produce a withdrawal rate of:
1) 10.96% for 10 years or
2) 7.61% for 15 years or
3) 5.94% for 20 years or
4) 4.94% for 25 years or
5) 4.28% for 30 years or
6) 3.81% for 35 years or
7) 3.47% for 40 years or
8 )3.20% for 45 years or
9) 2.98% for 50 years.

Here is an approximation and how it compares with exact answers.

Approximation: [1/N] + [r/2] + [r/2*N]
where r = interest rate and N is the number of years.

When r = 1.4 and N = 20, [5%] + [0.7%] + [0.04%] = 5.74% versus 5.77%.
When r = 1.4 and N = 30, [3.33%] + [0.7%] + [0.02%] = 4.05% versus 4.11%.
When r = 1.4 and N = 40, [2.5%] + [0.7%] + [0.02%] = 3.22% versus 3.28%.
When r = 1.4 and N = 50, [2%] + [0.7%] + [0.01%] = 2.71% versus 2.79%.

When r = 1.7 and N = 20, [5%] + [0.85%] + [0.04%] = 5.89% versus 5.94%.
When r = 1.7 and N = 30, [3.33%] + [0.85%] + [0.03%] = 4.21% versus 4.28%.
When r = 1.7 and N = 40, [2.5%] + [0.85%] + [0.02%] = 3.37% versus 3.47%.
When r = 1.7 and N = 50, [2%] + [0.85%] + [0.02%] = 2.87% versus 2.98%.

Have fun.

John R.


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Norbert Schlenker
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PostPosted: Thu Mar 24, 2005 11:06 am    Post subject: Reply with quote

peteyperson wrote:
If one draws down principal over 30 years, that is 3.33% each year of principal (100/30). The remainder is the partial interest as you get the full sum in the first year and declining amounts of interest as the capital declines. This compares very favorably to a 75/25 S&P 500/Bond Index mix which has only given 4% itself over 30 years with considerably more risk to capital, risk of lower returns and volatility accepted. TIPS are held to 10-year maturity and so volatility is moot.

You're making a lot of assumptions about forward real rates. I agree that it looks very safe but I can dream up (admittedly unlikely) rate scenarios that would cause this to fail.

(Now I get to run the risk of having The Moderator Who Only Allows One Opinion delete the message but here goes anyway.) The comparison to the 75/25 mix is perhaps also a little too skeptical. Yes, a guaranteed 4% over 30 years looks pretty good compared to all the risk that you run with the 75/25 mix. But if what you're interested in most is a guarantee, you should be considering an annuity. You should also admit that you are making this implicit assumption: To shed the risk of failure, I am willing to give up the expected upside of the 75/25 mix. Don't get me wrong: There is nothing wrong with people who will trade off a higher expected sum for security. They should just have it clear in their own minds that that is what they really want.

Quote:
The only way the system works where you intentionally spend the capital is if it can cover your likely lifespan (this exceeds actuary estimates at age 65) and if the capital value can be determined ahead of time. If you hold 10-year TIPS to maturity in a ladder form with say a 20% allocation, 2% would come due each year, plus interest.

Then I think you're setting yourself up for possible problems. You are setting up a big asset-liability duration mismatch. Your asset - the ladder - has a duration of perhaps 5 years and your liability - your retirement funding - has a duration of (according to you) 20+ years. A real yield curve shift can crucify you.

Quote:
This is a very tax-efficient asset allocation (79% of return is return of capital) so is unaffected by poss. hiked tax rates as boomers retire causing a strain on public finances

This may be your take on present day UK taxes. The same tax rules do not apply elsewhere, nor do the same rules need to apply in future. There are countries in the world today that tax assets, not just income. Governments in fiscal trouble can do it anywhere and anytime.



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PostPosted: Thu Mar 24, 2005 11:20 am    Post subject: Reply with quote

Quote:
If one draws down principal over 30 years, that is 3.33% each year of principal

Is there a risk of living 31 years?



