Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
It takes more than 1% return to make up for 1% inflation. E.g. on $100, you would lose $1 to inflation and get $1 in return, but now you have to pay taxes on the $1 return while you do not get to deduct the $1 loss on your taxes. In effect, the combination of inflation and tax on the return from investments amounts to a tax on even inflation-protected assets.
Doesn't that mean that e.g. TIPS aren't really inflation protected if held in a taxable account? Are there any assets that are actually inflation-protected after taxes if held in a taxable account?
Doesn't that mean that e.g. TIPS aren't really inflation protected if held in a taxable account? Are there any assets that are actually inflation-protected after taxes if held in a taxable account?
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Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
It is customary to ignore taxation when stating the real return of all assets, including stocks. A possible reason or excuse is that there are too many tax rates for any one-size-fits-all number. During the "Death of Equities" era, 1965-1982 inclusive, it is often stated that stocks had close to 0% real return, but that is before taxes. After taxes, it was much less.
Income tax is assessed on the nominal gain in the number of dollars. This is unfair, but the problem applies to all investment gains of all investments during periods of inflation--it is not some unique drawback of TIPS.
Income tax is assessed on the nominal gain in the number of dollars. This is unfair, but the problem applies to all investment gains of all investments during periods of inflation--it is not some unique drawback of TIPS.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
I completely agree that this isn't specific to TIPS, I just mentioned TIPS because it's the most well-known "inflation protected" asset. I do think that if there really do not exist truly inflation protected assets for a taxable account, that's something that everyone should be aware of, but I've never, ever seen it pointed out anywhere directly in those terms.
Up until recently, I would simply subtract inflation from return and assume that that was a relevant calculation. It is relevant for most tax-advantaged accounts, but not for taxable accounts.
Up until recently, I would simply subtract inflation from return and assume that that was a relevant calculation. It is relevant for most tax-advantaged accounts, but not for taxable accounts.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
I can't think of any assets that would explicit fit what you are asking for. I mean, stocks tend to hold up pretty well....
I will point out that CPI tends to overstate inflation. Does that give you any conform? Of course it all depends what your personal rate of inflation is.
Second, I kind of hope there are not assets like that out there. Countries that have lots of COLAs and other inflation proof clauses in their contracts tend to have higher inflation, leaving the average person worse off. Inflation is expected, which causes inflation, so higher inflation is expected, etc. A positive feedback loop is started.
I will point out that CPI tends to overstate inflation. Does that give you any conform? Of course it all depends what your personal rate of inflation is.
Second, I kind of hope there are not assets like that out there. Countries that have lots of COLAs and other inflation proof clauses in their contracts tend to have higher inflation, leaving the average person worse off. Inflation is expected, which causes inflation, so higher inflation is expected, etc. A positive feedback loop is started.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Interesting, I've never seen this claimed before, but I've seen the opposite, that the CPI understates inflation, claimed many times.alex_686 wrote:I will point out that CPI tends to overstate inflation.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
If there were a form of investment that we could own that guaranteed a return equal to that of inflation after taxes, I wouldn't have a savings account at all.
- Tim
- Tim
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Understand that you can't measure inflation. If 100 units of utility costs $100 last year, and 100 units of utility costs $110 today, we have had 10% inflation. Now, we can't measure a person's "unit of utility" so we need proxies. So we put together a average basket of goods and see how the prices track over a period of time. Here is where the real fun begins.John3754 wrote:Interesting, I've never seen this claimed before, but I've seen the opposite, that the CPI understates inflation, claimed many times.alex_686 wrote:I will point out that CPI tends to overstate inflation.
Let's say a $100 basket contains $10 of beef. If beef doubles to $20, so the basket goes to $110, so CPI jumps by 10%. Is inflation %10?Probably not. I can substitute chicken for some of the beef. All I can say is that inflation is between 0% and 10%. This is the substitution effect. Hence inflation is overstated.
