Why not put it all in TIPS?

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Dimitri
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Why not put it all in TIPS?

Post by Dimitri »

OK, I get it. The U.S. Government might default. Or they might not honor their obligations and tweak the TIPS calculation. If that happens we have some serious problems that probably can only be solved with cans of tuna, Krugerrands and boxes of ammo. For the sake of argument why don't we leave that off the table.

If I have my number (whatever that is - 30x, 40x, 50x, or something more) why not just put in TIPS (holding a slug in cash to deal with any potential liquidity issues) and forget it? I'm actually kind of serious about this. My wife and I were talking and are really wondering why take any risk at all. What good does it do us if we have enough? If we aren't looking to leave a legacy, inheritance, etc. then why not just put it in TIPS and sit back and relax?
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Re: Why not put it all in TIPS?

Post by Dottie57 »

Assuming the Government does not go broke, I think what you propose makes sense.
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Re: Why not put it all in TIPS?

Post by nisiprius »

Zvi Bodie wrote a very interesting book entitled Worry-Free Investing, published in 2003, which explored the possibilities of relying very heavily on TIPS for retirement investing.

Unfortunately, the decline in the real interest rate of TIPS has made the strategy no longer look feasible, and also has exposed the problems of "reinvestment risk" (assuming that when your bonds mature you can roll them over into more of the same).

Back in the day, I pointed out that making the traditional assumptions behind "safe withdrawal rate" studies--the most dangerous one being the assumption that you would not exceed 30 years in retirement--a 100% TIPS portfolio would provide a 4% safe withdrawal rate with ZERO chance of failure, provided you could get TIPS with a real interest rate of at least, I think it was 1.31%. At the time that seemed fairly reasonable because TIPS were yielding 2% real.

By the way, with regard to jiggering the CPI calculation, for the record, the actual Treasury description of what TIPS promise to do includes this:
If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
Whether that would really happen, who knows, but that's the promise.
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Re: Why not put it all in TIPS?

Post by Index Fan »

As a general rule, putting all of one's money into one asset is a horrible idea.

TIPS had large liquidity problems in 2008 that no one saw coming before 2008.

Diversification is a core tenet of Bogleheadism. Don't put all of your eggs in one basket.
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Re: Why not put it all in TIPS?

Post by aj76er »

nisiprius wrote: Unfortunately, the decline in the real interest rate of TIPS has made the strategy no longer look feasible, and also has exposed the problems of "reinvestment risk" (assuming that when your bonds mature you can roll them over into more of the same).

Back in the day, I pointed out that making the traditional assumptions behind "safe withdrawal rate" studies--the most dangerous one being the assumption that you would not exceed 30 years in retirement--a 100% TIPS portfolio would provide a 4% safe withdrawal rate with ZERO chance of failure, provided you could get TIPS with a real interest rate of at least, I think it was 1.31%. At the time that seemed fairly reasonable because TIPS were yielding 2% real.
Can you provide a link to this analysis? I would have thought that *any* positive real interest rate would guarantee success. Assuming you have enough to live on, wouldn't the the semi-annual inflation adjustment be all you needed to keep real purchasing power intact?
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Re: Why not put it all in TIPS?

Post by dbr »

Addressing the two comments above:

1. Agreed, with current real yields being near a forever low, it is costly to rely on all TIPS. At a real rate of about 0.8% on 30 year TIPS you are now down to a secure withdrawal rate of about 3.7%. If you could get 2% TIPS, you are up to 4.4% withdrawal, inflation indexed. An argument could be made that the safe withdrawal rate from a portfolio is about the same (3.7%), however. It is also an argument that if you could find a CPI indexed joint life annuity the payout would not be any better. A difference is that one has to be willing to pin everything on that TIPS ladder designed to be liquidated on schedule and gone after 30 years. I am not sure what the prospect is for just holding a TIPS fund, but it would not be as good.

2. I don't know what to think about risk. Every principle of basic diversification screams that one should not be entirely invested in one single corner of one single asset class of one single provider. It might be US Treasuries of any kind are an exception. Someone else will have to figure that out.
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Re: Why not put it all in TIPS?

Post by Dimitri »

Index Fan wrote:As a general rule, putting all of one's money into one asset is a horrible idea.

TIPS had large liquidity problems in 2008 that no one saw coming before 2008.

