LMP-3: Roll your own pension- Build a tips ladder!

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grok87
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LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Wed May 10, 2017 7:13 pm

LMP-3: Roll your own pension, Build a tips ladder!
(third in an occasional series on LMP = Liability matching portfolio strategies)

In this article Peter Tsui argues that folks as young as 25 could start building a tips ladder to provide a pension-substitute in retirement: http://www.indexologyblog.com/2017/04/1 ... llennials/
As she turns 65, she would have built up a 30-year laddered TIPS portfolio, with USD 10,000 of TIPS securities maturing in each of the next 30 years. Since these TIPS securities have coupons and inflation-adjusted principal amounts, the nominal amounts would be much different from the face amount of USD 10,000; but in real terms, meaning on an inflation-adjusted basis, each maturing tranche of the laddered portfolio would provide the same purchasing power of a real USD 10,000.
Personally i think 25 is a little early to start this project- i think age 35, or 30 years till retirement is about right. Before age 35, and for any surplus funds thereafter, i would recommend the david swensen portfolio of:

30% us stocks
20% international stocks
20% real estate
15% treasuries
15% tips

Back to the tips ladder:
The article suggest building a tips ladder with $10k per year. But that begs the question: is that the right amount for everyone?

As the article points out, the tips ladder will help to supplement your social security which currently has a maximum benefit of $32.2k (edited] per year. But not everyone will get the full $32k of course- to get that your salary would need to have been at the maximum taxable social security level (currently $127k) for 35 years.
https://www.ssa.gov/news/press/factshee ... ts2017.pdf

To get some rough estimates, let's simplify things and assume your taxable Social Security salary over the years has been a constant percentage of the SS taxable max (reality is obviously more messy) and we are ignoring the finer details of the Social Security system as well).
(edited after considering #Cruncher's post below)

Then assuming one wants a minimum retirement income floor of 40% of your final salary, one gets this table:

Code: Select all

   ($000)         % of max SS         Estimated SS                           Needed TIPs
   '17 Salary    taxable earnings      (today's $)        40% of salary          Ladder
        60                 47%                  23.1               24                 0.9
        75                 59%                  25.9               30                 4.1
       100                 79%                  29.3               40                10.7
       125                 98%                  32.2               50                17.8
       150                100%                  32.2               60                27.8
       175                100%                  32.2               70                37.8
       200                100%                  32.2               80                47.8
So it turns out that for someone at the $75 k $100k current salary level, a $10 k tips ladder might be about right. For those with higher incomes the size of the needed Tips ladder climbs steeply (since SS caps out).
Last edited by grok87 on Fri May 12, 2017 8:58 pm, edited 7 times in total.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by LadyGeek » Wed May 10, 2017 9:13 pm

grok87's Liability matching portfolio series is now in the wiki: Grok's tips

grok - As we've done with your investing tips series, just link to the wiki to see the complete set. Let me (or another wiki editor) know if you have any updates.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Wed May 10, 2017 9:14 pm

LadyGeek wrote:grok87's Liability matching portfolio series is now in the wiki: Grok's tips

grok - As we've done with your investing tips series, just link to the wiki to see the complete set. Let me (or another wiki editor) know if you have any updates.
Thanks LadyGeek!
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Wed May 10, 2017 11:22 pm

grok87 in original post wrote:Then assuming one wants a minimum retirement income floor of 40% of your final salary, one gets this table:

Code: Select all

   ($000)         % of max SS         Estimated SS                           Needed TIPs
   Salary       taxable earnings      (today's $)        40% of salary          Ladder
        60                 47%                  15.4               24                 8.6
        75                 59%                  19.3               30                10.7
       100                 79%                  25.7               40                14.3
       125                 98%                  32.1               50                17.9
       150                100%                  32.6               60                27.4
       175                100%                  32.6               70                37.4
       200                100%                  32.6               80                47.4
Grok, your Estimated SS column incorrectly assumes that SS benefits are proportional to salary (up to a maximum). However, SS benefits are actually a diminishing portion of salary. As explained on this web page, in 2017 the Primary Insurance Amount (PIA) is
  • 90% of the Average Indexed Monthly Earnings (AIME) up to $885
  • Plus 32% of the AIME up to $5,336
  • Plus 15% of the AIME in excess of $5,336
With this formula and an assumed maximum salary of $127,200 (per this web page), here is how your table would look:

Code: Select all

 Annual                        40% of     From
 Salary     AIME      PIA      Salary    Ladder
-------    ------    ------    ------    ------
 60,000     5,000    25,360    24,000         0
 75,000     6,250    28,295    30,000     1,705
100,000     8,333    32,045    40,000     7,955
125,000    10,417    35,795    50,000    14,205
150,000    10,600    36,125    60,000    23,875
175,000    10,600    36,125    70,000    33,875
200,000    10,600    36,125    80,000    43,875 [*]
This shows that for lower salaries a smaller TIPS ladder is now needed to provide spending equal to 40% of salary. Indeed for a $60,000 salary SS alone provides more than enough.

* Example of AIME and PIA calculations for $200,000 salary:

Code: Select all

AIME: 10,600 = MIN(200000, 127200) / 12
PIA:  36,125 = 12 * (90% * 885 + 32% * (5336 - 885) + 15% * (10600 - 5336))

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Thu May 11, 2017 5:52 am

#Cruncher wrote:
grok87 in original post wrote:Then assuming one wants a minimum retirement income floor of 40% of your final salary, one gets this table:

Code: Select all

   ($000)         % of max SS         Estimated SS                           Needed TIPs
   Salary       taxable earnings      (today's $)        40% of salary          Ladder
        60                 47%                  15.4               24                 8.6
        75                 59%                  19.3               30                10.7
       100                 79%                  25.7               40                14.3
       125                 98%                  32.1               50                17.9
       150                100%                  32.6               60                27.4
       175                100%                  32.6               70                37.4
       200                100%                  32.6               80                47.4
Grok, your Estimated SS column incorrectly assumes that SS benefits are proportional to salary (up to a maximum). However, SS benefits are actually a diminishing portion of salary. As explained on this web page, in 2017 the Primary Insurance Amount (PIA) is
  • 90% of the Average Indexed Monthly Earnings (AIME) up to $885
  • Plus 32% of the AIME up to $5,336
  • Plus 15% of the AIME in excess of $5,336
With this formula and an assumed maximum salary of $127,200 (per this web page), here is how your table would look:

Code: Select all

 Annual                        40% of     From
 Salary     AIME      PIA      Salary    Ladder
-------    ------    ------    ------    ------
 60,000     5,000    25,360    24,000         0
 75,000     6,250    28,295    30,000     1,705
100,000     8,333    32,045    40,000     7,955
125,000    10,417    35,795    50,000    14,205
150,000    10,600    36,125    60,000    23,875
175,000    10,600    36,125    70,000    33,875
200,000    10,600    36,125    80,000    43,875 [*]
This shows that for lower salaries a smaller TIPS ladder is now needed to provide spending equal to 40% of salary. Indeed for a $60,000 salary SS alone provides more than enough.

* Example of AIME and PIA calculations for $200,000 salary:

Code: Select all

AIME: 10,600 = MIN(200000, 127200) / 12
PIA:  36,125 = 12 * (90% * 885 + 32% * (5336 - 885) + 15% * (10600 - 5336))
Thanks #Cruncher that's really helpful.

But i thought the max SS at normal retirement age is $32.6k right now not $36.1k?

https://www.google.com/amp/amp.timeinc. ... urce%3Ddam
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Grt2bOutdoors » Thu May 11, 2017 7:47 am

grok87 wrote:LMP-3: Roll your own pension, Build a tips ladder!
(third in an occasional series on LMP = Liability matching portfolio strategies)

In this article Peter Tsui argues that folks as young as 25 could start building a tips ladder to provide a pension-substitute in retirement: http://www.indexologyblog.com/2017/04/1 ... llennials/



