Why not put it all in TIPS?

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swguy
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Re: Why not put it all in TIPS?

Post by swguy »

You might outlive your chosen withdrawal rate.
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Dimitri
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Re: Why not put it all in TIPS?

Post by Dimitri »

swguy wrote:You might outlive your chosen withdrawal rate.
I might. But as I postulated in my first post -- If I have my number (whatever that is - 30x, 40x, 50x, or something more) -- I believe that I've covered that problem. Nobody knows how long they will live. But from what I've read, a 2.5% withdrawal rate (picking my middle figure of 40x) gives me pretty good odds of not worrying. Would you feel comfortable at 40x your number in TIPS?
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swguy
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Re: Why not put it all in TIPS?

Post by swguy »

No. If I had 40x my number I'd take my number off the table and stay invested. Neither you nor I have any idea what will change regarding CPI or other issues regarding TIPS. That said, if you would be comfortable putting 100% of your eggs in that basket, excellent.
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Dimitri
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Re: Why not put it all in TIPS?

Post by Dimitri »

swguy wrote:No. If I had 40x my number I'd take my number off the table and stay invested. Neither you nor I have any idea what will change regarding CPI or other issues regarding TIPS. That said, if you would be comfortable putting 100% of your eggs in that basket, excellent.
Just out of curiosity, at what multiple would you call it quits? 50x, 100x, 200x?
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Re: Why not put it all in TIPS?

Post by saltycaper »

I like TIPS for safety, but you're practically begging the question here. If you assume unexpected events will not happen and everything will hum along just swimmingly, then of course there's no reason not to put it all in TIPS. You can't foresee all potential problems.
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swguy
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Re: Why not put it all in TIPS?

Post by swguy »

Respectfully, what's the difference? That number, unless it's a ridiculous one, is still just a guess. What's going to happen with TIPS over the course of a long retirement is also just a guess. You seem pretty certain that 100% TIPS is a good bet given those circumstances. I don't. Seems pretty simple.
robertalpert
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Re: Why not put it all in TIPS?

Post by robertalpert »

Tips only protects you from unexpected inflation; not from inflation in general.

But if you split bond holdings 50% short / intermediate tips plus 50% short / intermediate nominal treasuries --- that could protect from both expected inflation and expected inflation.
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Dimitri
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Re: Why not put it all in TIPS?

Post by Dimitri »

swguy wrote:Respectfully, what's the difference? That number, unless it's a ridiculous one, is still just a guess. What's going to happen with TIPS over the course of a long retirement is also just a guess. You seem pretty certain that 100% TIPS is a good bet given those circumstances. I don't. Seems pretty simple.
I think 100% TIPS is a pretty good bet. I'm willing to gamble on the United States of America. What would you propose as an alternative?
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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

patrick wrote:
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.
Note the bolded/underlined text. This is exactly why TIPS are superior (if somebody, such as the OP, has enough resources to cover the longevity risk).
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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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

robertalpert wrote:Tips only protects you from unexpected inflation; not from inflation in general.
I don't understand this at all. Please explain why TIPS don't provide protection from "inflation in general." :confused
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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#Cruncher
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Re: Why not put it all in TIPS?

Post by #Cruncher »

aj76er in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3194033#p3194033]this post[/url] wrote:
nisiprius [in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3194005#p3194005]this post[/url]] wrote:... Back in the day, I pointed out that ... 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%.
Can you provide a link to this analysis?
To get the withdrawal rate given a yield, just use the Excel PMT function. For example, assuming withdrawal at start of each year:

Code: Select all

4.00% =PMT(1.31%, 30, -1, 0, 1)
To get the yield given a withdrawal rate, just use the RATE function. For example, again assuming withdrawal at start of each year:

Code: Select all

1.31% =RATE(30, 4%, -1, 0, 1)
Here it is year by year assuming an initial investment of $1,000,000 of TIPS with $40,000 withdrawn at the start of each year:

Code: Select all

Year    Balance
----  ---------
   0  1,000,000
   1    972,576 =(1000000 - 40000) * 1.0131
   2    944,793 =( 972576 - 40000) * 1.0131
   3    916,646 etc.
   4    888,130
   5    859,240
   6    829,972
   7    800,321
   8    770,281
   9    739,848
  10    709,016
  11    677,780
  12    646,135
  13    614,075
  14    581,595
  15    548,690
  16    515,354
  17    481,581
  18    447,366
  19    412,703
  20    377,585
  21    342,007
  22    305,964
  23    269,448
  24    232,453
  25    194,975
  26    157,005
  27    118,538
  28     79,566
  29     40,085
  30         86
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Phineas J. Whoopee
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Re: Why not put it all in TIPS?