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peteyperson
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PostPosted: Thu Mar 24, 2005 11:39 am    Post subject: Reply with quote

ataloss wrote:
Quote:
If one draws down principal over 30 years, that is 3.33% each year of principal

Is there a risk of living 31 years?

Hi ataloss,

I plan for a 20-year accumulation and so I would likely retire around 60. I have asked John for the 40-year numbers because this covers beyond actuary numbers at age 60+. There is still the possibility one might outlive the TIPS/I-Bonds money, but if one has a max of say 25% allocation there, then you still have 75% invested in instruments that do not have a drawn down component even if in my case I survive past 100. In the words of one friend who I mentioned this too, he said I was 'very optimistic!'. But I like to have the downside covered too.

I hope that satisfies you.

Petey


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PostPosted: Thu Mar 24, 2005 12:11 pm    Post subject: Reply with quote

Norbert Schlenker wrote:
peteyperson wrote:
If one draws down principal over 30 years, that is 3.33% each year of principal (100/30). The remainder is the partial interest as you get the full sum in the first year and declining amounts of interest as the capital declines. This compares very favorably to a 75/25 S&P 500/Bond Index mix which has only given 4% itself over 30 years with considerably more risk to capital, risk of lower returns and volatility accepted. TIPS are held to 10-year maturity and so volatility is moot.

You're making a lot of assumptions about forward real rates. I agree that it looks very safe but I can dream up (admittedly unlikely) rate scenarios that would cause this to fail.

(Now I get to run the risk of having The Moderator Who Only Allows One Opinion delete the message but here goes anyway.) The comparison to the 75/25 mix is perhaps also a little too skeptical. Yes, a guaranteed 4% over 30 years looks pretty good compared to all the risk that you run with the 75/25 mix. But if what you're interested in most is a guarantee, you should be considering an annuity. You should also admit that you are making this implicit assumption: To shed the risk of failure, I am willing to give up the expected upside of the 75/25 mix. Don't get me wrong: There is nothing wrong with people who will trade off a higher expected sum for security. They should just have it clear in their own minds that that is what they really want.

Quote:
The only way the system works where you intentionally spend the capital is if it can cover your likely lifespan (this exceeds actuary estimates at age 65) and if the capital value can be determined ahead of time. If you hold 10-year TIPS to maturity in a ladder form with say a 20% allocation, 2% would come due each year, plus interest.

Then I think you're setting yourself up for possible problems. You are setting up a big asset-liability duration mismatch. Your asset - the ladder - has a duration of perhaps 5 years and your liability - your retirement funding - has a duration of (according to you) 20+ years. A real yield curve shift can crucify you.

Quote:
This is a very tax-efficient asset allocation (79% of return is return of capital) so is unaffected by poss. hiked tax rates as boomers retire causing a strain on public finances

This may be your take on present day UK taxes. The same tax rules do not apply elsewhere, nor do the same rules need to apply in future. There are countries in the world today that tax assets, not just income. Governments in fiscal trouble can do it anywhere and anytime.

Norbert,

There are a number of problems with your post.

With 1.7% TIPS, out of the 3.47% w/r, 2.5% comes from capital and only 0.97% from income pre-tax. A further reduction in the real yield from 1.7% down would not drastically affect the return because the majority of it is return-of-capital driven.

If you're concerned about the effect of deflation on TIPS returns, I would point out that all other investments have similar risks. On would opt to buy long-dated, non-callable, treasury bonds to protect against deflation risk. Major endowments place 7.5%-10% in such securities to cover that risk. One may choose to buy such an insurance policy for your portfolio but this does not suggest one should not own asset classes that respond to inflation (as most do). So deflation risk poses no additional risks to TIPS than anything other type of investment. Deflation is bad for almost everything.