We also have a problem where the goods change over time. You can't exactly compare a car from the 1950s to a car in 2015. A 2015 care uses less gas, is more reliable, last longer, safer, and more luxurious.
We also have a problem that people's preferences have changed over time. Today people prefer chicken over beef thanks to campaigns against saturated fat. People today buy MP3 players, not record players.
So, if we just used the average basket the CPI would be clearly overstated. The BoLS tries to account of these factors which is why some people state that CPI understates inflation. All of the research that I have read - which is a few years old - still believes that even after these adjustments CPI still overstates inflation.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
You can't spend the money from a tax deferred account without paying taxes either. In a tax exempt account, yes.bonn wrote:I completely agree that this isn't specific to TIPS, I just mentioned TIPS because it's the most well-known "inflation protected" asset. I do think that if there really do not exist truly inflation protected assets for a taxable account, that's something that everyone should be aware of, but I've never, ever seen it pointed out anywhere directly in those terms.
Up until recently, I would simply subtract inflation from return and assume that that was a relevant calculation. It is relevant for most tax-advantaged accounts, but not for taxable accounts.
As others have been pointing out it has never been a proposition that the after tax performance of any investment is not affected by taxes, strangely enough. Even tax exempt investments are affected by taxes relative to what advantage might accrue considering to the alternatives.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Correct. The government uses inflation as a tool to generate tax revenue on capital gains. I don't believe there is any such thing as a true hedge against inflation. Inflation will always redistribute wealth from taxpayers to government.bonn wrote:It takes more than 1% return to make up for 1% inflation. E.g. on $100, you would lose $1 to inflation and get $1 in return, but now you have to pay taxes on the $1 return while you do not get to deduct the $1 loss on your taxes. In effect, the combination of inflation and tax on the return from investments amounts to a tax on even inflation-protected assets.
Doesn't that mean that e.g. TIPS aren't really inflation protected if held in a taxable account? Are there any assets that are actually inflation-protected after taxes if held in a taxable account?
If there was a "tax-neutral TIPS" that paid CPI + 25%, it's real yield would probably be negative to compensate. Even TIPS, as they are structured now, have had negative real yields in the past.
The best thing you can do is vote for sound monetary policy, but 1 vote doesn't matter, so there's not really anything you can do but immigrate to a country with sound monetary policy, if one even exists. You could found your own micronation? That would have severe startup costs though.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
The "return" or "yield" on a TIPS is typically stated in real terms. In this sense a TIPS with a 1% return would "make up for 1% inflation" and have a positive after tax real return. This is how it works:bonn wrote:It takes more than 1% return to make up for 1% inflation. E.g. on $100, you would lose $1 to inflation and get $1 in return ...
A CPI-adjustment is added to its real return to get a TIPS' nominal return. For simplicity let's assume the TIPS has a 1% coupon, is purchased at par, and is still priced at par one year later. If the CPI rises 1% during the year the TIPS will have a 2% pretax nominal return. If held in a taxable account subject to a 25% marginal tax rate, the after tax return would be 1.5% in nominal terms and 0.5% in real terms. [1]
There is a point where the CPI increase does cause the TIPS to no longer have a positive real after tax return if held in a taxable account. If the real return is 1% and the tax rate is 25%, this CPI increase is about 3.09%. [2] If the CPI increases more than this, the real after tax return in negative. But if the TIPS is held in a Traditional or Roth IRA, the real after tax return equals the real pretax return regardless of how much the CPI increases. See my post, Re: Is it time to give-up on TIPS? for an illustration of this with a TIPS real yield of 0.5%.
- To be picky, the pretax nominal return would 2.01% (1.01 X 1.01 - 1), the after tax nominal return would be 1.5075% (2.01% X 75%), and the after tax real return would be 0.5025% (1.015075 / 1.01 - 1).