Post by Phineas J. Whoopee »

If one had enough money one could buy a 30-year ladder of TIPS, except one can't because of the period of time after 1997 when no 30-year TIPS were issued.

If one had enough left after buying their can't-be-bought 30-year ladder of TIPS one could buy more TIPS to go beyond the 30 years if, but only if, the Treasury keeps issuing them.

Usually I dislike replies which combine a number of other posters' comments, because it's harder later for somebody to quote the reply and keep all the attributions right, but there are so many that overlap so much this time I'm going to hold my peace and write it.
robertalpert wrote:Tips only protects you from unexpected inflation; not from inflation in general.

But if you split bond holdings 50% short / intermediate tips plus 50% short / intermediate nominal treasuries --- that could protect from both expected inflation and expected inflation.
All bonds take expected inflation into account, including TIPS. TIPS won't harm you if inflation comes in as expected. They will help you if it comes in higher. TIPS provide no additional protection against expected inflation, but they provide no less, either.
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).
FIREchief wrote: ...
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)
Reinvestment risk is the risk that you won't be able to invest the coupons at the same yield as the original bond. It is not the risk that once the bond matures prevailing yields may be different.

The reason it's an issue has to do with the standard definition of bond yield, that is, Yield to Maturity, or YTM. Yield to Maturity (read the link) includes the assumption that you reinvest the coupons at the same yield as the original bond through its maturity date. If you can't, realized yield will differ from calculated YTM, either lower or higher, hence its being called risk.

TIPS have less reinvestment risk than nominal Treasuries. With any portfolio of bonds, if you want your holding to keep up with inflation as it compounds you must reinvest that part of the yield which represents realized inflation. With nominal bonds you're subject to the mercy of the market, and that's if their returns are adequate to keep up at all. They might not be. With TIPS, for which part of the return is adjustment of principal in line with CPI-U, the reinvestment is automatic and inherently does carry the same yield, through maturity.

In a TIPS fund, of course, the inflation adjustments are paid out in cash and must be reinvested. Going immediately into the same fund is pretty good, to match the pace of compounding inflation.
jalbert wrote:...
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.
Indeed, if we kept calculating CPI, now called CPI-W, as it was originally defined in 1913 we would have different numbers. It's unreasonable to suppose the standard basket of goods and services, and the survey methods, and the economic understanding of inflation, will stay the same for over a century.
rgs92 wrote:...
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.
Each measure of CPI is defined and documented on the Bureau of Labor Statistics' website, as is the methodology. The proposal to go to C-CPI-U, a calculation that's already published, isn't fuzziness about what CPI is. It's a matter of providing justification for reducing annual Social Security adjustments, a political question on which I won't express an opinion in this forum.
rgs92 wrote:And your own personal inflation rate may differ a lot.
Inflation is a macroeconomic effect. Personal expenses, even without changing one's basket, are microeconomics. The Bureau of Labor Statistics, and for that matter the Bureau of Economic Analysis, doesn't pretend to measure CPI-rgs92, any more than CPI-PJW.

One's personal spending is important, but it's not realistic to expect a macroeconomic number to capture it in detail.
rgs92 wrote: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).
...
It might be so over any specified period of time, but I don't think it could be persistently. Coastal urban prices may adjust, but if prices other than housing and real estate were compounding more and more versus prices elsewhere there would be an opportunity to move goods and services in, even if it meant privately financing new transportation and communication infrastructure, which would dampen the effect. NYC, at least, I don't have information about San Francisco, is experiencing a housing construction boom, especially in the outer boroughs.
abuss368 wrote:...
How can you safely withdrawal 3% when the yield is less than that? No equities?
Either: 1) because none of us lives forever, therefore our assets don't have to last forever and we can draw from their value as we age; or 2) you attach yourself to a literal and extreme interpretation of the word safe, when the correct term is sustainable.

PJW
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gilgamesh
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Re: Why not put it all in TIPS?