In terms of tax changes, of course no one can ever predict. If one takes that kind of extreme attitude then one would have to conclude one can never retire because one can never know for sure you will be okay. One simply cannot live life that way. One makes prudent choices and then one has to live with that. It is always possible that one starts to be taxed on capital deployed and not income, but that would be a significant change to taxation policy. Is one supposed to add that in to the projections just because it is theoretically possible? That would apply to all types of investments, not must a part TIPS portfolio. Certainly France and Spain are now charging a "wealth" tax, and one would need to take that into account if choosing to FIRE there. In France's case, the cost of living outside of major cities like Paris and Lyon is markedly cheaper than the rest of Europe. So it swings in roundabouts.

In terms of buying an annuity, what makes you think those are safe? Standard Life, the 3rd largest annuity provider in the UK failed to meet the liquidity test having over invested in stocks right into the 2000 crash. They were forced to float a $3Bn. bond issue and the regulatory body rather than sticking to their guns simply halved the necessary liquidity to get many annuity providers under the new limits. Thus moving the goalposts on sound financial policies rendered moot thru poor investment practices now put those living off annuities at risk. Annuity rates were sold at 10% when any reasonable study of historical returns would show those types of return payouts were not realistic and the annuity provider would come unstuck. They did! Pension funds from the 1970s to today have proven themselves to be awful, market timing investor. In fact the pension plans here pulled out of the stock market deciding it was too risky only after the fact, selling and thus locking in losses. They did not experience the market rebound. Their money is now in bonds and chasing property prices up now that the NAVs have closed their 30% discount. So what makes you think with this kind of management of your money that once sold an annuity your payout is safe? If they don't do a great job, you cannot simply get your money returned. I don't consider these safe at all. Quite the opposite.

In terms of giving up stocks returns for less risk, if one had a 25% allocation to TIPS and the other 75% in a mix of assets including stocks, real estate and the like, how is this giving up returns? 25% in bonds is considered a low allocation when the norm is 40% during distribution phase. So you seem to have this wrong too. No one is trading away returns. I still plan to be heavily investing in global ScV, global micro cap, real estate, etc. This is just one part of a diversified whole, I'm simply getting a higher return from TIPS over forty years than one might otherwise. TIPS have unique charactistics when an investment is structured appropriately to provide higher returns in a safer manner from a bond component.

Even if coupon rates fell to 0%, the return on TIPS over a 40-year period would be 2.5% real (net). Here in the UK, bonds returned 5.6% nominal from 1900-2000. More than 20% would have been lost to taxes (1.12%). Management fees were high thru the period but we shall be kind and call it (0.20%). UK Inflation was 4.3% during the timeframe. Real return of -0.02%. Lovely! This included decades where bond value did not keep up with inflation. TIPS represent a better alternative for the lower risk end of your portfolio. You could opt to buy longer-term TIPS and lock the real rates in. If you could ladder these well enough that might work fine, but you are likely to be accepting volatile market pricing to do so. Given that 72% of the return comes from return of capital and not bond coupon, it makes sense for emphasis to be placed on realising capital at par value, and not chase higher yields.

Petey


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ataloss
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PostPosted: Thu Mar 24, 2005 12:25 pm    Post subject: Reply with quote

ok petey, there have been proposals for 100% tips portfolios (and you are way too young for that Laughing )



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PostPosted: Thu Mar 24, 2005 12:36 pm    Post subject: Reply with quote

peteyperson wrote:
With 1.7% TIPS, out of the 3.47% w/r, 2.5% comes from capital and only 0.97% from income pre-tax. A further reduction in the real yield from 1.7% down would not drastically affect the return because the majority of it is return-of-capital driven.

Think more broadly. You've convinced yourself that it will be okay if rates remain the same and even if rates go down. What's left?

Real rates could go up. Three and a half years ago, real rates on long TIPS were around 4%. So think about buying your ladder at today's rates, having real rates go back to 4%, reducing the market value of your capital by 20%+. That blows rather a big hole in "2.5% comes from capital", doesn't it?

Quote:
If you're concerned about the effect of deflation on TIPS returns, I would point out that all other investments have similar risks.

Absolutely. I am not telling you not to use TIPS. I use them myself. I recommend them to all my clients. What I don't do is gloss over unpleasant scenarios for any kind of investment.