So it turns out that for someone at the $75 k current salary level, a $10 k tips ladder might be about right. For those with higher incomes the size of the needed Tips ladder climbs steeply (since SS caps out).
Great series you've put together. Would just like to point out while higher incomes may want to replace a percentage of income, if you are a Boglehead :wink: you may need much less than what is suggested simply because you will either have accumulated a large risk portfolio or you may need even less than 40% of gross income to live on. The biggest issue is placement - if most of your assets are in a employer provided deferred plan with no brokerage window or TIPs or Real Return fund option, what then?
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Thu May 11, 2017 7:55 am

I wasn't purporting to show the maximum benefit payable now. Rather I was just applying the 2017 bend points using the $127,200 Contribution and Benefit Base in 2017 as the maximum salary. I did this to illustrate the non-linear relationship between salary and SS benefit. [*]

The SS web page, Workers with Maximum-Taxable Earnings, confirms the $2,687 maximum monthly benefit at normal retirement age stated in the link you reference. (By the way this is $32.2K per year, not $32.6K.) It says this is based on Average Indexed Monthly Earnings (AIME) of $8,843 ($106,116 per year), much less than the current $127,200 base. This isn't surprising because this AIME reflects what the contribution bases were in the past, not what it is now.

* The non-linearity would be illustrated just as well with the current maximum benefit:

Code: Select all

 Annual                        40% of     From
 Salary     AIME      PIA      Salary    Ladder
-------    ------    ------    ------    ------
 60,000     5,000    25,158    24,000         0
 75,000     6,250    27,728    30,000     2,272
100,000     8,333    31,478    40,000     8,522
125,000     8,843    32,395    50,000    17,605
150,000     8,843    32,395    60,000    27,605
175,000     8,843    32,395    70,000    37,605
200,000     8,843    32,395    80,000    47,605
To get the maximum PIA close to $2,687 per month I had to use the bend points for 2016 ($856 & $5,157) instead of 2017. Even then I'm off by $13: $32,395 / 12 = $2,700 per month.

Code: Select all

2,700 = 90% * 856 + 32% * (5157 - 856) + 15% * (8843 - 5157)

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Thu May 11, 2017 6:19 pm

Grt2bOutdoors wrote:
grok87 wrote:LMP-3: Roll your own pension, Build a tips ladder!
(third in an occasional series on LMP = Liability matching portfolio strategies)

In this article Peter Tsui argues that folks as young as 25 could start building a tips ladder to provide a pension-substitute in retirement: http://www.indexologyblog.com/2017/04/1 ... llennials/



So it turns out that for someone at the $75 k current salary level, a $10 k tips ladder might be about right. For those with higher incomes the size of the needed Tips ladder climbs steeply (since SS caps out).
Great series you've put together. Would just like to point out while higher incomes may want to replace a percentage of income, if you are a Boglehead :wink: you may need much less than what is suggested simply because you will either have accumulated a large risk portfolio or you may need even less than 40% of gross income to live on. The biggest issue is placement - if most of your assets are in a employer provided deferred plan with no brokerage window or TIPs or Real Return fund option, what then?
Well the 40% is just a placeholder. Everyone's situation is different. The big unknown is medical costs i guess.

Re the placement question, I guess maybe Ibonds?
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Thu May 11, 2017 6:33 pm

#Cruncher wrote:
I wasn't purporting to show the maximum benefit payable now. Rather I was just applying the 2017 bend points using the $127,200 Contribution and Benefit Base in 2017 as the maximum salary. I did this to illustrate the non-linear relationship between salary and SS benefit. [*]

The SS web page, Workers with Maximum-Taxable Earnings, confirms the $2,687 maximum monthly benefit at normal retirement age stated in the link you reference. (By the way this is $32.2K per year, not $32.6K.) It says this is based on Average Indexed Monthly Earnings (AIME) of $8,843 ($106,116 per year), much less than the current $127,200 base. This isn't surprising because this AIME reflects what the contribution bases were in the past, not what it is now.

