All money in TIPs??

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Erwin
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All money in TIPs??

Post by Erwin »

My wife and I have been retired for 10 years and live very comfortable. Our portfolio is about 25% in a World stock Index (ACWI), 65% in 4 intermediate term total return bond funds, and 10% cash/short term bond funds. Since we live out of SS plus savings, the 10% gets replenished after depletion.

My goal has always been NOT to have the bond money in intermediate total return bond funds, but rather to build a long term ladder of TIPs that will cover our expenses until our end and get over with worrying about bond performance. But with interest rates so low, I keep waiting. Foolishly, I missed the opportunity in 2008, but no point in crying now.

Now my question: if you were my adviser, would you not jump in and buy the TIPs ladder now?

Welcome opinions and other ideas.
Erwin
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Re: All money in TIPs??

Post by Call_Me_Op »

mpt follower wrote:
Now my question: if you were my adviser, would you not jump in and buy the TIPs ladder now?

Welcome opinions and other ideas.
You should do what will allow you to sleep well at night. If you have enough so that TIPS with today's real yields will suffice, I see no reason to wait. Real yields may not get much better for many years - no way to tell. I would keep a little in stocks, however.
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Re: All money in TIPs??

Post by nisiprius »

If you're in good shape, you can do anything you like. It's all a question of whether you have "decreasing relative risk aversion," in which you say "Now that I have plenty of money, I can afford to gamble some of it," or "increasing relative risk aversion," in which you say "Now that I have plenty of money, I don't need to gamble any of it." The weird thing is that it is often implied that there's some objective right or wrong attitude, but there isn't. Nobody can say one is right and the other is wrong.

I thought I was a big fan of TIPS but personally I would be uncomfortable in "100% of anything."

One minor detail is that the government issues TIPS to meet its needs, not investors' needs. For example, in the days when the government was running a surplus it didn't need to borrow money and didn't issue many TIPS. Thus, the pattern of issue and maturity dates is irregular. There are holes in it. It's not too user-friendly for people trying to build ladders. There are, for example, none maturing in 2030 or 2031. See the list by maturity date here:

http://eyebonds.info/tips/tipslist_mat.html
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Aptenodytes
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Re: All money in TIPs??

Post by Aptenodytes »

On paper you would be good candidate for a SPIA.
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Erwin
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Re: All money in TIPs??

Post by Erwin »

Aptenodytes wrote:On paper you would be good candidate for a SPIA.
I may not have explained my situation well. The reason that I am thinking about a TIPs ladder because it seems to me to be a very adequate retirement strategy. There are people like Zvi Bodie's (http://www.zvibodie.com) from Boston U that feel strongly on TIPs as the main tool to establish retirement.
To me, by using SPIAs, for a fee, you are rendering your money to others mainly because you can't or do not wish to handle it yourself. I am certainly not in that camp.

Now back to the topic. Last time I check, a 30 year TIP ladder is yielding only about 0.5% (real). So I ask, should I or should I not wait?
Erwin
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Re: All money in TIPs??

Post by dbr »

mpt follower wrote:
Aptenodytes wrote:On paper you would be good candidate for a SPIA.
I may not have explained my situation well. The reason that I am thinking about a TIPs ladder because it seems to me to be a very adequate retirement strategy. There are people like Zvi Bodie's (http://www.zvibodie.com) from Boston U that feel strongly on TIPs as the main tool to establish retirement.

"Very adequate" qualifies as a good enough plan that does not need a better plan. That said, I personally could never stomach 100% of anything as that violates overriding principles of diversity in investing.

To me, by using SPIAs, for a fee, you are rendering your money to others mainly because you can't or do not wish to handle it yourself. I am certainly not in that camp.

The main purpose of an SPIA is to insure longevity risk by pooling that risk with others. The SPIA is a fundamental shift from ENSURING you will have enough ASSETS to INSURING that you will have enough INCOME. On paper it is THE overriding rational thing a retired investor should do. Of course, the decision includes accounting for income that is already annuitized such as SS and pensions. The decision also includes evaluating how much longevity risk there is. A very wealthy investor, relative to income needed, does not benefit much, and an investor with very little in assets can't solve that problem with an annuity.