Diversification is a core tenet of Bogleheadism. Don't put all of your eggs in one basket.
I'll play along. If putting my money up with the U.S. Government isn't safe then what is? Skip the tuna fish, Krugerrands and ammo (pretend I've already got that covered). Where would you put your money if you were in my situation (not looking to leave any inheritance or legacy)?
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Re: Why not put it all in TIPS?

Post by dbr »

aj76er wrote:
nisiprius wrote: Unfortunately, the decline in the real interest rate of TIPS has made the strategy no longer look feasible, and also has exposed the problems of "reinvestment risk" (assuming that when your bonds mature you can roll them over into more of the same).

Back in the day, I pointed out that making the traditional assumptions behind "safe withdrawal rate" studies--the most dangerous one being the assumption that you would not exceed 30 years in retirement--a 100% TIPS portfolio would provide a 4% safe withdrawal rate with ZERO chance of failure, provided you could get TIPS with a real interest rate of at least, I think it was 1.31%. At the time that seemed fairly reasonable because TIPS were yielding 2% real.
Can you provide a link to this analysis? I would have thought that *any* positive real interest rate would guarantee success. Assuming you have enough to live on, wouldn't the the semi-annual inflation adjustment be all you needed to keep real purchasing power intact?
The analysis is what you can get from a hypothetical ladder of 30 year TIPS, one maturing and being spent in each year of a retirement. That is just doing math in a spreadsheet, which is what I did and it gets exactly that number nisi posted and the one's I posted. When TIPS return 0% real, the result is a withdrawal rate of 3.33% real, which is obviously correct being 1/30th of the investment. At the end of thirty years there is no asset left and no income, the same assumption made for end of retirement in safe withdrawal rate studies.

Your hypothesis is one of living off the real interest and leaving the investment intact indefinitely. If you did that today you could get about 0.8% from a single thirty year TIPS, which is an investment to income multiple of 125, which is prohibitively expensive. If somehow real interest rates ran wild and someone could invest a nest egg in 5% real interest TIPS, then that would be a windfall. Those interest rates existed in the early eighties bu TIPS did not exist until 1997.
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Re: Why not put it all in TIPS?

Post by gwe67 »

Try an annuity.
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Re: Why not put it all in TIPS?

Post by Dimitri »

gwe67 wrote:Try an annuity.
Why? Seriously. Why would I want to buy an annuity vs. buying a government guarantee (TIPS)? I would think a U.S. Government guarantee would be worth more than that of an insurance company.
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Re: Why not put it all in TIPS?

Post by qwertyjazz »

Make it explicit to see if possible. How many years will you and year wife live. What spending multiple have you saved. Annuities are not as garaunteed but pay a higher rate. What are your numbers?
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Re: Why not put it all in TIPS?

Post by dbr »

Dimitri wrote:
gwe67 wrote:Try an annuity.
Why? Seriously. Why would I want to buy an annuity vs. buying a government guarantee (TIPS)? I would think a U.S. Government guarantee would be worth more than that of an insurance company.
An annuity "guarantees" more than TIPS guarantee, namely a lifetime income stream with mortality credits by which long lived annuitants cash in on the money left behind by short lived annuitants. But this is an insurance proposition that has a different nature from an investment proposition.

It is still important to be clear if the plan with TIPS is to buy bonds and live off the real interest or to buy bonds and spend down the principal. Note that in this comparison an annuity "spends down" the principal from the get go.
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Re: Why not put it all in TIPS?

Post by FIREchief »

Dimitri wrote:OK, I get it. The U.S. Government might default. Or they might not honor their obligations and tweak the TIPS calculation. If that happens we have some serious problems that probably can only be solved with cans of tuna, Krugerrands and boxes of ammo. For the sake of argument why don't we leave that off the table.

If I have my number (whatever that is - 30x, 40x, 50x, or something more) why not just put in TIPS (holding a slug in cash to deal with any potential liquidity issues) and forget it? I'm actually kind of serious about this. My wife and I were talking and are really wondering why take any risk at all. What good does it do us if we have enough? If we aren't looking to leave a legacy, inheritance, etc. then why not just put it in TIPS and sit back and relax?
OP - You ask an excellent question. Many here on the forum (and elsewhere) are very fond of asking "If you've won the game, why are you still playing?" (or similar, but the same basic thought). We rarely see further explanation as to what "stopped playing the game" looks like. I think the scenario outlined in your post is the closest I've seen to what no longer playing the game would look like. I assume zero real return from TIPS for the foreseeable future and plan accordingly. Unlike you, I am not in a position to put everything into TIPS, but I am planning for my LMP to ultimately consist 100% of TIPS. There is simply too much risk in an upward spiral of inflation and rate hikes for me to hold a substantial portion of my LMP in nominal bonds at this point.
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Re: Why not put it all in TIPS?

