Need for inflation protection w/SS and/or inflation-adjusted pensions?

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friar1610
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Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by friar1610 » Fri Oct 06, 2017 5:39 pm

I'm curious how other BHs who have SS and/or inflation-adjusted pensions assess their need for inflation protection in the fixed income portions of their portfolios. Specifically, if you have (an) inflation-indexed income stream(s) do you also use I-Bonds and/or TIPS? Or do you feel that the inflation-adjusted streams adequately protect you? I ask because am relooking my FI choices to include another look at whether more of it should consider inflation. Thank you.
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Tyler Aspect
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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by Tyler Aspect » Fri Oct 06, 2017 8:43 pm

The size of the TIPs market is 5% of the size of the total bond market in the United States. In this way, I feel that market has already voted on the need for inflation protection, and the answer was a qualified "no".
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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by patrick » Fri Oct 06, 2017 10:28 pm

All of your spending (except for paying off debt) would be subject to inflation. Having all of your bond portfolio in inflation-protected bonds would give you the least inflation risk, though of course your personal inflation rate is very unlikely to precisely match the CPI. On the other hand, you could hope to get an inflation risk premium from nominal bonds.

The small size of the TIPS market is a result of what the Treasury chooses to issue.

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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by heyyou » Sat Oct 07, 2017 12:07 am

Since retirees fear inflation, there is money to be made by those who get a commission from selling supposed solutions for it. Inflation is a risk but the insurance is expensive if buying TIPS or a commodities fund based on trading commodities futures. Our world has changed from when OPEC could dictate our costs of energy, so the next bout of high inflation will have a different source than our last one. Expect to always be several steps behind whatever would have been optimal, similar to the generals who first try the strategy that would have worked well in the previous war.

Consider an alternative: Over long periods, equities out grow inflation. Investing in them has been better than buying the insurance to buffer inflation.

Our retirement budget has discretionary spending that could absorb some inflation. As mentioned elsewhere, that is the retiree version of continuing to live within our means. My suggestion is to just live with the risk while expecting to adapt to a variable financial environment, instead of trying to allocate now for every conceivable future.

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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by jeffarvon » Sat Oct 07, 2017 6:43 am

Just a comment about the "given" of a COLA pension. Teacher pensions in Ohio have frozen any COLA adjustments, seemingly for at least 5 years when the decision will be revisited. I believe similar things are happening in other states.

See also https://www.teacherpensions.org/resourc ... l-pensions
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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by ruralavalon » Sat Oct 07, 2017 7:47 am

friar1610 wrote:
Fri Oct 06, 2017 5:39 pm
I'm curious how other BHs who have SS and/or inflation-adjusted pensions assess their need for inflation protection in the fixed income portions of their portfolios. Specifically, if you have (an) inflation-indexed income stream(s) do you also use I-Bonds and/or TIPS? Or do you feel that the inflation-adjusted streams adequately protect you? I ask because am relooking my FI choices to include another look at whether more of it should consider inflation. Thank you.
We have Social Security, but no pension, and don't use either TIPS or I-bonds in the bond half of our portfolio.
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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by Dandy » Sat Oct 07, 2017 10:24 am

I have "enough" assets and Social Security. I diversify my fixed income to cover different things: e.g. intermediate bonds for better yield, short term bonds for less exposure to rising rates, Intermediate Treasuries for potential flight to quality events, muni funds for their tax advantages, CD ladder and online savings for FDIC/liquidity and TIPS for unexpected inflation.

I don't fuss to much on trying to rebalance these fixed income sub accounts a little more or less in each of them won't make any meaningful difference. I do have a 57% allocation to fixed income and the non intermediate fixed income is mostly to fund 20 years or so of my current drawdown amount in "safe" fixed income a la Dr. Bernstein's idea.

I think there would be a whole lot of interest in TIPS if we hadn't experienced such a long period of especially low inflation. Of course retirees in general may experience more inflation pressure with medical related inflation usually being an issue. If I am right today's TIPS fund NAV might be a bargain. If I recall President Ford started a WIN program (whip inflation now) to get inflation DOWN to 5%!!

I once did a spread sheet that calculated what I called the pension gap i.e. the increase on your drawdown to cover the fact that your pension wasn't COLA protected. Not bad in the early years but 10 to 15 years out and you could really see the pension gap hole was quite a challenge with even moderate inflation. I wish I still had it.

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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by alex_686 » Sat Oct 07, 2017 10:30 am

Tyler Aspect wrote:
Fri Oct 06, 2017 8:43 pm
The size of the TIPs market is 5% of the size of the total bond market in the United States. In this way, I feel that market has already voted on the need for inflation protection, and the answer was a qualified "no".
Could you expand on this? My understanding is that the limiting factor is the supply the Treasury Department is offering, not the demand from the market.

To the OP, I don't think there is an easy answer. Active management of your AA is the answer. Select the duration exposure you need, invest in risky equities that offer a good inflation hedge.

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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by Tyler Aspect » Sat Oct 07, 2017 11:39 am

alex_686 wrote:
Sat Oct 07, 2017 10:30 am
Tyler Aspect wrote:
Fri Oct 06, 2017 8:43 pm
The size of the TIPs market is 5% of the size of the total bond market in the United States. In this way, I feel that market has already voted on the need for inflation protection, and the answer was a qualified "no".
Could you expand on this? My understanding is that the limiting factor is the supply the Treasury Department is offering, not the demand from the market.
Granted the Treasury Department could offer more, but they chose not to. In any case there is no free lunch; inflation protection is a feature that must comes with a cost in terms of lower yield. I can also see the case when inflation do pick up steam, then the CPI provider will have incentive to adjust the index to lag inflation. Is the guarantee that rock solid?

I think I would advocate for a CD ladder with average maturity around 2.5 years. Once built, you get 5 year coupon rates and relatively quick catch up if rates go up. You can do a 4 year CD ladder, or even a 6 year CD ladder according to your preference.
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Re: Need for inflation protection w/SS and/or inflation-adjusted pensions?

Post by friar1610 » Sat Oct 07, 2017 11:49 am

alex_686 wrote:
Sat Oct 07, 2017 10:30 am


To the OP, I don't think there is an easy answer. Active management of your AA is the answer. Select the duration exposure you need, invest in risky equities that offer a good inflation hedge.
Right; I recognize that. Just trying to get a sense for how others in similar circumstances deal with the situation.

For the record, My wife and I each draw SS and I have a federal (military) pension. We have I-Bonds equal to about 20% of FI which, in turn, is about 55-60% of total port. As I get older I'm increasingly drawn to the "when you've won the game..." point of view and have been considering whether or not to convert any of our IRAs (currently 100% VG Total Bond Index) to TIPS.
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