All investments have risk. There is a blinding desire to shuck that risk by buying the "perfect product", to find the one "sure thing" that will produce a return with no risk. TIPS are being flogged that way these days. All I am asking you and others to do is to realize that (a) you cannot shuck all risk and (b) you had better get used to it.


Quote:
In terms of tax changes, of course no one can ever predict. If one takes that kind of extreme attitude then one would have to conclude one can never retire because one can never know for sure you will be okay. One simply cannot live life that way.

Again, I am just asking you to think more broadly. It is a very natural thing to presume that tomorrow will be just like today. It works for weather and it works pretty much for taxes too. But things can change and they do. I don't know that much about UK taxes and index-linked gilts but I have heard that there are special rules regarding the same. Those rules may allow you to make a calculation about the tax efficiency of an investment plan that applies only in the UK and only today. I happen to be in Canada and most of the posters here are in the US. The same rules do not apply in either of these countries. There are gruesome tax implications that prevent the holding of TIPS outside retirement accounts. That they must be held inside such accounts means that your tax argument re a mostly tax-free withdrawal of capital does not apply here. (Before I get jumped on, there are exceptions in the US in the form of Roth IRAs and I-bonds, but they are quite limited for people with any substantial net worth.)

Quote:
In terms of buying an annuity, what makes you think those are safe?

Again, I never said they were safe. You expressed an interest in a particular strategy because it trades off higher return for increased safety. If one proceeds further down that same road, then an annuity is worth considering. There are yet again risks, as you have pointed out, because the insurer could get into trouble themselves. But you have risks too with a TIPS portfolio. Built to last 30 or even 40 years, what if there's a medical breakthrough and life expectancy goes to 140 for all? The TIPS portfolio could fail, while the insurer, foreseeing the problem (somehow) could continue to pay for your full life.

There are risks everywhere. You cannot guard against them all no matter what you do.



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PostPosted: Thu Mar 24, 2005 1:08 pm    Post subject: Reply with quote

I guess most agree that TIPs can be a good part in a well diversified portfolio.

If one decides to run it as 2 portfolios (1 TIPs/1 others) and first spending down the TIPs portfolio while letting the other part stay untouched, I guess that does not not change the overall risk/return much. And I am guessing it adds a feel-good factor.

I do think one could be missing out on some re-balancing benefits and since I am the "leave no asset-class behind"-type that is something that I want to keep.

Cheers!



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PostPosted: Fri Mar 25, 2005 6:19 am    Post subject: Reply with quote

ataloss wrote:
ok petey, there have been proposals for 100% tips portfolios (and you are way too young for that Laughing )

Yeah. I don't think that is smart. You can always have institution risk, however secure the insitution appears. Printing endless money to pay the bond coupon and being insulated from the ensuing inflation is one idea but it doesn't work for me. I may well be living as an expat and so the uncertainty that would put on the value of the pound would be problematic.

I don't think there is a problem placing 25% in TIPS. That is light for a bond component in a diversified portfolio.

Petey


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PostPosted: Fri Mar 25, 2005 6:24 am    Post subject: Reply with quote

ben wrote:
I guess most agree that TIPs can be a good part in a well diversified portfolio.

If one decides to run it as 2 portfolios (1 TIPs/1 others) and first spending down the TIPs portfolio while letting the other part stay untouched, I guess that does not not change the overall risk/return much. And I am guessing it adds a feel-good factor.

I do think one could be missing out on some re-balancing benefits and since I am the "leave no asset-class behind"-type that is something that I want to keep.

Cheers!

Hi Ben,

It depends how much one considers the TIPS allocation to be covering a global market decline and for how long. If one allocated 20% to TIPS and had a 2% yield from the remainder of the porfolio, then 10-year TIPS could be all used up over a decade but isolate the remainder of the portfolio. This doesn't allow for rebalancing as one would be rebalancing which has some benefits but you may still be left with the inability to fund ongoing FIRE. Clearly that part doesn't work so well!