Post by gilgamesh »

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?
That's almost exactly what I will be doing. TIPS ladder later combined with SS will provide 80% of my retirement income until 80. A TIPS that mature at age 80 will pay for an SPIA. So, each year a TIPS will mature and the payout is used for the next 12 months. This is my floor, set high though.

TIPS interest rates are ignored. This extra payout will be used for even more travel (basic travel/vacation is already included in the floor) I am assuming travel will wane over time as interest payments wane as easy Tips mature.

Could be replaced with CD for up to 5 years if the current low interest rates persist

I however will have a side regular portfolio to withdraw the 20%. Drawn at 3% or less. On top of the 20%, it will also be Used for emergency and later long term care (it should have grown with 3% withdrawal). Even if it doesn't the SPIA will allow for decent long term care. The side portfolio is never needed for fairly comfortable living (not just the bare basics).
dbr
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Re: Why not put it all in TIPS?

Post by dbr »

FIREchief wrote:
robertalpert wrote:Tips only protects you from unexpected inflation; not from inflation in general.
I don't understand this at all. Please explain why TIPS don't provide protection from "inflation in general." :confused

First, of course, since all TIPS all the time are indexed for inflation, by definition they "protect" one from inflation in general.

The place where the comment gets derailed is in the fact that interest rates on any nominal bond are priced with expected inflation taken into account. One could say one buys the real interest rate one can get, the same one one gets from TIPS, and then the nominal rate will be higher by expected inflation. In that sense TIPS have no advantage over nominal bonds if one actually gets expected inflation. In fact the nominal bond will have returned more than TIPS if inflation actually turns out to be less than expected. That is what is meant by "TIPS don't provide protection from expected inflation" but it is a very odd and misleading way to make that statement.
Last edited by dbr on Sun Jan 15, 2017 10:09 am, edited 1 time in total.
dbr
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Re: Why not put it all in TIPS?

Post by dbr »

FIREchief wrote:
robertalpert wrote:Tips only protects you from unexpected inflation; not from inflation in general.
I don't understand this at all. Please explain why TIPS don't provide protection from "inflation in general." :confused
This is a misunderstood common conversation people have about TIPS.

First, of course, since all TIPS all the time are indexed for inflation, by definition they "protect" one from inflation in general.

The place where the comment gets derailed is in the fact that interest rates on any nominal bond are priced with expected inflation taken into account. One could say one buys the real interest rate one can get, the same one one gets from TIPS, and then the nominal rate will be higher by expected inflation. In that sense TIPS have no advantage over nominal bonds if one actually gets expected inflation. In fact the nominal bond will have returned more than TIPS if inflation actually turns out to be less than expected. That is what is meant by "TIPS don't provide protection from expected inflation" but it is a very odd and misleading way to make that statement.
209south
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Re: Why not put it all in TIPS?

Post by 209south »

Dmitri, I think your strategy is sound but possibly sub-optimal. Facing a similar set of circumstances I am addressing my LMP 'needs/desires' with a combination of three cash flows:

1. social security - deferred 'til age 70 but then an inflation-protected annuity for life
2. TIPs ladder within my IRAs to deal with RMDs from age 70-86 (2046 is currently longest maturity - I will add to this each year)
3. DIAs starting at age 75, 80 and 85 - nominal but a reasonable hedge given the inflation-protected nature of the first two.

SS and TIPs provide inflation-protection and SS + DIAs provide longevity protection - I think the DIAs are a less-expensive way of addressing longevity than 'additional TIPs', but in any event I like the hedge.

I am fortunate to have sufficient assets to establish those three legs plus have additional dollars in effectively a 50-30-20 portfolio of nominal bonds, equities and alternatives (bullion and REITs). I sleep well at night and my biggest focus is bringing my currently excessive annual spending down to a more sustainable level.
hoops777
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Re: Why not put it all in TIPS?

Post by hoops777 »

Dimitri just go for it.You have convinced yourself that tips are foolproof and the best path for you.You have rejected any conflicting advice by always coming back to how safe they are.I suppose tips are as foolproof as one can get if you feel comfortable putting all your eggs in one basket.Really,what are the odds that anything could go wrong?I am putting my full faith into SS not having a problem and at 65 I feel very secure.If I was 45 not so much.If tips and SS collapse then everything else is going down with it.I get it,but I personally choose a bit more diversification anyway.
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Re: Why not put it all in TIPS?