* The non-linearity would be illustrated just as well with the current maximum benefit:

Code: Select all

 Annual                        40% of     From
 Salary     AIME      PIA      Salary    Ladder
-------    ------    ------    ------    ------
 60,000     5,000    25,158    24,000         0
 75,000     6,250    27,728    30,000     2,272
100,000     8,333    31,478    40,000     8,522
125,000     8,843    32,395    50,000    17,605
150,000     8,843    32,395    60,000    27,605
175,000     8,843    32,395    70,000    37,605
200,000     8,843    32,395    80,000    47,605
To get the maximum PIA close to $2,687 per month I had to use the bend points for 2016 ($856 & $5,157) instead of 2017. Even then I'm off by $13: $32,395 / 12 = $2,700 per month.

Code: Select all

2,700 = 90% * 856 + 32% * (5157 - 856) + 15% * (8843 - 5157)
yeah apparently the calculation of the $2,687 is fairly tricky. for others who want to follow along, the $2,687 PIA is at the bottom of the age 66 column in this doc
https://www.ssa.gov/oact/cola/examplemax.html
and it's calculated off the $8,843 AIME which is calculated at the bottom of the far right column of this page
https://www.ssa.gov/oact/ProgData/retirebenefit1.html
and the calc of $2,687 PIA from the $8,843 AIME is shown in this doc
https://www.ssa.gov/oact/ProgData/retirebenefit2.html
where you have to take the $2,595.79 shown in the second row and adjust it for 4 years of COLAs which are 1.5%, 1.7%, 0% and 0.3%

The way i look at it, if being at or above the max taxable SS wages every year (up to and including the 2016 $118,500) gets you an AIME of $8,843, then a 2016 salary of $60 k or 50.6% of max would get you to an AIME of $4,475 (i.e. 50.6% of $8,843). Then That would put that PIA at about $23,489 or so I think.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Kevin M » Thu May 11, 2017 7:18 pm

grok87 wrote: Re the placement question, I guess maybe Ibonds?
Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred. For example, assuming a constant tax rate of 25% and 2% average inflation, $10K in the TIPS in taxable grows to $19,580, while $10K in the I Bond tax-deferred grows to $16,085 after tax.

Even at 3% inflation and a lower 15% tax rate on the I Bonds in retirement, still assuming 25% tax rate on TIPS, you end up with $24,432 with TIPS in taxable and $22,132 with the I Bond.

You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years, but then you lose the supposedly "tax-deferred space" of the I Bond, and you pay your taxes on the I Bond redemption much sooner. This is why I don't understand why people buy I Bonds at 0% real thinking they'll hold them for 30 years.

Kevin
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Grt2bOutdoors » Thu May 11, 2017 7:29 pm

Kevin M wrote:
grok87 wrote: Re the placement question, I guess maybe Ibonds?
Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred. For example, assuming a constant tax rate of 25% and 2% average inflation, $10K in the TIPS in taxable grows to $19,580, while $10K in the I Bond tax-deferred grows to $16,085 after tax.

Even at 3% inflation and a lower 15% tax rate on the I Bonds in retirement, still assuming 25% tax rate on TIPS, you end up with $24,432 with TIPS in taxable and $22,132 with the I Bond.

You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years, but then you lose the supposedly "tax-deferred space" of the I Bond, and you pay your taxes on the I Bond redemption much sooner. This is why I don't understand why people buy I Bonds at 0% real thinking they'll hold them for 30 years.

Kevin
Can you get 1% real in the 30 year now? Why not just own the Tips fund instead?
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Peter G » Fri May 12, 2017 12:48 am

I’ll have a shot at how to build a 30 year $10k/year bond ladder, and invite corrections of my mistakes. This is a non-rolling bond ladder – you consume the coupons and return of principal, and don’t re-invest.
Folk have posted Excel files showing this, but they’re a bit complicated for me and I’m happier if I can understand all the steps. I hope what follows is understandable. It’s taken from a 2013 article by Pfau; that itself refers to ‘accrued asking price’ whose calculation was beyond me.
To make it a bit easier for me to describe how to create a spreadsheet, or do it all with pencil and paper, assume:
• Bonds are bought on the secondary market (because I don’t understand how they’re originally sold, and certainly not in each country that offer inflation protected bonds).
• Coupons only paid once/yr. Bonds are redeemed at maturity at the time of their final coupon payment (if your country’s tips are different, you may need to account for this).
• There are tips maturing each year, or if not then some of them are sold early (this introduces inaccuracy as the price we get will not be the final inflation adjusted price and thus not known now), or we have more to be redeemed at maturity than we need in a particular year (but hold some of the money over for use next year/years – not inflation protected unfortunately).
• We don’t care if we get a bit more or less than $10k/yr.

