TIPS ladder in retirement

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CWRadio
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TIPS ladder in retirement

Post by CWRadio » Wed Oct 03, 2012 1:34 pm

In William Bernstein new e book "The age of the Investor", he recommends to build a TIPs ladder for your required expenses in retirement.
My question:
With interest near or below zero on TIPS does it make sense to build a TIPs ladder now or do something else? Paul

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Re: TIPS ladder in retirement

Post by Call_Me_Op » Wed Oct 03, 2012 1:44 pm

Personally, I'd be hesitant to lock-in such low real rates. I would probably stick with high-quality short-term fixed income for now.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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steve roy
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Re: TIPS ladder in retirement

Post by steve roy » Wed Oct 03, 2012 1:45 pm

There is the option of shifting into short-term bond funds, and riding interest hikes up over time.

Dr. Bernstein recommends short-term bonds, and has for some time. He admits that his timing with short term bonds has been off. "Wrong for the last two years," as he puts it (regarding direction of longer-term bonds.)

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Re: TIPS ladder in retirement

Post by Dinero » Thu Oct 04, 2012 7:09 am

I would not want to lock in negative real rates on TIPS at this point either. You have to go out 20 years to get a (barely) positive real yield on TIPS, last time I checked. Staying short makes sense, and I believe that Larry Swedroe has indicated that high-quality short-term corporate bonds have provided meaningful risk-adjusted returns versus short-term treasuries.

As Dr. Bernstein says:
[i]The Ages of the Investor[/i] wrote:...with today's historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.
It is a useful (and sobering) exercise to list your retirement years on a spreadsheet (I worked the problem through age 95), estimate how much social security will be paying per year, and get an estimate of how much you need each year from investments. Then you can get an idea of what your total Liability Matching Portfolio might have to be. This, of course, is guesswork only, since 1) it is difficult to know what your annual spending needs will be in retirement and 2) you don't know what the maximum age is that you need to "Liability Match."

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Re: TIPS ladder in retirement

Post by Doc » Thu Oct 04, 2012 8:52 am

adlerps wrote:In William Bernstein new e book "The age of the Investor", he recommends to build a TIPs ladder for your required expenses in retirement.
As we approached retirement I built a ten year TIPS ladder to cover bare minimum expenses for a ten year period in case "all hell broke loose". Well it did in 2008 and the ladder did well except for the severe drop in short term TIPS prices which were supposed to cover the expenses without any penalty.

Since the economy hasn't recovered yet I have not been replacing maturing TIPS with another ten but rather "parking" the maturing notes in short nominal Treasuries and/or short term TIPS funds until ??? So the ladder is still there in some sense but the duration of that ladder is getting shorter every January 15th.

Given that inflation doesn't seem a threat in the near term and the corporate spread is wider than "normal" because of Fed action short AAA corporates might also make a good holding place for a rung of a future TIPS ladder.

So my answer is yes build a (pseudo) TIPS ladder of short duration and extend the duration as the ladder's "rungs" mature.
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Re: TIPS ladder in retirement

Post by CWRadio » Thu Oct 04, 2012 10:02 am

Thanks all for your answers and advice.
One question again:
Should a "short term bond fund" or ETF have government and corp bonds or just corp bonds?
Please give examples of fund or ETFs.
Thanks Paul

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Re: TIPS ladder in retirement

Post by Call_Me_Op » Thu Oct 04, 2012 10:09 am

adlerps wrote:Thanks all for your answers and advice.
One question again:
Should a "short term bond fund" or ETF have government and corp bonds or just corp bonds?
Please give examples of fund or ETFs.
Thanks Paul
Really depends upon your risk tolerance. If your risk tolerance is very low, I would opt for a short-term ladder of brokerage CDs.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: TIPS ladder in retirement

Post by Doc » Thu Oct 04, 2012 1:23 pm

Call_Me_Op wrote:
adlerps wrote:Thanks all for your answers and advice.
One question again:
Should a "short term bond fund" or ETF have government and corp bonds or just corp bonds?
Please give examples of fund or ETFs.
Thanks Paul
Really depends upon your risk tolerance. If your risk tolerance is very low, I would opt for a short-term ladder of brokerage CDs.
CDs have a liquidity risk that Treasuries and AAA corporates do not. How important this is to the individual depends a lot on how they are using the short FI. If you want low risk in a liquidity crunch CDs are probably not a good thing. Even short TIPS did poorly in fall of 2008. If your risk tolerance is low there is nothing better than short Treasuries with T-Bills as the limit. Of course with low risk comes low return. But the premise of the OP is a TIPS ladder in retirement which implies a low risk philosophy. If you have enough assets to meet your retirement needs except for inflation a TIPS ladder even with zero real return may fit the need.

