USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

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hudson
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USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by hudson » Fri Jul 31, 2020 5:43 am

In four years at age 77, I'm looking at moving enough funds to cover basic needs from 77-100 by using TIPS to cover 24 years

For ages 77-89 (13 years), I would buy the Vanguard Inflation-Protected Securities Fund...average duration 8 years
For ages 90-100 (11 years), I would buy the ETF LTPZ...PIMCO's 15+ Year U.S. TIPS Index Exchange-Traded Fund...effective duration 21.64 years.

This would be step one. I do not have any funds to make a move until then...in 2024.

Step 2 would be to set up a non-rolling ladder of TIPS, maybe combining that with a single premium immediate annuity or the like.

What am I missing? How could I tweak my plan? What do you think?

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vineviz
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by vineviz » Fri Jul 31, 2020 7:13 am

hudson wrote:
Fri Jul 31, 2020 5:43 am
In four years at age 77, I'm looking at moving enough funds to cover basic needs from 77-100 by using TIPS to cover 24 years

For ages 77-89 (13 years), I would buy the Vanguard Inflation-Protected Securities Fund...average duration 8 years
For ages 90-100 (11 years), I would buy the ETF LTPZ...PIMCO's 15+ Year U.S. TIPS Index Exchange-Traded Fund...effective duration 21.64 years.

This would be step one. I do not have any funds to make a move until then...in 2024.

Step 2 would be to set up a non-rolling ladder of TIPS, maybe combining that with a single premium immediate annuity or the like.

What am I missing? How could I tweak my plan? What do you think?
First, instead of the Vanguard fund why not use Schwab US TIPS ETF (SCHP)? Same index, half the expense.

I think it's simpler to look at the problem this year: in four years you will build a TIPS ladder that has an average duration of 12 years.

IF you will be investing the money in TIPS funds in 2024 you will want a mix of VAIPX and LTPZ with an average duration of 12 years, so roughly 30% LTPZ and 70% SCHP. This will roughly match the duration of the desired TIPS ladder.

IF you are investing the money in TIPS funds today you want a mix of VAIPX and LTPZ that has an average duration of 16 years, so roughly 60% LTPZ and 40% SCHP. Between now and then, you could transition gradually from 60% LTPZ to 30% LTPZ. Or just split the difference and call it "close enough".

See here for more details. viewtopic.php?t=318412
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by vineviz » Fri Jul 31, 2020 7:18 am

vineviz wrote:
Fri Jul 31, 2020 7:13 am

First, instead of the Vanguard fund why not use Schwab US TIPS ETF (SCHP)? Same index, half the expense.
Also note the availability of the iShares Inflation Hedged Corporate Bond ETF (LQDI) which in exchange for the credit risk of corporate bonds gives you intermediate-term inflation protection with a positive expected real yield instead of the negative real yield of TIPS.

The duration of LQDI is little longer than SHCP or VAIPX, but not by much.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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hudson
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by hudson » Fri Jul 31, 2020 7:57 am

vineviz wrote:
Fri Jul 31, 2020 7:13 am
hudson wrote:
Fri Jul 31, 2020 5:43 am
In four years at age 77, I'm looking at moving enough funds to cover basic needs from 77-100 by using TIPS to cover 24 years

For ages 77-89 (13 years), I would buy the Vanguard Inflation-Protected Securities Fund...average duration 8 years
For ages 90-100 (11 years), I would buy the ETF LTPZ...PIMCO's 15+ Year U.S. TIPS Index Exchange-Traded Fund...effective duration 21.64 years.

This would be step one. I do not have any funds to make a move until then...in 2024.

Step 2 would be to set up a non-rolling ladder of TIPS, maybe combining that with a single premium immediate annuity or the like.

What am I missing? How could I tweak my plan? What do you think?
First, instead of the Vanguard fund why not use Schwab US TIPS ETF (SCHP)? Same index, half the expense.

I think it's simpler to look at the problem this year: in four years you will build a TIPS ladder that has an average duration of 12 years.

IF you will be investing the money in TIPS funds in 2024 you will want a mix of VAIPX and LTPZ with an average duration of 12 years, so roughly 30% LTPZ and 70% SCHP. This will roughly match the duration of the desired TIPS ladder.