Now back to the topic. Last time I check, a 30 year TIP ladder is yielding only about 0.5% (real). So I ask, should I or should I not wait?
Last edited by dbr on Fri Aug 01, 2014 9:20 am, edited 1 time in total.
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Re: All money in TIPs??

Post by Aptenodytes »

mpt follower wrote: To me, by using SPIAs, for a fee, you are rendering your money to others mainly because you can't or do not wish to handle it yourself. I am certainly not in that camp.
I suggest you read more about SPIAs before committing to the full TIPS ladder. Your understanding is very different from the mainstream. I wouldn't suggest putting all your money in a SPIA, but I would at least take a look at the option of putting some in.

That still leaves your original question, which is a toughie. If I were in your shoes, I would probably question the premise, at least the extent of it. With yields so low, maybe the benefits of a full LMP approach are less attractive and a more conventional portfolio might be more appropriate. My guess is that if you are an absolutist on LMP you more or less have no choice but to sink your money in the TIPS ladder now.

I tend not to be an absolutist about anything. I'm setting up a ladder of TIPS but it only will meet a portion of my liabilities, not all of them. I will also be buying some SPIAs when I get older. I have some stable value funds. And the rest is in the usual mix of stock and bond funds. It isn't optimal for any one scenario of future market conditions and life circumstances, but it is reasonable across a wide range of them.

Have you been reading what Bodie is advising people to do in current market conditions? He's probably thinking pretty hard about exactly your question.
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Re: All money in TIPs??

Post by Browser »

"Should I wait?" The eternal dilemma for bond investors these days. Having pondered this endlessly myself, there are no good choices here. First, you have no assurance that current yields will go up - they may go down. You also have the problem of where your money is living while you're waiting. You have it parked in an array of bond funds that don't have a real return any higher than TIPS, so while you're waiting for Godot you aren't making any money either. The thing about bonds is that the current YTM is the best indicator of your future YTM. You can't escape this reality by waiting in the corridor because your future YTM consists of what you earn while in the corridor plus what you earn when you finally take the plunge. Now maybe that future forecast is all wrong -- you could stay in cash and suddenly TIPS yields skyrocket as in 2008 and you can lock those yield in. Only one of several possible scenarios will work in your favor if you wait... Hope for that one. I got lucky in 2008 because I listened to Larry. But now I've got another problem -- the higher YTM from those bonds is "lumpy". It has already occurred in the form of the increase in principal value. Now I'm sitting on TIPS with a funky forward-looking YTM that could be sold to capture the cap gains. Should I wait?
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Re: All money in TIPs??

Post by bobcat2 »

mpt follower wrote:
Aptenodytes wrote:On paper you would be good candidate for a SPIA.
I may not have explained my situation well. The reason that I am thinking about a TIPs ladder because it seems to me to be a very adequate retirement strategy. There are people like Zvi Bodie's (http://www.zvibodie.com) from Boston U that feel strongly on TIPs as the main tool to establish retirement.
To me, by using SPIAs, for a fee, you are rendering your money to others mainly because you can't or do not wish to handle it yourself. I am certainly not in that camp.

Now back to the topic. Last time I check, a 30 year TIP ladder is yielding only about 0.5% (real). So I ask, should I or should I not wait?
You are certainly free to use TIPS as the main tool for income in retirement, but that is not Zvi Bodie's position. Bodie believes that most retirement income should come from a combination of Social Security, TIPS (particularly a ladder), life annuities (preferably indexed for inflation), I-bonds, and db pension benefits if available.

Advantages of annuitized income, including Social Security and db pension.

Annuitized income addresses longevity risk. TIPS ladder does not.
Annuitized income is a contingent claim and therefore you get additional income from the mortality credit.
Annuitized income can be inflation adjusted. When it is inflation adjusted it addresses inflation risk.