1. Plan to get $10k/yr
2. As an example of the data you’ll be working with: each bond has an inflation adjusted face value used to determine the coupon payment, and you need to know this face value when you purchase, but never again; each has a coupon rate eg, 1%; each has a buying price you’ll have to pay (expect it to be different from the adjusted face value).
3. Start with the 30th year in constructing the spreadsheet. Your tips money for this year is provided solely by return of inflation adjusted principal of those redeemed at maturity in the final year, and their coupon paid that year. You calculate the coupon payment you’ll receive that year by multiplying the current inflated face value (not purchase price) by the coupon rate by the number of tips being redeemed that year. Trial and error can tell you how many will need to be redeemed in that last year; and they'll be the last ones you'll hold.
4. Move back to your second last year to determine how many tips will be redeemed this year. This year your tips-provided money comes from the coupons of those being redeemed/sold in the next (final) year, plus the coupons of those being redeemed/sold this penultimate year, plus the principal of those being redeemed/sold this year.
5. And so you go back until the first year in which bonds are redeemed/sold.
6. You can now add to determine how many of each available tips to buy.
7. If you don't buy them all at the same time you at least have to buy the later maturing bonds first, and re-calculate further purchases if adjusted face values change in the meantime.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Peter G » Fri May 12, 2017 1:02 am

Why not just own the Tips fund instead?
That might be a better option if you only need to consume what the fund returns each year.
But I think the issue is: if you own a very short duration fund you might be missing out on some longer term higher coupon bonds which are available; and if you own a longer term fund and need to sell any you might take some losses if interest rates have risen.
With the bond ladder each year's needs are accurately met with certainty of inflation protection, and known real return.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Grt2bOutdoors » Fri May 12, 2017 10:41 am

Peter G wrote:
Why not just own the Tips fund instead?
That might be a better option if you only need to consume what the fund returns each year.
But I think the issue is: if you own a very short duration fund you might be missing out on some longer term higher coupon bonds which are available; and if you own a longer term fund and need to sell any you might take some losses if interest rates have risen.
With the bond ladder each year's needs are accurately met with certainty of inflation protection, and known real return.
The biggest issue as noted above is certain years are missing since the Treasury didn't offer certain maturity bonds in various years. That creates an issue unless you are willing to purchase at issue 10 year TIPs running risk of low reinvestment yield. Kind of negates the picking up of extra yield.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Fri May 12, 2017 1:27 pm

Thanks for this link. Grok. (It's page 1 of 2. Click NEXT at the bottom left for page 2.) I now see why I wasn't able to exactly get the $2,687 per month. For those interested here are the steps to get from the $8,843 Average Indexed Monthly Earnings (AIME) to the $2,687 Primary Insurance Amount (PIA).
  • The person was born in 1951 so the initial benefit calculation uses the bend points for 2013, the year he turns 62.

    Code: Select all

    2,595.79 = 0.9 * 791 + 0.32 * (4768 - 791) + 0.15 * (8843 - 4768)
  • Since the person was born 1943-1954, his Normal Retirement Age (NRA) is 66 which he won't reach until 2017. (See this web page.) So the initial result needs to be adjusted upward for 2013-2016 Cost of Living Adjustments (COLAs). Prior to each year's adjustment the number is truncated down to the nearest $0.10.