IF you are investing the money in TIPS funds today you want a mix of VAIPX and LTPZ that has an average duration of 16 years, so roughly 60% LTPZ and 40% SCHP. Between now and then, you could transition gradually from 60% LTPZ to 30% LTPZ. Or just split the difference and call it "close enough".

See here for more details. viewtopic.php?t=318412
Thanks again Vineviz! I've snipped it and put it in my 2024 TIPS folder

I was going to do a 50-50 split, but 30-70 makes more sense....average duration 12 years....I'd have never come up with that on my own.

SCHP looks good. I'd never heard of it.

My CD ship doesn't come in until 2024....so that's when I'll likely make a move to TIPS.

I'll follow that link later today.

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hudson
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by hudson » Fri Jul 31, 2020 8:00 am

vineviz wrote:
Fri Jul 31, 2020 7:18 am
vineviz wrote:
Fri Jul 31, 2020 7:13 am

First, instead of the Vanguard fund why not use Schwab US TIPS ETF (SCHP)? Same index, half the expense.
Also note the availability of the iShares Inflation Hedged Corporate Bond ETF (LQDI) which in exchange for the credit risk of corporate bonds gives you intermediate-term inflation protection with a positive expected real yield instead of the negative real yield of TIPS.

The duration of LQDI is little longer than SHCP or VAIPX, but not by much.
I usually avoid corporate bonds. I need to take a hard look at LQDI. I'm not sure how it works.

miket29
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by miket29 » Fri Jul 31, 2020 1:37 pm

I don't understand why you have the first step of buying TIPS funds. Why not go directly to the TIPS ladder of actual bonds?

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hudson
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by hudson » Fri Jul 31, 2020 3:06 pm

miket29,

Why funds first? It's simpler and easier to buy into funds or ETFs.
I think that you are saying that it's probably best to go straight into TIPS. That seems to be the prevailing argument, and I don't disagree. I don't really know the answer; I'm trying to figure it out.

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hudson
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by hudson » Fri Jul 31, 2020 5:32 pm

Let's say that in 2024...at age 76, I do the ladder first. By then I should have that part figured out.
If I just go on Vanguard's website and start buying bonds on the secondary market, will that workout OK or could I get a haircut?
I've read several contributors say that it's OK. What level of expertise does one need to have?

000
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by 000 » Fri Jul 31, 2020 5:50 pm

Nah, no need to pay Vanguard and PIMCO 20 basis points for an investment that is already offering negative yields.

Just buy the individual TIPS -- free to buy at Vanguard and probably most other US brokers.

bigskyguy
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by bigskyguy » Fri Jul 31, 2020 5:54 pm

hudson wrote:
Fri Jul 31, 2020 5:32 pm
Let's say that in 2024...at age 76, I do the ladder first. By then I should have that part figured out.
If I just go on Vanguard's website and start buying bonds on the secondary market, will that workout OK or could I get a haircut?
I've read several contributors say that it's OK. What level of expertise does one need to have?
Purchasing Treasuries, including TIPS, can be easily done at any of the major brokerages. I happen to use Schwab, but Fidelity and Vanguard are equally user friendly. I don’t believe any of them charge commissions for treasury purchases either at auction or in the secondary market, and the bid-ask spread for treasuries of all colors is usually fairly tight. Considering that for a LMP ladder you are purchasing and holding to maturity, the cost of setting up a ladder is indeed minuscule in the long run scheme of things.

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FIREchief
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Re: USING TIPS FUNDS to fund a Liability Matching Portfolio AGES 76-100

Post by FIREchief » Fri Jul 31, 2020 7:32 pm

hudson wrote:
Fri Jul 31, 2020 3:06 pm
miket29,

Why funds first? It's simpler and easier to buy into funds or ETFs.
I think that you are saying that it's probably best to go straight into TIPS. That seems to be the prevailing argument, and I don't disagree. I don't really know the answer; I'm trying to figure it out.
I would agree that it is simpler and easier to buy TIPS funds if you've never bought individual TIPS before. Once I bought a few individual TIPS (at both auction and in the secondary market) it became an extremely simple task; well worth it for the added portfolio control and zero expenses.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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