Advantages of TIPS ladder
It is always fully inflation adjusted.
It is more flexible than annuitized income, which is fixed.

Example –
I have a TIPS ladder that provides $15,000 per year. If I need to spend $25,000 this year I can spend this year’s maturing TIPS and sell $10,000 of next year’s TIPS. The duration risk of TIPS maturing in one year is small.

The answer is choose both at retirement.

Run the TIPS ladder out to your early or mid 80s. This gives you both the mortality credit of the annuities and the flexibility of the TIPS income. Once you reach the end of the TIPS ladder in your 80s, annuitize that amount of income going forward. The mortality credit will be high and you have longevity protection if you live to a very old age.

You could instead purchase a longevity annuity at retirement that kicks in when the TIPS ladder is exhausted, or combine a longevity annuity and purchasing a life annuity at the end of the TIPS ladder.

BobK
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Re: All money in TIPs??

Post by dbr »

Bob, would you not also mention that not the entirety of the assets go to annuities and TIPS? I think there should always be room for some equity investing.

Or, perhaps this is an indication the retiree does not have adequate resources to support the planned retirement. We are speaking theoretically and not specifically to the OP.
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Re: All money in TIPs??

Post by Aptenodytes »

dbr wrote:Bob, would you not also mention that not the entirety of the assets go to annuities and TIPS? I think there should always be room for some equity investing.
I agree. Kitces and Pfau have a paper that argues that a major benefit of an annuity-heavy approach is that it allows equities to grow relatively unfettered. The True Impact of Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective. This insight makes a lot of sense to me.
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Re: All money in TIPs??

Post by Erwin »

Good stuff!
Thank you all.
Erwin
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Re: All money in TIPs??

Post by bobcat2 »

dbr wrote:Bob, would you not also mention that not the entirety of the assets go to annuities and TIPS? I think there should always be room for some equity investing.
Yes, there is certainly room for equity investing, and a retiree can have a combined equity and life annuity strategy. When equities in a given year, such as 2013, produce much higher than expected real returns, purchase a life annuity with some, or all, of this bonus and spread that one year of investment good fortune over the rest of your life.

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Re: All money in TIPs??

Post by baw703916 »

nisiprius wrote:One minor detail is that the government issues TIPS to meet its needs, not investors' needs. For example, in the days when the government was running a surplus it didn't need to borrow money and didn't issue many TIPS. Thus, the pattern of issue and maturity dates is irregular. There are holes in it. It's not too user-friendly for people trying to build ladders. There are, for example, none maturing in 2030 or 2031. See the list by maturity date here:

http://eyebonds.info/tips/tipslist_mat.html
That's not quite the reason for the gap in maturities. It's true that the amount of TIPS sold is based on the government's funding needs, as well as market demand for nominal vs. real return bonds. But the gap results from only 5, 10, and 30 year duration TIPS being sold at auction. So it takes 20 years from the time that TIPS were initially instituted (mid 1990s) to fill in all the maturities. That would have happened by now, except the Treasury has changed its mind a couple times. It started with 5/10/30, then switched to 5/10/20, then back to 5/10/30. The 30 year TIPS was revived in 2009, IIRC, so it will take another 15 years for the rest of the gaps to disappear.
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Re: All money in TIPs??

Post by mindbogle »

Browser wrote:
"Should I wait?" The eternal dilemma for bond investors these days. Having pondered this endlessly myself, there are no good choices here. First, you have no assurance that current yields will go up - they may go down. You also have the problem of where your money is living while you're waiting. You have it parked in an array of bond funds that don't have a real return any higher than TIPS, so while you're waiting for Godot you aren't making any money either. The thing about bonds is that the current YTM is the best indicator of your future YTM. You can't escape this reality by waiting in the corridor because your future YTM consists of what you earn while in the corridor plus what you earn when you finally take the plunge. Now maybe that future forecast is all wrong -- you could stay in cash and suddenly TIPS yields skyrocket as in 2008 and you can lock those yield in. Only one of several possible scenarios will work in your favor if you wait... Hope for that one.
+1 - excellent description of the "eternal dilemma"!