Post by dbr »

FIREchief wrote:
Dimitri wrote:OK, I get it. The U.S. Government might default. Or they might not honor their obligations and tweak the TIPS calculation. If that happens we have some serious problems that probably can only be solved with cans of tuna, Krugerrands and boxes of ammo. For the sake of argument why don't we leave that off the table.

If I have my number (whatever that is - 30x, 40x, 50x, or something more) why not just put in TIPS (holding a slug in cash to deal with any potential liquidity issues) and forget it? I'm actually kind of serious about this. My wife and I were talking and are really wondering why take any risk at all. What good does it do us if we have enough? If we aren't looking to leave a legacy, inheritance, etc. then why not just put it in TIPS and sit back and relax?
OP - You ask an excellent question. Many here on the forum (and elsewhere) are very fond of asking "If you've won the game, why are you still playing?" (or similar, but the same basic thought). We rarely see further explanation as to what "stopped playing the game" looks like. I think the scenario outlined in your post is the closest I've seen to what no longer playing the game would look like. I assume zero real return from TIPS for the foreseeable future and plan accordingly. Unlike you, I am not in a position to put everything into TIPS, but I am planning for my LMP to ultimately consist 100% of TIPS. There is simply too much risk in an upward spiral of inflation and rate hikes for me to hold a substantial portion of my LMP in nominal bonds at this point.
But we still need to clarify if the LMP simply means holding a pile of TIPS and spending it down randomly, or does it mean holding a TIPS ladder and spending down the rungs year by year, or does it mean, meaning the OP, owning nothing but TIPS and spending the real interest, or does it mean something else. Also, the "pure" paradigm for an LMP is an inflation indexed annuity.
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Re: Why not put it all in TIPS?

Post by FIREchief »

dbr wrote: It is still important to be clear if the plan with TIPS is to buy bonds and live off the real interest or to buy bonds and spend down the principal. Note that in this comparison an annuity "spends down" the principal from the get go.
I think it is pretty clear from the context that the OP's proposition was to live mostly off of the principal (he mentioned 30x, 40x, 50x which would never generate enough TIPS coupons to sustain one's lifestyle).
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Re: Why not put it all in TIPS?

Post by Northern Flicker »

If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
Whether that would really happen, who knows, but that's the promise.
It already happened in 1998. CPI was also revised in Jan. 1987, but TIPs didn't exist then. The next revision is scheduled for 2018.
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Re: Why not put it all in TIPS?

Post by FIREchief »

dbr wrote:
But we still need to clarify if the LMP simply means holding a pile of TIPS and spending it down randomly, or does it mean holding a TIPS ladder and spending down the rungs year by year, or does it mean, meaning the OP, owning nothing but TIPS and spending the real interest, or does it mean something else. Also, the "pure" paradigm for an LMP is an inflation indexed annuity.
Both, or neither..... In my situation, the LMP means holding a pile of TIPS that "can" be burned down in a structured manner (perhaps a percent of maturing rungs, with the balance being reinvested) if required. I fully expect stocks to outperform all other investments over the next 10+ years. In the highly likely scenario that this is true, my TIPS ladder LMP will likely lay dormant for the duration and become a stable inheritance for my heirs or charity. OTOH, if "Japan happens here," then I don't expect to be living in the street and/or eating dog food (actually, I think Ramen is cheaper than dog food, so it would likely only be a reversion to a college lifestyle).

I think the OP was describing a 100% LMP / 0% RP.
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Re: Why not put it all in TIPS?

Post by rgs92 »

Personally I think TIPS are weird since they are a relatively new invention. The issue is not that the gov't will fail or go broke or default or not meet their contractual obligations to investors, but something more subtle: fuzzy math inflation calculations.

It's a fuzzy area about the CPI [consumer price index]. Remember the issue about having Social Security based on the "chained CPI" or not? And there are other types.

And your own personal inflation rate may differ a lot.

First of all, it's a national figure, not regional. I bet inflation has been higher if you are in NYC or San Francisco (just speculating here).