Post by Stormbringer »

Dimitri wrote: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?
You could also put it all in inflation-indexed single premium life annuities, effectively buying yourself a pension and transferring your risk to the insurance companies (and by extension, the taxpayers via state insurance guarantee fund).
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rgs92
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Re: Why not put it all in TIPS?

Post by rgs92 »

Hey thanks PJWhoopee above for those great comments and rejoinders to my post. Best to you I enjoyed the new perspectives.
swguy
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Re: Why not put it all in TIPS?

Post by swguy »

I think this thread is one of many that confuse the possible (theory) and the practical (practice).

"In theory there is no difference between theory and practice; in practice there is." - Nassim Nicholas Taleb
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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

Stormbringer wrote:
Dimitri wrote: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?
You could also put it all in inflation-indexed single premium life annuities, effectively buying yourself a pension and transferring your risk to the insurance companies (and by extension, the taxpayers via state insurance guarantee fund).
If my state's guarantee fund goes bankrupt, are the taxpayers really on the hook? We'll probably never know for sure until it happens in some state.
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Re: Why not put it all in TIPS?

Post by patrick »

FIREchief wrote:
patrick wrote:
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.
Note the bolded/underlined text. This is exactly why TIPS are superior (if somebody, such as the OP, has enough resources to cover the longevity risk).
Only to indicate that it's still not completely certain. The individual TIPS strategy isn't completely certain either, for reasons such as the following:

1. If you want TIPS to cover 50 years, you'll have to buy TIPS maturing as late as 2067 (if the retirement period starts today). They might not ever be issued, and if they are, they might have very negative real yields.

2. With TIPS you have to pay taxes on the inflation adjustments when the adjustment is made. If there is both high inflation and an increase in real interest rates, then you'd have to sell TIPS early (and with depressed real prices) to pay the taxes.

3. You might make a mistake in carrying out the strategy and there is (unlike when using the annuity) no guaranty association to fall back on.

Having enough resources is a fairly extreme starting point. From the somewhat outdated table on https://www.principal.com/retirement/in ... income.htm, an inflation adjusted annuity can pay somewhere between 3.5% per year (for a 55 year old woman) to 7.6% per year (for a 75 year old man) -- using the individual TIPS strategy to get 2% gives far less money to spend in retirement!
dbr
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Re: Why not put it all in TIPS?

Post by dbr »

Going to extremes to squeeze out the last few increments of real or imagined risk might be the riskiest behavior of all.
anoop
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Re: Why not put it all in TIPS?

Post by anoop »

nisiprius wrote: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.
You can buy the book here for $5.
http://www.zvibodie.com/buy+book

And he has a bunch of other stuff on his website.
http://www.zvibodie.com/
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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

patrick wrote:
1. If you want TIPS to cover 50 years, you'll have to buy TIPS maturing as late as 2067 (if the retirement period starts today). They might not ever be issued, and if they are, they might have very negative real yields.
If they are no longer available, then one would just have to choose an alternative at that time. They would start with the same purchasing power, so nothing really "failed" in this scenario. Also, if real yields are extremely negative in the future, that insurance company that could have sold me an inflation adjusted annuity is probably bankrupt, along with any "guarantee" funds.
patrick wrote:
2. With TIPS you have to pay taxes on the inflation adjustments when the adjustment is made. If there is both high inflation and an increase in real interest rates, then you'd have to sell TIPS early (and with depressed real prices) to pay the taxes.
This could certainly be true in many situations. That said, I think that many here hold their TIPS in a tIRA or Roth, so no issues.
patrick wrote:
3. You might make a mistake in carrying out the strategy and there is (unlike when using the annuity) no guaranty association to fall back on.
This is a valid concern, which applies to many retirement strategies. Certainly something to focus on as we get older. Perhaps a responsible, intelligent adult child would need to become involved as a "second set of eyes," as transactions are executed. Keeping things simple would be a definite benefit.
patrick wrote:
Having enough resources is a fairly extreme starting point. From the somewhat outdated table on https://www.principal.com/retirement/in ... income.htm, an inflation adjusted annuity can pay somewhere between 3.5% per year (for a 55 year old woman) to 7.6% per year (for a 75 year old man) -- using the individual TIPS strategy to get 2% gives far less money to spend in retirement!
An annuity can provide much more money (if I live beyond my expectancy) or much less (if I die the next day). Sure, I can pay a bit more and get a 20 year guaranteed payout. With the TIPS however, if I die early, my heirs get a larger inheritance. I don't see any free lunches with annuities, if the intention is to benefit multiple generations. The insurance company isn't doing this for free.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Dandy
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Re: Why not put it all in TIPS?