- The CPI increase such that the after tax real return is 0% is calculated as follows:
Code: Select all
CPI = (tr - r) / (r - t - tr) where t = tax rate and r = real rate 3.09% = (25% * 1% - 1%) / (1% - 25% - 25% * 1%)
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
It is interesting that one rarely hears talk of the real taxation rate. I am quite sure that the average person on the street does not know they are paying taxes on returns that only kept them even with inflation. Twas ever thus, and also, one could make the argument that the government needs what it needs and would merely raise its rates if it were forced to only tax on real returns.
A personal example: From the time I bought my home in 1996, my property tax increases came mostly from the increase in the assessed value of my home. But after 2008, the property tax increases came not only from rate increases, the rate increases were so drastic that the fact that the value of my home was cut in half did nothing to prevent the county from collecting every bit as much and more than it had when my home was worth twice as much.
I can think of two bright spots in all of this:
1) One does have some control over one's personal inflation rate. See Mr Money Mustache and similar frugality sites for ways to manipulate this.
2) For people who are truly struggling financially, taxation goes way down, eventually to nothing or even negative.
More concisely: This is the way we've always done it.
Kalo
A personal example: From the time I bought my home in 1996, my property tax increases came mostly from the increase in the assessed value of my home. But after 2008, the property tax increases came not only from rate increases, the rate increases were so drastic that the fact that the value of my home was cut in half did nothing to prevent the county from collecting every bit as much and more than it had when my home was worth twice as much.
I can think of two bright spots in all of this:
1) One does have some control over one's personal inflation rate. See Mr Money Mustache and similar frugality sites for ways to manipulate this.
2) For people who are truly struggling financially, taxation goes way down, eventually to nothing or even negative.
More concisely: This is the way we've always done it.
Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
That's true, but TIPS still do offer full inflation protection in a tax-deferred account - unless you want to take into account something like income tax bands not being corrected for inflation (I don't know if that's the case).dbr wrote:You can't spend the money from a tax deferred account without paying taxes either. In a tax exempt account, yes.bonn wrote:Up until recently, I would simply subtract inflation from return and assume that that was a relevant calculation. It is relevant for most tax-advantaged accounts, but not for taxable accounts.
The proposition in question is whether inflation protected assets like TIPS are fully protected from inflation. They are not, and that's not common knowledge, I suspect, even if it's obvious AFTER carefully explaining the mechanism that makes it not the case.As others have been pointing out it has never been a proposition that the after tax performance of any investment is not affected by taxes, strangely enough. Even tax exempt investments are affected by taxes relative to what advantage might accrue considering to the alternatives.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
I'm not talking about 1% real return, I'm talking about e.g. 1% inflation and the equal inflation-protection pre-tax return. The point is that the inflation-protection component of the taxable return from TIPS will then be 1% and that won't be sufficient to make up for the 1% inflation after taxes.#Cruncher wrote:The "return" or "yield" on a TIPS is typically stated in real terms. In this sense a TIPS with a 1% return would "make up for 1% inflation" and have a positive after tax real return.bonn wrote:It takes more than 1% return to make up for 1% inflation. E.g. on $100, you would lose $1 to inflation and get $1 in return ...
It's true that the return on TIPS also has a component that is supposed to be after inflation and this part of the return can be used to take away some of the losses to inflation that the inflation protection did not handle after taxes. There is no TIPS "after inflation" return so great that sufficiently high inflation could not eat it away anyway after taxes, so that is still not full inflation protection.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
In conversation among laymen and in populist politics it's often claimed that CPI understates 'real' inflation and seldom the opposite. In academic economic circles, and among public policy wonks, it's quite often said CPI overstates inflation and seldom the opposite. It is true that those who claim CPI understates inflation often claim it does so by a lot, and those who believe it overstates real inflation tend to find it does so by a little. But the academic credentials tend to be on the side of those saying CPI overstates the real weighted average cost of living (though to some on the 'understates' side, academic credentials automatically discredit an argument ).John3754 wrote:Interesting, I've never seen this claimed before, but I've seen the opposite, that the CPI understates inflation, claimed many times.alex_686 wrote:I will point out that CPI tends to overstate inflation.