If housing tanks, this could pull down the official CPI while food and health care costs skyrocket and this could hurt you more if these are your main expenses in your paid-off house.

There are all sorts of factors and fuzzy calculations in the market-basket CPI.

In short, you need to be more diversified to keep up with the cost of living, meaning some healthy dose of stocks, bonds, and maybe CDs.
Stocks represent the floating costs of what you actually buy, like, say, gasoline and electricity with energy/oil/gas/utility stocks.

If you are motivated to do this because of market anxiety, adjust your asset allocation, but don't do something extreme like you are proposing.
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Re: Why not put it all in TIPS?

Post by FIREchief »

jalbert wrote:
If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index.
Whether that would really happen, who knows, but that's the promise.
It already happened in 1998. CPI was also revised in Jan. 1987, but TIPs didn't exist then. The next revision is scheduled for 2018.
Of course, this could swing both ways. If any revision is sincerely intended to better reflect the changes to the cost of living of the "typical" American, than it shouldn't create risk. If our population is aging and health care expenses are becoming a larger component of overall living expenses, than a CPI revision that properly reflects this will increase the principal adjustments on my TIPS.
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Re: Why not put it all in TIPS?

Post by FIREchief »

Hypothetically, if the CPI is modified in a manner that makes it less reflective of actual inflation; then won't the TIPS market just adjust for this? If the market feels that inflation is now under-reflected, than bidders will demand a higher real return at the next TIPS auction. If over-reflected, than the bidders may bid the "real" (actually, no-longer-real) returns further down and possibly negative. It shouldn't take long for somebody with a ladder comprised of 5 or 10 year TIPS to recover. OTOH, the person with the CPI adjusted annuity (I'm still not convinced that they really exist for a married couple) might not fare so well.
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Re: Why not put it all in TIPS?

Post by hoops777 »

I am extremely conservative in my investing and would never put everything in tips or any other singular entity.Stuff happens and sometimes even things that seem so impossible.Bad idea.Quit playing the game in other ways.
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Re: Why not put it all in TIPS?

Post by FIREchief »

hoops777 wrote:I am extremely conservative in my investing and would never put everything in tips or any other singular entity.Stuff happens and sometimes even things that seem so impossible.Bad idea.Quit playing the game in other ways.
How about just putting your "LMP floor" 100% in TIPS and then feeling free to diversify your RP however you feel inclined? :beer
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Re: Why not put it all in TIPS?

Post by Dimitri »

hoops777 wrote:I am extremely conservative in my investing and would never put everything in tips or any other singular entity.Stuff happens and sometimes even things that seem so impossible.Bad idea.Quit playing the game in other ways.
I'm game to other suggestions (otherwise I wouldn't have necessarily posed the question). What do you recommend for someone who wants to quit playing the game (and doesn't care about leaving a legacy, inheritance, etc.). With 30x, 40x, 50x or whatever where would you invest to quit the game?
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Re: Why not put it all in TIPS?

Post by Northern Flicker »

Hypothetically, if the CPI is modified in a manner that makes it less reflective of actual inflation; then won't the TIPS market just adjust for this?
Yes, just like happens for nominal bonds as inflation expectations change. It also occurs with TIPs in response to changes in inflation expectations, as the latter affects the demand for bonds in general, which affects real rates.
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Re: Why not put it all in TIPS?

Post by hoops777 »

Cd's,annuities,treasuries,bond funds,muni bonds,cash and just a pinch of total stock market :D
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Re: Why not put it all in TIPS?

Post by Spirit Rider »

Dimitri wrote:I'll play along. If putting my money up with the U.S. Government isn't safe then what is? Skip the tuna fish, Krugerrands and ammo (pretend I've already got that covered). Where would you put your money if you were in my situation (not looking to leave any inheritance or legacy)?
The flip side of safety is risk. You are only looking at credit risk, which I will admit is very low with the full faith and credit of the U.S.

However, there is interest rate risk and market sentiment risk, which both cause TIPS to exhibit significant volatility. The significant volatility aggravates reinvestment risk. As already mentioned there is liquidity risk (TIPS are a fraction of nominal Treasuries).

I love TIPS, but would never recommend 100% allocation to them.
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Re: Why not put it all in TIPS?

Post by abuss368 »

Putting your assets in one investment is crazy.
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Re: Why not put it all in TIPS?