    Code: Select all

     2,687.30 = FLOOR(1.003 * FLOOR(1.017 * FLOOR(1.015 * FLOOR(2595.79, 0.1),  0.1), 0.1), 0.1)
Kevin M in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3365224#p3365224]this post[/url] wrote:Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred.
Your calculations are good, Kevin. :thumbsup But I would still dread the prospect of the tax accounting for up to 30 individual TIPS held in a taxable account. At least, if they were bought at initial auction, there would be no discount accretion or premium amortization to worry about. (See this post for more.)
Kevin M in same post wrote:You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years ...
I may try to model this, calculating how much TIPS yields would have to increase after X years for this to be better than simply buying 30-year TIPS in the first place. But, if I do, it will be in a new thread since it is off topic.
Peter G in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3365456#p3365456]this post[/url] wrote:3. Start with the 30th year ... You calculate the coupon payment ... by multiplying the current inflated face value ... by the coupon rate by the number of tips being redeemed ... Trial and error can tell you how many will need to be redeemed ... (underline added)
There is no need to use "trial and error", Peter. You can compute how many TIPS to buy. To illustrate, here is the computation for the last three years of a 30-year $10,000 per year ladder. I'm arbitrarily defining $10,000 in purchasing power as of 4/1/2017; and therefore using the index ratios as of that date as shown in the April 1 column of this web page.
  • 0.875% Feb 2047 : 1.00599
  • 1.000% Feb 2046 : 1.02488
  • 0.750% Feb 2045 : 1.03124

Code: Select all

Feb 2047 0.875% coupon
  1.01039 = 1.00599 * (1 + 0.875% / 2)   divisor
    9,897 = 10000 / 1.01039              face value purchase
       87 =  9897 * 1.00599 * 0.875%     annual interest
Feb 2046 1% coupon
  1.03000 = 1.02488 * (1 + 1.000% / 2)   divisor
    9,624 = (10000 - 87) / 1.03000       face value purchase
       99 =   9624 * 1.02488 * 1.000%    annual interest
Feb 2045 0.75% coupon
  1.03511 = 1.03124 * (1 + 0.75% / 2)    divisor
    9,481 = (10000 - 87 - 99) / 1.03511  face value purchase
       73 =   9481 * 1.03124 * 0.750%    annual interest
Note that the above reflects the fact that these three TIPS mature in February, and hence get only 1/2 of the annual interest the final year. The above does not reflect the fact that, In real life, you'd have to round the face value purchases to thousands since that is the smallest increment brokers will allow. This and other refinements are handled in my TIPS Ladder Builder spreadsheet. But in this thread Grok will probably be discussing an approach whereby the ladder is built up year-by-year with purchases at auction instead of all at once in the secondary market.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Kevin M » Fri May 12, 2017 3:44 pm

:greedy
#Cruncher wrote:
Kevin M in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3365224#p3365224]this post[/url] wrote:Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred.
Your calculations are good, Kevin. :thumbsup But I would still dread the prospect of the tax accounting for up to 30 individual TIPS held in a taxable account.
I've never owned TIPS in taxable, but I don't see why this would be such a big deal. Once you get it set up in a spreadsheet, it seems to me that it should be fairly straightforward.
#Cruncher wrote:At least, if they were bought at initial auction, there would be no discount accretion or premium amortization to worry about. (See this post for more.)
From that thread:
stlutz wrote: #2) With the cost basis regulations that took effect in 2014 for "simple" fixed income like regular T-notes, your broker/intermediary has to track all of this for you. So, if there is amortization it will be on your 1099. If there is market discount, it will be included as interest income on your 1099. If there is a capital gain, they will report the cost basis to you just as if it was a mutual fund/ETF/stock. You don't have to manually track any of this yourself.
Question: does this apply to TIPS? If so, seems pretty easy. If not, back to the spreadsheet, which doesn't seem that much more complicated.

I'm tempted to buy a small amount of TIPS in taxable just to learn about this for myself. Maybe next time the 5-year yield hits 0.5% (most recently 12/30/2015) :wink:

Kevin
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Fri May 12, 2017 5:12 pm