It sets up more or less as follows. Among academics/economists (including in govt) it's taken for granted there's no funny business going on in the govt's calculation, and the problems with the calculation tend to be in not fully correcting for improvements to products and shifts in the consumer basket so CPI makes the real weighted average cost of what people buy seem to rise slightly faster than it really does. Beyond those circles the first assumption is less likely to hold, and there also tends to be an assumption that if a given person's costs rise faster than CPI (which must be true of some people or any generally accurate measure of inflation), that's a prima facie case that 'CPI understates inflation' in general. Also I think there's a built in assumption that living standards should always rise, but have tended to rise slowly lately in the US and perhaps even fall for most, and if people's real incomes don't rise they tend to perceive that as 'inflation is really higher than they say'.
I hope none of the above is deemed 'political'. It's just that your take on the perception is accurate in the popular/political sphere, but the opposite predominant in academic economics sphere. AFAIK most credentialed economists' opinions range from 'CPI is about as accurate as it can be, nothing is perfect', to 'CPI tends to overstate inflation slightly'.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Speaking of that, there is a website called shadowstats that tries to come up with their own "real" inflation index that is much more aggressive than the CPI. They have an entire theory that the government has been intentionally understating inflation since 1980 so it can advance political and bureaucratic goals. http://www.shadowstats.com/article/no-4 ... easurement Not sure whether to believe it or not, but it is an interesting perspective! Is true inflation higher or lower than the CPI? Who knows!Johno wrote:In conversation among laymen and in populist politics it's often claimed that CPI understates 'real' inflation and seldom the opposite. In academic economic circles, and among public policy wonks, it's quite often said CPI overstates inflation and seldom the opposite. It is true that those who claim CPI understates inflation often claim it does so by a lot, and those who believe it overstates real inflation tend to find it does so by a little. But the academic credentials tend to be on the side of those saying CPI overstates the real weighted average cost of living (though to some on the 'understates' side, academic credentials automatically discredit an argument ).John3754 wrote:Interesting, I've never seen this claimed before, but I've seen the opposite, that the CPI understates inflation, claimed many times.alex_686 wrote:I will point out that CPI tends to overstate inflation.
It sets up more or less as follows. Among academics/economists (including in govt) it's taken for granted there's no funny business going on in the govt's calculation, and the problems with the calculation tend to be in not fully correcting for improvements to products and shifts in the consumer basket so CPI makes the real weighted average cost of what people buy seem to rise slightly faster than it really does. Beyond those circles the first assumption is less likely to hold, and there also tends to be an assumption that if a given person's costs rise faster than CPI (which must be true of some people or any generally accurate measure of inflation), that's a prima facie case that 'CPI understates inflation' in general. Also I think there's a built in assumption that living standards should always rise, but have tended to rise slowly lately in the US and perhaps even fall for most, and if people's real incomes don't rise they tend to perceive that as 'inflation is really higher than they say'.
I hope none of the above is deemed 'political'. It's just that your take on the perception is accurate in the popular/political sphere, but the opposite predominant in academic economics sphere. AFAIK most credentialed economists' opinions range from 'CPI is about as accurate as it can be, nothing is perfect', to 'CPI tends to overstate inflation slightly'.
- nisiprius
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Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
1) Do the math yourself.bh7 wrote:...Speaking of that, there is a website called shadowstats that tries to come up with their own "real" inflation index that is much more aggressive than the CPI. They have an entire theory that the government has been intentionally understating inflation since 1980 so it can advance political and bureaucratic goals. http://www.shadowstats.com/article/no-4 ... easurement Not sure whether to believe it or not, but it is an interesting perspective!...
Shadowstats claims that inflation has averaged about 8% per year for the last twenty years. If that were true, prices would be 4.7 times higher today then they were in 1995. So, in 1995, a car ought to have cost about $6,400. Did it?