MB
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Re: All money in TIPs??

Post by Watty »

Now my question: if you were my adviser, would you not jump in and buy the TIPs ladder now?

Given the way that TIPs are taxed each year buying TIPs in a taxable account is generally not a good idea but can work in some special cases.

If you have them in a retirement account then you need to make sure that you will be getting enough interest and bonds maturing each year to take your RMD each year when you are older so that you do not need to sell them at a loss just to take the RMD.

Keeping the TIPS ladder up to date when you are older, or if a less experienced spouse ends up managing the portfolio might not work so well. A TIPs mutual fund might work better although you would have less control.
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Re: All money in TIPs??

Post by #Cruncher »

mpt follower wrote:My wife and I have been retired for 10 years …
Yes, but how old are you? This is relevant in determining the longest maturities it makes sense to buy. For example, if you are each over age 70, I wouldn't suggest buying bonds that mature in 30 years.
mpt follower wrote:Now my question: if you were my adviser, would you not jump in and buy the TIPs ladder now?
No, I wouldn't "jump" in, but I would "wade" in. Assuming you and your wife are age 70 - 75, here's one possible approach to ponder. I doubt you'd want to follow it exactly, but it may give you ideas.
  • Hold on to your equity fund through 2019.
  • Keep enough in cash and short term bond funds for your spending through 2018.
  • Sell some of your intermediate term bond funds and use the proceeds to build a TIPS ladder for the years 2019 - 2029. Do this by buying
    • in the secondary market TIPS maturing in 2020 - 2023 and 2025 - 2029.
    • the 5-year TIPS maturing April 2019 at the reopening auction tentatively scheduled for August 21. [ * ]
    • the 10-year TIPS maturing July 2024 at the reopening auction tentatively scheduled for September 18.
  • Then beginning in 2020 buy a 10-year TIPS every year at auction. Fund these purchases from your remaining bond funds and your equity fund.
baw703916 wrote:[ The Treasury ] started with 5/10/30 [ year TIPS maturities ], then switched to 5/10/20, then back to 5/10/30. The 30 year TIPS was revived in 2009, IIRC,...
The issuing history is even more erratic than that. Here is the issue history summarized from this list:

Code: Select all

1997         5  &  10
1998-2001          10  &  30
2002-2003          10
2004-2009    5  &  10  &  20
2010-2014    5  &  10  &  30
But it gets better: You might wonder, why if 30-year TIPS were issued in 2000 and 2001, there aren't any that mature in 2030 or 2031. The reason is that the one issued in October 2000 was a reissue of the one originally issued 1-1/2 years before in April 1999 to mature in 2029. And the one issued in October 2001 matured 30-1/2 years later in 2032. (See 30-year TIPS auctions.)

* See Tentative Auction Schedule PDF File.
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Re: All money in TIPs??

Post by Erwin »

#Cruncher wrote:
mpt follower wrote:My wife and I have been retired for 10 years …
Yes, but how old are you? This is relevant in determining the longest maturities it makes sense to buy. For example, if you are each over age 70, I wouldn't suggest buying bonds that mature in 30 years.
mpt follower wrote:Now my question: if you were my adviser, would you not jump in and buy the TIPs ladder now?
No, I wouldn't "jump" in, but I would "wade" in. Assuming you and your wife are age 70 - 75, here's one possible approach to ponder. I doubt you'd want to follow it exactly, but it may give you ideas.
  • Hold on to your equity fund through 2019.
  • Keep enough in cash and short term bond funds for your spending through 2018.
  • Sell some of your intermediate term bond funds and use the proceeds to build a TIPS ladder for the years 2019 - 2029. Do this by buying
    • in the secondary market TIPS maturing in 2020 - 2023 and 2025 - 2029.
    • the 5-year TIPS maturing April 2019 at the reopening auction tentatively scheduled for August 21. [ * ]
    • the 10-year TIPS maturing July 2024 at the reopening auction tentatively scheduled for September 18.
  • Then beginning in 2020 buy a 10-year TIPS every year at auction. Fund these purchases from your remaining bond funds and your equity fund.
baw703916 wrote:[ The Treasury ] started with 5/10/30 [ year TIPS maturities ], then switched to 5/10/20, then back to 5/10/30. The 30 year TIPS was revived in 2009, IIRC,...
The issuing history is even more erratic than that. Here is the issue history summarized from this list:

Code: Select all

1997         5  &  10
1998-2001          10  &  30
2002-2003          10
2004-2009    5  &  10  &  20
2010-2014    5  &  10  &  30
But it gets better: You might wonder, why if 30-year TIPS were issued in 2000 and 2001, there aren't any that mature in 2030 or 2031. The reason is that the one issued in October 2000 was a reissue of the one originally issued 1-1/2 years before in April 1999 to mature in 2029. And the one issued in October 2001 matured 30-1/2 years later in 2032. (See 30-year TIPS auctions.)

* See Tentative Auction Schedule PDF File.
I just turned 66 and my wife is 62. Can I ask you to rework your ideas given this new data?? thank you
Erwin
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Re: All money in TIPs??

Post by #Cruncher »

mpt follower wrote:I just turned 66 and my wife is 62. Can I ask you to rework your ideas given this new data?? thank you
You are each younger than I guessed since you have both been retired for 10 years. That's why in my previous post, I suggested you consider initially building a TIPS ladder only out to 2029 and then adding one more year with 10-year TIPS annually beginning in 2020.

But given your younger ages, I'll modify my suggestion. First off I'm assuming you are comfortably well off so that you have no reasonable chance of running out of money even if either of you lived another 30 years. [ 1 ] [ 2 ] If you are, then you can afford to purchase a 30-year TIPS ladder even at today's low yields and still have enough left over after 30 years to live on should one of you still be living. So that is my suggestion: if you can afford it and you wish to minimize risk, bite the bullet and purchase a full 30-year TIPS ladder even with today's low rates.

However, if -- like me -- you find it difficult to lock in today's low rates over such a long period, here's a "split-the-difference" alternative: Buy TIPS through 2044 but do not buy extra amounts of the 2029, 2032, and 2040 maturities to cover the "gap" years of 2030-2031 and 2033-2039 when no TIPS mature. Instead buy double amounts of TIPS maturing in 2020-2021 and 2023-2029. When these mature, plan on spending 1/2 of the proceeds to cover expenses, and using the remainder to buy 10-yeat TIPS maturing in 2030-2031 and 2033-2039. I just modified my TIPS Ladder Spreadsheet to handle this type of approach. It is shown on the Ladder-Dbl sheet.
  1. This would probably correspond to a portfolio 30 or 40 times the amount of your annual expenses not covered by social security
  2. If you are not so well off, you might consider an SPIA to kick in at some future time. For example as ...
    bobcat2 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2140837#p2140837]this post[/url] wrote:Run the TIPS ladder out to your early or mid 80s. … Once you reach the end of the TIPS ladder in your 80s, annuitize that amount of income going forward. The mortality credit will be high and you have longevity protection if you live to a very old age.
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Re: All money in TIPs??

Post by baw703916 »

#Cruncher wrote:
baw703916 wrote:[ The Treasury ] started with 5/10/30 [ year TIPS maturities ], then switched to 5/10/20, then back to 5/10/30. The 30 year TIPS was revived in 2009, IIRC,...
The issuing history is even more erratic than that. Here is the issue history summarized from this list:

Code: Select all

1997         5  &  10
1998-2001          10  &  30
2002-2003          10
2004-2009    5  &  10  &  20
2010-2014    5  &  10  &  30
But it gets better: You might wonder, why if 30-year TIPS were issued in 2000 and 2001, there aren't any that mature in 2030 or 2031. The reason is that the one issued in October 2000 was a reissue of the one originally issued 1-1/2 years before in April 1999 to mature in 2029. And the one issued in October 2001 matured 30-1/2 years later in 2032. (See 30-year TIPS auctions.)