Post by Dimitri »

Spirit Rider wrote:
Dimitri wrote:I'll play along. If putting my money up with the U.S. Government isn't safe then what is? Skip the tuna fish, Krugerrands and ammo (pretend I've already got that covered). Where would you put your money if you were in my situation (not looking to leave any inheritance or legacy)?
The flip side of safety is risk. You are only looking at credit risk, which I will admit is very low with the full faith and credit of the U.S.

However, there is interest rate risk and market sentiment risk, which both cause TIPS to exhibit significant volatility. The significant volatility aggravates reinvestment risk. As already mentioned there is liquidity risk (TIPS are a fraction of nominal Treasuries).

I love TIPS, but would never recommend 100% allocation to them.
I'll go along with not putting 100% on anything. Let us just say that I've got the tuna, Krugerrands and ammo. What would you recommend to hold in cash and the rest in TIPS?
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Re: Why not put it all in TIPS?

Post by Dimitri »

abuss368 wrote:Putting your assets in one investment is crazy.
I'll go along with that. Just say that I've got my tuna, Krugerrands and ammo. What do you think is a safer investment than U.S. Govt. securities?
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Re: Why not put it all in TIPS?

Post by FIREchief »

Spirit Rider wrote:
However, there is interest rate risk and market sentiment risk, which both cause TIPS to exhibit significant volatility.

As already mentioned there is liquidity risk (TIPS are a fraction of nominal Treasuries).
Would you agree that if somebody utilizes a ladder strategy that holds all TIPS to maturity, that neither of these risks exist?
Spirit Rider wrote:
The significant volatility aggravates reinvestment risk.
Is this the same as saying that there is "risk" that once a TIPS strategy returns full inflation adjusted buying power, there is risk that you can't buy another TIPS to repeat the process? (ignoring coupons for now, since they are essentially zero)
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Re: Why not put it all in TIPS?

Post by FIREchief »

Dimitri wrote:
abuss368 wrote:Putting your assets in one investment is crazy.
I'll go along with that. Just say that I've got my tuna, Krugerrands and ammo. What do you think is a safer investment than U.S. Govt. securities?
In the scenario where the full faith and credit of the US government no longer exists, then tuna, Krugerrands and ammo are likely the top three investments out there! (Queue Warren Zevon) Good diversification. Let's call it the "doomsday three asset portfolio." The ETF symbol will be "DTAP"."

Why do folks who might otherwise encourage somebody to sink most/all of their liquid assets into a SPIA have such a problem with putting most/all assets into TIPS? Is that insurance company investing in something safer than TIPS?? :confused
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Re: Why not put it all in TIPS?

Post by alec »

FIREchief wrote:
Why do folks who might otherwise encourage somebody to sink most/all of their liquid assets into a SPIA have such a problem with putting most/all assets into TIPS? Is that insurance company investing in something safer than TIPS?? :confused
I'm a big proponent of TIPS and life annuities, but I think that's a straw man. In my experience on this board, the same people who warn against SPIA's are usually the same people wary of TIPS.
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Re: Why not put it all in TIPS?

Post by FIREchief »

alec wrote:
FIREchief wrote:
Why do folks who might otherwise encourage somebody to sink most/all of their liquid assets into a SPIA have such a problem with putting most/all assets into TIPS? Is that insurance company investing in something safer than TIPS?? :confused
I'm a big proponent of TIPS and life annuities, but I think that's a straw man. In my experience on this board, the same people who warn against SPIA's are usually the same people wary of TIPS.
You may be right. I just can't recall a thread where a significant investment in a SPIA was met with the same type of "are you nuts?" reactions that 100% TIPS seems to evoke.
Last edited by FIREchief on Sat Jan 14, 2017 7:55 pm, edited 1 time in total.
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Re: Why not put it all in TIPS?

Post by stlutz »

I think getting too hung up on TIPS (whether pro or con) can lead astray in this case. Bottom line is that if you're 65 and looking at a withdrawal rate south of 3%, you can go 100% *fixed income* and be just fine. That may be total bond, TIPS, CDs, or some combination of all 3--it really doesn't matter all that much. The only caveat is I wouldn't take too much duration risk with nominal bonds. Going 100% in a long-term bond fund could go away if inflation gets out of control.
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Re: Why not put it all in TIPS?