Post by Dandy »

I would never consider 100%, even with a modest slug of cash, in one investment. I would consider putting 20-25 years of your current residual needs (money needed each year to supplement other income) in TIPS/and/or other "safe" products. Your actual expense growth/inflation may not align with the TIPS inflation protection. Medical expenses, emergencies, long term care, etc. could alter your outcome.

Also, TIPS may not be issued or the terms changed so individual TIPS may not be attractive in the future or not be available. They may be cumbersome to maintain an inventory as you age. Funds have variations in NAVs and who knows what events will affect TIPS funds. Not saying TIPS or TIPS funds are not a good idea just not to put all your eggs in that basket.

So, if you have your number or better yet more than your number I don't think you have to go to an extreme allocation.
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gwe67
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Re: Why not put it all in TIPS?

Post by gwe67 »

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.

I would rather have multiple annuities guaranteed by reputable insurance companies than to rely on instruments from a government that is $19 trillion in debt. And you don't outlive annuities. Since you are a "doomsday prepper" it seems really odd that you would want all of your money in TIPS. Maybe you're just being argumentative.
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hoops777
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Re: Why not put it all in TIPS?

Post by hoops777 »

This thread has mostly run it's course but I will add that there is only one thing in life that is ABSOLUTELY GUARANTEED and we all know what that is :D
K.I.S.S........so easy to say so difficult to do.
Rodc
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Re: Why not put it all in TIPS?

Post by Rodc »

If TIPS fail completely we have such huge problems no US investment is likely worth much. Possibly international stocks or bonds will still have value. But betting that CPI will track your personal inflation rate seems more problematic, but perhaps not too horrible if you have some decent margin built in.

The biggest issue with a TIPS ladder (which it sounds like we are talking about) is longevity risk not the government going broke. You have zero investment income when the ladder finishes. While SWR studies allow for using all the principle, in the vast majority of cases there is a lot of money left at the end -often more than you started with (and at any rate one should use a variable withdrawal so you will not run out of money, though income may be decreased). If you buy a real annuity (not many of those) you do not have longevity risk (or not much as again CPI might not match your inflation rate). But an annuity does come with at least some risk the company will go broke and whatever guarantee agency exists in 20 or 30 or 40 years may not come through.

So if you want to go with a TIPS ladder not only do you need to accept very low returns, you need to plan for a very long life such that you have a very high chance of dying with money still in the ladder. This means super low income compared to other options. This means in turn that using other options you could retire much earlier or have much more income to spend.

Some money in a TIPS ladder could make sense, but I think most people would want that to be modest, and possibly combined with an annuity, and a stock/bond portfolio to reduce the various risks, allowing one to retire earlier or with a better income.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

Personally, I would sleep much better at night being 100% dependent on a TIPS ladder than I would being 100% dependent on an annuity.

Also, there is absolutely nothing that guarantees that stocks, nominal bonds, commodities, etc. (in any combination) will provide more future purchasing power than a TIPS ladder.
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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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

hoops777 wrote:This thread has mostly run it's course but I will add that there is only one thing in life that is ABSOLUTELY GUARANTEED and we all know what that is :D
Are you forgetting about the rapture? Or, are you talking about taxes.
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Rodc
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Re: Why not put it all in TIPS?

Post by Rodc »

FIREchief wrote:Personally, I would sleep much better at night being 100% dependent on a TIPS ladder than I would being 100% dependent on an annuity.

Also, there is absolutely nothing that guarantees that stocks, nominal bonds, commodities, etc. (in any combination) will provide more future purchasing power than a TIPS ladder.

Why would anyone go 100% all in on any of those options? Everyone of them is to some non-trival degree problematic. That is why we diversify.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Phineas J. Whoopee
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Re: Why not put it all in TIPS?

Post by Phineas J. Whoopee »

gwe67 wrote:...
I would rather have multiple annuities guaranteed by reputable insurance companies than to rely on instruments from a government that is $19 trillion in debt. And you don't outlive annuities. Since you are a "doomsday prepper" it seems really odd that you would want all of your money in TIPS. Maybe you're just being argumentative.
Right. The insurance companies haven't invested much of their assets in Treasuries, including TIPS to cover their future liabilities for the CPI-adjusted life annuities they sold.
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Erwin
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Re: Why not put it all in TIPS?