* See Tentative Auction Schedule PDF File.
Thanks for the useful information!
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Erwin
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Re: All money in TIPs??

Post by Erwin »

#Cruncher wrote:
mpt follower wrote:I just turned 66 and my wife is 62. Can I ask you to rework your ideas given this new data?? thank you
You are each younger than I guessed since you have both been retired for 10 years. That's why in my previous post, I suggested you consider initially building a TIPS ladder only out to 2029 and then adding one more year with 10-year TIPS annually beginning in 2020.

But given your younger ages, I'll modify my suggestion. First off I'm assuming you are comfortably well off so that you have no reasonable chance of running out of money even if either of you lived another 30 years. [ 1 ] [ 2 ] If you are, then you can afford to purchase a 30-year TIPS ladder even at today's low yields and still have enough left over after 30 years to live on should one of you still be living. So that is my suggestion: if you can afford it and you wish to minimize risk, bite the bullet and purchase a full 30-year TIPS ladder even with today's low rates.

However, if -- like me -- you find it difficult to lock in today's low rates over such a long period, here's a "split-the-difference" alternative: Buy TIPS through 2044 but do not buy extra amounts of the 2029, 2032, and 2040 maturities to cover the "gap" years of 2030-2031 and 2033-2039 when no TIPS mature. Instead buy double amounts of TIPS maturing in 2020-2021 and 2023-2029. When these mature, plan on spending 1/2 of the proceeds to cover expenses, and using the remainder to buy 10-yeat TIPS maturing in 2030-2031 and 2033-2039. I just modified my TIPS Ladder Spreadsheet to handle this type of approach. It is shown on the Ladder-Dbl sheet.
  1. This would probably correspond to a portfolio 30 or 40 times the amount of your annual expenses not covered by social security
  2. If you are not so well off, you might consider an SPIA to kick in at some future time. For example as ...
    bobcat2 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2140837#p2140837]this post[/url] wrote:Run the TIPS ladder out to your early or mid 80s. … Once you reach the end of the TIPS ladder in your 80s, annuitize that amount of income going forward. The mortality credit will be high and you have longevity protection if you live to a very old age.
THANK YOU many times.
Erwin
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Re: All money in TIPs??

Post by Browser »

I-Bonds are preferable to TIPS in every possible way. Problem is you are limited in the amounts you can purchase, and you can't stuff them away in your tax-deferred accounts. I consider my I-Bonds to be the "hole fillers" in my TIPS ladder, since they can be cashed at any time and have no principal risk if cashed before maturity, as do TIPS.
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Re: All money in TIPs??

Post by graveday »

Yes, i-BONDS max out at ten grand per year. Still, do it yearly and sooner or later you are talking real money, heh.
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Re: All money in TIPs??

Post by Browser »

graveday wrote:Yes, i-BONDS max out at ten grand per year. Still, do it yearly and sooner or later you are talking real money, heh.
Of course a couple can boost that to $20K/year. Now we're getting there, but you have to think ahead (which few people do) because you can't just pile your egg into them all at once. If you're Zvi Bodie you've been doing this forever anyway. He favors I-Bonds over TIPS.
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Re: All money in TIPs??

Post by SnowSkier »

For a couple, can do 25k per year in i bonds. 10k per each ssn, and then 5k through income tax refund in the form of i bonds.

Some time before April 15, one can file for an extension, and submit an estimated tax payment that overpays taxes by, for example, 6k.

Then, file the return (OK to do before April 15, even though extension has been filed), and request that the 6k refund be paid with 5k in i bonds and the rest in cash.
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Re: All money in TIPs??

Post by graveday »

Crafty, Snowskier, very crafty. I like it.
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