In 1995, a gallon of gas should have cost about $0.50. Did it?
In 1995, a plane flight from New York to Los Angeles should have cost about $75. Did it?
2) Shadowstats claims that they are calculating inflation the same way it was calculate din 1980. That would mean that housing costs are based on actual actual housing prices, rather than owner equivalent rent. That would mean that Shadowstats 1980-method CPI (the black line) ought to have crashed with the housing market in 2005-2006 much more than the official CPI did. Did it?
3) Shadowstats promised some time around 2010 or 2011 that it would have "an academic" review their methodology for validity and publish the results. They never did.
It's pretty clear that Shadowstats bungled terribly and somehow confused the CPI, which is a cumulative measure, with the annual inflation rate, which is not. They have mixed up the rate with the index. Thus somehow they are claiming, not only that the annual inflation rate is being understated, but that it is being understated by a greater and greater amount every year.
Last edited by nisiprius on Mon Sep 07, 2015 9:23 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
If you pay 25% tax on your inflation adjustment, and your TIPS are in a taxable account, then you need 4/3 as much in TIPS as the amount you want to protect against inflation. For example, if you have $40K in TIPS, and inflation is 10%, you will receive a $4000 inflation adjustment, which is $3000 after tax, so you covered the inflation on a $30K balance.
For that matter, if you have TIPS in a (non-Roth) IRA, you also need 4/3 as much as the amount you want to protect, since the IRS will take 25% of all withdrawals. If you have $40K in TIPS in your IRA, you can only get $30K to spend if you withdraw the money. If inflation is 10%, you have $44K, which becomes $33K after withdrawal.
For that matter, if you have TIPS in a (non-Roth) IRA, you also need 4/3 as much as the amount you want to protect, since the IRS will take 25% of all withdrawals. If you have $40K in TIPS in your IRA, you can only get $30K to spend if you withdraw the money. If inflation is 10%, you have $44K, which becomes $33K after withdrawal.
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Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
With respect to the government (aren't we self-governed in the US?) fudging CPI, the Bureau of Labor Statistics publishes both its data and its methodology.
If you want to check their calculations, you can. If you want to examine their methodology in service of finding a better one, you can.
Its results are not far off from MIT's Billion Prices Project; and although CPI is usually a little higher, from the Commerce Department's Personal Consumption Expenditures price index.
I'm not saying to trust the BLS without checking. I am saying anybody who cares to do so can check.
PJW
If you want to check their calculations, you can. If you want to examine their methodology in service of finding a better one, you can.
Its results are not far off from MIT's Billion Prices Project; and although CPI is usually a little higher, from the Commerce Department's Personal Consumption Expenditures price index.
I'm not saying to trust the BLS without checking. I am saying anybody who cares to do so can check.
PJW
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Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
The best that I know of are dividend from stocks/funds held for 1+ years and in the lower marginal income brackets. YMMV on total returns.bonn wrote:...snip... Are there any assets that are actually inflation-protected after taxes if held in a taxable account?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
This is correct if the TIPS are held in a regular taxable account. (One can avoid this problem by holding TIPS in a tax deferred or tax exempt account.) In case anyone is interested, here are the CPI increases such that the after tax real return would be 0% (i.e., the after tax nominal return equals the CPI increase). If the CPI rises more than this, the after tax real return would be negative.bonn in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2616080#p2616080]this post[/url] wrote:There is no TIPS "after inflation" return so great that sufficiently high inflation could not eat it away anyway after taxes, so that is still not full inflation protection.