Post by Erwin »

I think that if you have acquired enough (the meaning of enough is very personal), my absolutely right strategy is capital preservation ("stop playing, if you have already won the game").
Given that, a portfolio holding 80% in a TIPS ladder (if the funds are tax protected, and if not in a TIPS fund) plus 20% in a simple global equity fund, like VT or ACWI, would be the way I would go. Given the small real yield that TIPS offer to day, they basically provide inflation protection, so the small equity allocation may help pay taxes so that the capital protection is truly after taxes.
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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

Erwin wrote:I think that if you have acquired enough (the meaning of enough is very personal), my absolutely right strategy is capital preservation ("stop playing, if you have already won the game").
Given that, a portfolio holding 80% in a TIPS ladder (if the funds are tax protected, and if not in a TIPS fund) plus 20% in a simple global equity fund, like VT or ACWI, would be the way I would go. Given the small real yield that TIPS offer to day, they basically provide inflation protection, so the small equity allocation may help pay taxes so that the capital protection is truly after taxes.
I like your approach. I would probably substitute a US total market index fund for the equities, but the results would likely be very similar in the long term.

Another option would be to hold the TIPS ladder in a Roth. That would protect the purchasing power against that final risk (erosion due to tax rate escalation).
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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FIREchief
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Re: Why not put it all in TIPS?

Post by FIREchief »

Rodc wrote:
FIREchief wrote:Personally, I would sleep much better at night being 100% dependent on a TIPS ladder than I would being 100% dependent on an annuity.

Also, there is absolutely nothing that guarantees that stocks, nominal bonds, commodities, etc. (in any combination) will provide more future purchasing power than a TIPS ladder.

Why would anyone go 100% all in on any of those options? Everyone of them is to some non-trival degree problematic. That is why we diversify.
If I wasn't concerned about risk of near to mid term losses, I would be 100% equities. I diversify to control those risks. If an investment is without risk of losing dollar denominated purchasing power (such as TIPS and only TIPS), then the need to diversify essentially goes away. With everything else, I agree that some form of diversification is desirable in order to control risk.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Rodc
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Re: Why not put it all in TIPS?

Post by Rodc »

FIREchief wrote:
Rodc wrote:
FIREchief wrote:Personally, I would sleep much better at night being 100% dependent on a TIPS ladder than I would being 100% dependent on an annuity.

Also, there is absolutely nothing that guarantees that stocks, nominal bonds, commodities, etc. (in any combination) will provide more future purchasing power than a TIPS ladder.

Why would anyone go 100% all in on any of those options? Everyone of them is to some non-trival degree problematic. That is why we diversify.
If I wasn't concerned about risk of near to mid term losses, I would be 100% equities. I diversify to control those risks. If an investment is without risk of losing dollar denominated purchasing power (such as TIPS and only TIPS), then the need to diversify essentially goes away. With everything else, I agree that some form of diversification is desirable in order to control risk.
TIPS have a number of risks. If you need the money before the TIPS matures you have risk of losing money. If CPI does not track your inflation you have risk of losing purchasing power. More importantly if you use a TIPS ladder you have longevity risk if you out live the ladder, or you need a ladder so long you lose out on significant purchasing power today. Using 100% TIPS you have a lost opportunity risk.

You may decide you do not care about those things, or you may choose to overlook them, but TIPS are not magically free of risk.

I don't have anything against TIPS. I have started a TIPS ladder for retirement. But I am not willing to put all my money into a TIPS ladder - I would rather continue to diversify my risks.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Clive
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Re: Why not put it all in TIPS?

Post by Clive »

One if not the biggest causes of serious loss is down to concentration risk.

TIPS could suffer due to taxation. Or simply because consumer price inflation lags other asset price inflation. In the UK CPI has broadly lagged house prices, gold, art and stock price only inflation over the last century. I believe more recently in the US CPI has lagged medical care cost inflation. ...etc.

I suspect CPI inflation has lagged due to technology. Single Combine Harvester doing the work of fields full of workers. Robots replacing factories full of workers ... etc. Enabling consumable prices to relatively decline ... causing CPI to relatively lag.
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