Post by FIREchief »

stlutz wrote: That may be total bond, TIPS, CDs, or some combination of all 3--it really doesn't matter all that much. The only caveat is I wouldn't take too much duration risk with nominal bonds. Going 100% in a long-term bond fund could go away if inflation gets out of control.
I think you just made the argument for 100% TIPS. :happy
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Re: Why not put it all in TIPS?

Post by abuss368 »

stlutz wrote:I think getting too hung up on TIPS (whether pro or con) can lead astray in this case. Bottom line is that if you're 65 and looking at a withdrawal rate south of 3%, you can go 100% *fixed income* and be just fine. That may be total bond, TIPS, CDs, or some combination of all 3--it really doesn't matter all that much. The only caveat is I wouldn't take too much duration risk with nominal bonds. Going 100% in a long-term bond fund could go away if inflation gets out of control.
How can you safely withdrawal 3% when the yield is less than that? No equities?
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Re: Why not put it all in TIPS?

Post by alec »

FIREchief wrote:
alec wrote:
FIREchief wrote:
Why do folks who might otherwise encourage somebody to sink most/all of their liquid assets into a SPIA have such a problem with putting most/all assets into TIPS? Is that insurance company investing in something safer than TIPS?? :confused
I'm a big proponent of TIPS and life annuities, but I think that's a straw man. In my experience on this board, the same people who warn against SPIA's are usually the same people wary of TIPS.
You may be right. I just can't recall a thread where a significant investment in a SPIA was met with the same type of "are you nuts?" reactions that 100% TIPS seems to evoke.
Probably recency bias. :D I seem to remember several during the 2008 and 2009, during the financial crisis.
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Re: Why not put it all in TIPS?

Post by stlutz »

How can you safely withdrawal 3% when the yield is less than that? No equities?
Suppose inflation is 0%. If I withdraw 3% per year, that will last me 33 1/3 years (100/3). Of course there is inflation, so I do need to generate enough positive return to match inflation. TIPS, CDs, and Total Bond are all doing that.
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Re: Why not put it all in TIPS?

Post by Dimitri »

stlutz wrote:
How can you safely withdrawal 3% when the yield is less than that? No equities?
Suppose inflation is 0%. If I withdraw 3% per year, that will last me 33 1/3 years (100/3). Of course there is inflation, so I do need to generate enough positive return to match inflation. TIPS, CDs, and Total Bond are all doing that.

Exactly. That is what I'm getting at. If my goal is a 3% withdrawal rate then TIPS afford me 33.3 years. A 2.5% rate gives me 40 years. 2.0% puts it at 50 years, etc. Good enough. I don't think it is overly realistic to think beyond that. With these parameters I'm not sure why I would necessarily want to consider equities.
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Re: Why not put it all in TIPS?

Post by Index Fan »

Just say that I've got my tuna, Krugerrands and ammo. What do you think is a safer investment than U.S. Govt. securities?
A diversified portfolio with multiple asset classes (which can have a good amount of U.S. Govt. securities).

You seem obsessed with the idea that safe means only one asset class. I think that is wrong. That exposes one to possible single-asset-class catastrophic failure.
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Re: Why not put it all in TIPS?

Post by Dimitri »

Index Fan wrote:
Just say that I've got my tuna, Krugerrands and ammo. What do you think is a safer investment than U.S. Govt. securities?
A diversified portfolio with multiple asset classes (which can be heavy on U.S. Govt. securities).

You seem obsessed with the idea that safe means only one asset class. I think that is wrong.

I'm game - that is why I put the question out here. What would you suggest (beyond TIPS)? I've got the tuna, etc. covered. All I'm trying to achieve is something that will keep up with inflation for the duration.
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Re: Why not put it all in TIPS?

Post by hoops777 »

SINGLE ASSET CLASS CATASTROPHIC FAILURE....Repeat after index fan.... :D
Very wise words of warning.
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Re: Why not put it all in TIPS?

Post by Dimitri »

hoops777 wrote:SINGLE ASSET CLASS CATASTROPHIC FAILURE....Repeat after index fan.... :D
Very wise words of warning.
OK, so if U.S. Govt. securities aren't a safe investment, what do you recommend?
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Re: Why not put it all in TIPS?

Post by patrick »

FIREchief wrote:Why do folks who might otherwise encourage somebody to sink most/all of their liquid assets into a SPIA have such a problem with putting most/all assets into TIPS? Is that insurance company investing in something safer than TIPS?? :confused
There are benefits of the SPIA over TIPS (assuming an inflation-indexed SPIA of course) which don't require the insurance company to hold any asset safer that is safer than TIPS.