Code: Select all
--------- TIPS Yield ----------
Tax 0.5% 1.0% 1.5% 2.0%
----- ----- ----- ------ ------
10.0% 4.71% 9.89% 15.61% 21.95%
15.0% 2.92% 6.01% 9.29% 12.78%
25.0% 1.52% 3.09% 4.71% 6.38%
28.0% 1.30% 2.64% 4.01% 5.42%
33.0% 1.03% 2.07% 3.14% 4.23%
35.0% 0.94% 1.89% 2.87% 3.86%
39.6% 0.77% 1.55% 2.34% 3.15%
Code: Select all
3.09% = (1.01 * 1.0309 - 1) * 0.75
I understand what you're saying about TIPS in a Traditional IRA (TIRA), Grabiner, but not what you're saying about TIPS in a taxable account. For example, assuming a 0% yield, $40,000 of TIPS in a TIRA will maintain a $30,000 after tax real value regardless of the increase in the CPI and regardless of the time period.grabiner in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2616356#p2616356]this post[/url] wrote:If you pay 25% tax on your inflation adjustment, and your TIPS are in a taxable account, then you need 4/3 as much in TIPS as the amount you want to protect against inflation. ... For that matter, if you have TIPS in a (non-Roth) IRA, you also need 4/3 as much as the amount you want to protect ...
But, again assuming a 0% yield, $40,000 of TIPS in a taxable account will have more than $30,000 in after tax real value after one year. But if the CPI rises fast enough and if the TIPS are held long enough, eventually the after tax real value becomes less than $30,000. Here is an example assuming the CPI rises 10% per year.
Pretax nominal value
Code: Select all
Years TIRA
----- ------
1 44,000
2 48,400
5 64,420
10 103,750
20 269,100
30 697,976
Code: Select all
Years TIRA Taxable
----- ------ -------
1 33,000 43,000
2 36,300 46,225
5 48,315 57,425
10 77,812 82,441
20 201,825 169,914
30 523,482 350,198
Code: Select all
Years TIRA Taxable
----- ------ -------
1 30,000 39,091
2 30,000 38,202
5 30,000 35,657
10 30,000 31,785
20 30,000 25,257
30 30,000 20,069
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
Yes I had that partly in mind under lacking credentials, populist politics infused, outside academic circles, and as noted already shadowstats' numbers are clearly out to lunch based on the most cursory examination. That's not to propose a totally 'pro-elitist' view that no blog screeching in the wilderness of the internet can ever come up with an important finding 'the establishment' in its field doesn't recognize. But in this case as also mentioned, the CPI method is not a secret, and most serious discussion in terms of the actual method is around whether or not the change in CPI overstates the rise in the cost of living enough to be worth changing the method, rather than much if any belief it understates it. But again in a period of stagnant-ish median living standards it's easy IMO to see why a lot of average people would be open to the idea that that's caused in part by 'the govt understating inflation', or in fact to really be an expression of 'our living standard should be rising, but it doesn't seem to be', rather than a serious argument that the CPI rate of increase (as was also noted, CPI literally is the level of an index, change in CPI is actually inflation or deflation) is fudged or otherwise incorrect.bh7 wrote:Speaking of that, there is a website called shadowstats that tries to come up with their own "real" inflation index that is much more aggressive than the CPI.Johno wrote:In conversation among laymen and in populist politics it's often claimed that CPI understates 'real' inflation and seldom the opposite. In academic economic circles, and among public policy wonks, it's quite often said CPI overstates inflation and seldom the opposite...But the academic credentials tend to be on the side of those saying CPI overstates the real weighted average cost of livingJohn3754 wrote:Interesting, I've never seen this claimed before, but I've seen the opposite, that the CPI understates inflation, claimed many times.alex_686 wrote:I will point out that CPI tends to overstate inflation.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
As others have mentioned, keep in mind that CPI is a rough tool. Your “personal CPI” may be much different than the official basket. You might even come out ahead.
I’ve found these updates to be helpful in getting a handle on this.
http://www.advisorperspectives.com/dsho ... erview.php
To do this, you’ll need to have a decent handle on your budget, now and in the future.