If one held more than 20% TIPS and didn't wish to cover more than a 10-year returns nightmare, then one could rebalance that portion. One could rebalance, I'm just not sure I would. I think it would depend on the situation. There will be plenty of other assets to rebalance if you own a global mix of common stocks, but also real estate securites globally, absolute return funds, other bonds, etc. Just because you might choose not to rebalance the TIPS does not leave you devoid of rebalancing options. It would only be 20% out of 80% that you didn't rebalance.

Also on rebalancing, I have yet to see a study that shows that you come out ahead net of the earlier than necessary capital gains tax paid on assets you sell. Even moving 10% would put me in the upper capital tax tax band which I would not otherwise trigger when FIREd, so it is not a small matter to rebalance. One may reduce risk somewhat but not come out ahead net of taxes. I do plan to rebalance but I don't see it as crucial in the whole portfolio if you have plans on other assets that don't need to be rebalanced.

One will have to take a view at the time as to whether the buying opportunity switching out of I-Bonds/TIPS is worth the risk from less liquidity. If the market had already fallen 50% from a high to fair value, there is still a risk it could fall to P/E 7.5. If however the market fell from P/E 15 to P/E 7.5, then halving again would be highly unlikely. Indeed I have not seen Shiller's data go much below P/E 7 and certainly it didn't stay that cheap for long if it did. So from a market history standpoint you would be safer to swap out a lot of the TIPS to rebalance at dirt cheap stocks prices! This is no guarantee even that that decision would be the right one. What are TIPS protecting your from other than inflation in this setup? Why are you reaching for extra return from your insurance policy? This is what I would be asking.

So I think there are different levels of rebalancing and benefits vs risks/costs. It would be a harder case to make it retired now and stocks fell from P/E 22 in the U.S. to 16. They could still fall further from there and so losing your TIPS protection to handle a 10-year market decline from P/E 16 might be a return chasing mistake in hindsight. However good it looked at the time if you're stuck with underwater stocks and having to sell a far higher percentage to survive you'll simply go broke in rapid fashion. Killing off a shield intended to provide some protection from a 1970s event in order to (partly) get higher returns is a shortsighted move.

Petey


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PostPosted: Fri Mar 25, 2005 6:44 am    Post subject: Reply with quote

That is true Petey - I just want to keep my portfolio re-balancing as unemotional and mechanical as possible after it is set up which means to rebalance from loser to winner no matter what. My experience and history tells me it is smarter way to do it. I cound be wrong! Very Happy

Anyway; I am talking TIPs funds anyway as not ready (or have access to) for the hassle of laddered TIPs on a global basis.

Cheers!



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PostPosted: Fri Mar 25, 2005 6:59 am    Post subject: Reply with quote

Hi NS,

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.

I don't see TIPS or I-Bonds as a sure thing. Indeed I have commented that one should not aim for a 50% or 100% allocation to them, and however safe one investment looks at the time one still needs to diversify as things can change. I just posted the same before this to Ben. So there is no blinding desire.

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%.

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.

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. I also take no account of a possible government pension unlike many who think in terms of FIRE monies until the gov't pension kicks in. So there is slack in the planning. I'm certainly not looking at best case scenario in anything here. I acknowledge there are always risks but if you have a balance of different kinds of risks, you put yourself on sound footing.

I haven't seen anything in your argument that really disputes the claim on living off TIPS or I-Bonds.

Petey

Norbert Schlenker wrote:
peteyperson wrote:
With 1.7% TIPS, out of the 3.47% w/r, 2.5% comes from capital and only 0.97% from income pre-tax. A further reduction in the real yield from 1.7% down would not drastically affect the return because the majority of it is return-of-capital driven.

Think more broadly. You've convinced yourself that it will be okay if rates remain the same and even if rates go down. What's left?

Real rates could go up. Three and a half years ago, real rates on long TIPS were around 4%. So think about buying your ladder at today's rates, having real rates go back to 4%, reducing the market value of your capital by 20%+. That blows rather a big hole in "2.5% comes from capital", doesn't it?