An individual investor can't properly avoid longevity risk (the risk of running run out of money because you lived longer than expected) with TIPS. Most people won't live to 100 years old, but some will, so an individual either has to withdraw at a very low rate (meaning a very low spending level in retirement) in order to still have money left if they do get to 100, or else the individual has to risk ending up 100 years old and broke.

An insurance company issuing thousands of annuities, however, has a pretty good idea what fraction will live to 100. They only need to have enough budgeted for that many 100 year olds (plus a little bit more in reserve) in order to be able to pay out all the policies.

The SPIA does add the additional risk that the insurance company will fail, but that may not be a huge risk. Both government regulations and business sense would require the insurance company to have enough reserves to pay out its policies, and if it does fail anyway there are guaranty associations that should (with some limits) take over the payouts.
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Re: Why not put it all in TIPS?

Post by Quark »

Assume you have 50x annual expenses. You invest 30x in a 30 year TIPS ladder. You invest the other 20x in any maturity or combination of maturities you want, eventually ending up with a 20 year TIPS ladder 30 years from now.

So long as you don't live more than 50 years, what's the risk (other than the govt stops selling TIPS or real rates go negative)?

You're never selling, so why would volatility be a problem?
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Re: Why not put it all in TIPS?

Post by hoops777 »

Dimitri.I am very far from being an expert and am barely competent,but it makes no sense to just assume that nothing could ever happen to cause a major problem with tips.Is it likely ? No,but there are other very safe and reasonable alternatives to spread it around a bit with.They have all been mentioned.
Just look at the daily news cycle the past 3 months and tell me how many predicted this a year ago.I guess it is easy to just throw it all in one thing and simplify your financial life.There have just been too things that could never happen that surprise.... happened.
Last edited by hoops777 on Sat Jan 14, 2017 10:06 pm, edited 1 time in total.
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Re: Why not put it all in TIPS?

Post by Ged »

If you have enough to satisfy all needs, I think it is a reasonable idea.

I might consider diversifying a bit though. For example inflation linked bonds denominated in Swiss Francs. Precious metals. Etc.
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Re: Why not put it all in TIPS?

Post by Dimitri »

hoops777 wrote:Dimitri.I am very far from being an expert and am barely competent,but it makes no sense to just assume that nothing could ever happen to cause a major problem with tips.Is it likely ? No,but there are other very safe and reasonable alternatives to spread it around a bit with.They have all been mentioned.
Just look at the daily news cycle the past 3 months and tell me how many predicted this a year ago.I guess it is easy to just throw it all in one thing and simplify your financial life.There have just been too things that could never happen that surprise.... happened.There is no reason to have to do what you propose,so why do it.
I appreciate your comment. My thought is that if I can't depend on a U.S. Government security then I had better look at my cans of tuna, Krugerrands, and ammo. I've got a lot of confidence betting on U.S. Government securities. Personally, I don't know of anything with a higher rating. If they go to h*ll then I think we all have a much bigger problem on our hands.
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Re: Why not put it all in TIPS?

Post by swguy »

Dimitri wrote:
hoops777 wrote:SINGLE ASSET CLASS CATASTROPHIC FAILURE....Repeat after index fan.... :D
Very wise words of warning.
OK, so if U.S. Govt. securities aren't a safe investment, what do you recommend?
I think it's been well covered. It's not an issue of safety. It's quite possible that this very safe strategy may pose risks, for example longevity risk. If one is 100% OK with that risk, then by all means. It's all in how one defines safe I guess.
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Re: Why not put it all in TIPS?

Post by Dimitri »

swguy wrote:
Dimitri wrote:
hoops777 wrote:SINGLE ASSET CLASS CATASTROPHIC FAILURE....Repeat after index fan.... :D
Very wise words of warning.
OK, so if U.S. Govt. securities aren't a safe investment, what do you recommend?
I think it's been well covered. It's not an issue of safety. It's quite possible that this very safe strategy may pose risks, for example longevity risk. If one is 100% OK with that risk, then by all means. It's all in how one defines safe I guess.
Thanks for your comment. I'm not sure where you see the longevity risk in buying TIPS. Would you mind explaining what you see as longevity risk?
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