For example, the official CPI counts housing costs as 42% of total expenses. We own our home outright, and our housing costs are less than 10% of our expenses. So if/when housing costs rise in the future, it will have much less of an impact on our expenses than it will on the CPI. Similarly, our Education expenses are near 0, compared to 7% in the CPI.
And not to get too complicated here, but in addition to TIPS/Ibonds, we have attempted to hedge some of our ongoing expenses with equities, mostly though Vanguard Sector funds.
I’ve found these updates to be helpful in getting a handle on this.
http://www.advisorperspectives.com/dsho ... erview.php
To do this, you’ll need to have a decent handle on your budget, now and in the future.
For example, the official CPI counts housing costs as 42% of total expenses. We own our home outright, and our housing costs are less than 10% of our expenses. So if/when housing costs rise in the future, it will have much less of an impact on our expenses than it will on the CPI. Similarly, our Education expenses are near 0, compared to 7% in the CPI.
And not to get too complicated here, but in addition to TIPS/Ibonds, we have attempted to hedge some of our ongoing expenses with equities, mostly though Vanguard Sector funds.
Time is what we want most, but what we use worst. William Penn
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
I fully agree with you, but for what it's worth, the average person on the street probably isn't affected by the inflation component of taxation on capital gains. A typical American household does not have significant taxable investments or any real estate other than owner-occupied housing.Kalo wrote:It is interesting that one rarely hears talk of the real taxation rate. I am quite sure that the average person on the street does not know they are paying taxes on returns that only kept them even with inflation. Twas ever thus, and also, one could make the argument that the government needs what it needs and would merely raise its rates if it were forced to only tax on real returns.
A personal example: From the time I bought my home in 1996, my property tax increases came mostly from the increase in the assessed value of my home. But after 2008, the property tax increases came not only from rate increases, the rate increases were so drastic that the fact that the value of my home was cut in half did nothing to prevent the county from collecting every bit as much and more than it had when my home was worth twice as much.
I can think of two bright spots in all of this:
1) One does have some control over one's personal inflation rate. See Mr Money Mustache and similar frugality sites for ways to manipulate this.
2) For people who are truly struggling financially, taxation goes way down, eventually to nothing or even negative.
More concisely: This is the way we've always done it.
Kalo
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
It's not just on capital gains. Bank interest is taxed as well, for example. It's typically paying less than the inflation rate, so after one has lost out to inflation, the government comes along and calculates a nominal gain, and takes another bite for income tax.linguini wrote:I fully agree with you, but for what it's worth, the average person on the street probably isn't affected by the inflation component of taxation on capital gains. A typical American household does not have significant taxable investments or any real estate other than owner-occupied housing.Kalo wrote:It is interesting that one rarely hears talk of the real taxation rate. I am quite sure that the average person on the street does not know they are paying taxes on returns that only kept them even with inflation. Twas ever thus, and also, one could make the argument that the government needs what it needs and would merely raise its rates if it were forced to only tax on real returns.
A personal example: From the time I bought my home in 1996, my property tax increases came mostly from the increase in the assessed value of my home. But after 2008, the property tax increases came not only from rate increases, the rate increases were so drastic that the fact that the value of my home was cut in half did nothing to prevent the county from collecting every bit as much and more than it had when my home was worth twice as much.
I can think of two bright spots in all of this:
1) One does have some control over one's personal inflation rate. See Mr Money Mustache and similar frugality sites for ways to manipulate this.
2) For people who are truly struggling financially, taxation goes way down, eventually to nothing or even negative.
More concisely: This is the way we've always done it.
Kalo
Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
US policy is to keep it at 2%. I consider that a very sound policy. I would wait with starting your own country until it gets changed to something in the double digit range.bh7 wrote: The best thing you can do is vote for sound monetary policy, but 1 vote doesn't matter, so there's not really anything you can do but immigrate to a country with sound monetary policy, if one even exists. You could found your own micronation? That would have severe startup costs though.
Re: Are TIPS really inflation protected, if 1% return does not make up for 1% inflation?
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