Quote:
If you're concerned about the effect of deflation on TIPS returns, I would point out that all other investments have similar risks.

Absolutely. I am not telling you not to use TIPS. I use them myself. I recommend them to all my clients. What I don't do is gloss over unpleasant scenarios for any kind of investment.

All investments have risk. There is a blinding desire to shuck that risk by buying the "perfect product", to find the one "sure thing" that will produce a return with no risk. TIPS are being flogged that way these days. All I am asking you and others to do is to realize that (a) you cannot shuck all risk and (b) you had better get used to it.


Quote:
In terms of tax changes, of course no one can ever predict. If one takes that kind of extreme attitude then one would have to conclude one can never retire because one can never know for sure you will be okay. One simply cannot live life that way.

Again, I am just asking you to think more broadly. It is a very natural thing to presume that tomorrow will be just like today. It works for weather and it works pretty much for taxes too. But things can change and they do. I don't know that much about UK taxes and index-linked gilts but I have heard that there are special rules regarding the same. Those rules may allow you to make a calculation about the tax efficiency of an investment plan that applies only in the UK and only today. I happen to be in Canada and most of the posters here are in the US. The same rules do not apply in either of these countries. There are gruesome tax implications that prevent the holding of TIPS outside retirement accounts. That they must be held inside such accounts means that your tax argument re a mostly tax-free withdrawal of capital does not apply here. (Before I get jumped on, there are exceptions in the US in the form of Roth IRAs and I-bonds, but they are quite limited for people with any substantial net worth.)

Quote:
In terms of buying an annuity, what makes you think those are safe?

Again, I never said they were safe. You expressed an interest in a particular strategy because it trades off higher return for increased safety. If one proceeds further down that same road, then an annuity is worth considering. There are yet again risks, as you have pointed out, because the insurer could get into trouble themselves. But you have risks too with a TIPS portfolio. Built to last 30 or even 40 years, what if there's a medical breakthrough and life expectancy goes to 140 for all? The TIPS portfolio could fail, while the insurer, foreseeing the problem (somehow) could continue to pay for your full life.

There are risks everywhere. You cannot guard against them all no matter what you do.


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kathyet
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Joined: 28 Nov 2002
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PostPosted: Fri Mar 25, 2005 8:10 am    Post subject: Reply with quote

Quote:
What if life expectancy boosts up to 140?

God help me...

Hey you guys talk, and dispute all you want but don't any of you think about quality of life??? People in there 80's are getting dementia, Alhzimers, Parkinsons etc. who wants to live with all that. Save yes, try to get the best return for your money yes, but plan for 40 or 50 years over the age of 60 leaves me cold just thinking about it.

Kathyet

Either enjoy life all the way or/

If you have to prop me up to live I will just have to say forget about it....


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ataloss
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PostPosted: Fri Mar 25, 2005 9:48 am    Post subject: Reply with quote

good point kathyet!


quality of life is key



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peteyperson
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PostPosted: Fri Mar 25, 2005 8:23 pm    Post subject: Reply with quote

I actually did think of this but just did not add it in. I don't know that it is desirable to live beyond a certain age if the quality of life just isn't there. Interestingly, the human body seems to hear this and acts appropriately. Many men die within a few months of losing their wives, for instance. This seems very common to me. Other times people embark on a new life and they live much longer. I think it depends on keeping mentally involved and active with your body. If you do that, life is just much more enjoyable. It is when you get stuck in the mud and cannot see an enjoyable way forward that things get much harder (at any age).

Petey

kathyet wrote:
Quote:
What if life expectancy boosts up to 140?

God help me...

Hey you guys talk, and dispute all you want but don't any of you think about quality of life??? People in there 80's are getting dementia, Alhzimers, Parkinsons etc. who wants to live with all that. Save yes, try to get the best return for your money yes, but plan for 40 or 50 years over the age of 60 leaves me cold just thinking about it.

Kathyet

Either enjoy life all the way or/

If you have to prop me up to live I will just have to say forget about it....


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