But if you put all your money in a TIPS ladder you would have no need to read this forum and you would get bored. :wink:
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: TIPS ladder in retirement

Post by Call_Me_Op » Thu Oct 04, 2012 1:40 pm

Hi Doc,

Good point with regard to liquidity risk with short TIPS. I would think that with very short TIPS, the liquidity penalty would be small - but point well taken. I would also note that in 2008, the liquidity penalty for CD's was very short-lived. But you're quite correct that nothing will compare with Tbills for liquidity.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: TIPS ladder in retirement

Post by Carpe » Thu Oct 04, 2012 2:32 pm

If you have a strong and disciplined portfolio strategy that does not push anything to excess and covers other fixed income, equities, and whatever else you care to use, then the TIPs ladder becomes a conributing part of a larger working system. It does a specific job in a way that no other assets do, and becomes part of a diversified approach that does not (should not) attempt to base success on a particular future (inflation) scenario. I do it on this basis, and would recommend the same - as long as you feel you could stick with it.

Holding the TIPs to maturity is the key - something you don't get to do with TIPs bond funds (which I no longer use). If you do this, then any losses will be losses of opportunity. You can mitigate this to some extent by rolling the ladder, as you will pick up the "opportunity" on the periodic purchases you subsequently make. If the returns of future TIPs issues don't improve, you will be happy you have an inventory of past purchases.

There are also Ibonds to consider - some might prefer these instead or to purchase first.

Good luck.
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Re: TIPS ladder in retirement

Post by Grt2bOutdoors » Thu Oct 04, 2012 3:46 pm

Agree - If you have 30 or less years to retirement, you can set up a ladder today: 1)full allotment of I bonds (tax deferred) and/or 2)rolling ladder of CD's. That combined with pension,annuity or Social Security is your floor.
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Re: TIPS ladder in retirement

Post by Browser » Fri Oct 05, 2012 11:24 am

adlerps wrote:In William Bernstein new e book "The age of the Investor", he recommends to build a TIPs ladder for your required expenses in retirement.
My question:
With interest near or below zero on TIPS does it make sense to build a TIPs ladder now or do something else? Paul
Here's what Bernstein said in his ebook:
Further, with today’s historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.
He doesn't say what to do with your wad while you're waiting. I guess he might say to sock it away in short treasuries which also have a negative real return. Or, you can get that same return my depositing the money in the Undermattress Bank & Trust too.
We don't know where we are, or where we're going -- but we're making good time.

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Re: TIPS ladder in retirement

Post by Electron » Sat Oct 06, 2012 5:19 pm

adlerps wrote:Should a "short term bond fund" or ETF have government and corp bonds or just corp bonds?
Here's a five year chart comparing Vanguard Short Term Bond Index, Vanguard Short Term Investment Grade, and SIT U.S. Government Securities.

http://finance.yahoo.com/q/bc?t=5y&s=VB ... SNGVX&ql=1

The next chart is a one year period comparing the same three funds.

http://finance.yahoo.com/q/bc?s=VBISX&t ... TX%2CSNGVX

Vanguard Short Term Investment Grade holds a lot of corporate bonds and you can see the price decline in 2008.

However, during other periods such as the last year it may outperform.

The Vanguard Short Term Bond Index has a high concentration in Government bonds as does SIT U.S. Government Securities.

These charts show NAV only and do not include monthly dividends.
Electron

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CWRadio
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Re: TIPS ladder in retirement

Post by CWRadio » Sat Oct 06, 2012 9:03 pm

Thanks KAWill70 for putting the charts together.
No simple answer if you want to be very safe and still make money. Paul

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Re: TIPS ladder in retirement

Post by woodedareas » Sun Oct 07, 2012 12:51 pm

These are great charts. When I sort of have it figured out, I realize I ca not figure it out. I will have to side with low risk and low returns. Both charts pushe me to purchase individual corporate bonds even with longer maturities and with Highly rated companies.

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