#Cruncher wrote:
Kevin M in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3365224#p3365224]this post[/url] wrote:Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred.
Your calculations are good, Kevin. :thumbsup But I would still dread the prospect of the tax accounting for up to 30 individual TIPS held in a taxable account. At least, if they were bought at initial auction, there would be no discount accretion or premium amortization to worry about. (See this post for more.)
I think by law brokers need to do all these calcs for you. I bought some 5 year tips last year in taxable on the secondary market and fidelity handled the tax aspect just fine.
#Cruncher wrote:
Kevin M in same post wrote:You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years ...
I may try to model this, calculating how much TIPS yields would have to increase after X years for this to be better than simply buying 30-year TIPS in the first place. But, if I do, it will be in a new thread since it is off topic..
Personally i wouldn't consider it off topic since it relates to how best to construct a tips ladder using taxable funds so feel free to include it here.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Fri May 12, 2017 7:04 pm

Kevin M wrote:
#Cruncher wrote:
Kevin M in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3365224#p3365224]this post[/url] wrote:Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred.
Your calculations are good, Kevin. :thumbsup But I would still dread the prospect of the tax accounting for up to 30 individual TIPS held in a taxable account.
I've never owned TIPS in taxable, but I don't see why this would be such a big deal. Once you get it set up in a spreadsheet, it seems to me that it should be fairly straightforward.
#Cruncher wrote:At least, if they were bought at initial auction, there would be no discount accretion or premium amortization to worry about. (See this post for more.)
From that thread:
stlutz wrote: #2) With the cost basis regulations that took effect in 2014 for "simple" fixed income like regular T-notes, your broker/intermediary has to track all of this for you. So, if there is amortization it will be on your 1099. If there is market discount, it will be included as interest income on your 1099. If there is a capital gain, they will report the cost basis to you just as if it was a mutual fund/ETF/stock. You don't have to manually track any of this yourself.
Question: does this apply to TIPS? If so, seems pretty easy. If not, back to the spreadsheet, which doesn't seem that much more complicated.

I'm tempted to buy a small amount of TIPS in taxable just to learn about this for myself. Maybe next time the 5-year yield hits 0.5% (most recently 12/30/2015) :wink:

Kevin
i think tips were covered starting with tax year 2016. i bought some secondary market tips in 2016 and fidelity handled it just fine
http://content.schwab.com/web/as/public ... Secure.pdf
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Sat May 13, 2017 7:42 am

Kevin M in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3366210#p3366210]this post[/url] wrote:I've never owned TIPS in taxable, but I don't see why this [tax reporting] would be such a big deal. Once you get it set up in a spreadsheet, it seems to me that it should be fairly straightforward.
See TIPS Interest and OID Calculator for a spreadsheet I use to compare against 1099s. Member tfb explains how to compute premium amortization on pages 109-113 of his book, Explore TIPS. (Unfortunately the URL to a spreadsheet on page 113 doesn't work.)

For background my post, Re: TIPS: individual vs fund?, lists five tax reporting difficulties I see for individual TIPS held in a taxable account. Here is more on one of them:

2. Negative OID: If held in a taxable account the increase in TIPS principal is taxable and is called (confusingly) Original Issue Discount or OID. Usually it is positive and is reported on form 1099-OID. But it is occasionally negative; e.g., for most TIPS in 2009, two in 2014, three in 2015, and two in 2016. (See red figures in far right columns 2009, 2014, 2015, and 2016. [*]) The broker may exclude it from the 1099-OID and relegate it to the back of the 1099 package. So the first problem is to know that it occurred. The second problem is knowing how to handle it. The IRS instructions I've found don't provide a method that would always work. For example,
in [url=https://www.irs.gov/publications/p1212/ar02.html]Publication 1212[/url] the IRS wrote:Deflation adjustments. If your calculation to figure OID on an inflation-indexed debt instrument produces a negative number, you do not have any OID. Instead, you have a deflation adjustment. A deflation adjustment generally is used to offset interest income from the debt instrument for the tax year.
This makes the unwarranted assumption that OID will be less than coupon interest. This wasn't the case in the year it matured for the April 2015 TIPS I held. Interest was only $2.70 per $1,000 of face value while OID was -$15.00 (See 2nd row of this 2015 table.) I put the negative OID on my Schedule B as a separate item anyway. The form looked OK since the total interest came out positive, but only because I had other interest reported. If my only interest income was from this one TIPS, the total would have been a negative number. Would the tax software and the IRS have accepted this?

More generally consider the clutter of having up to 30 individual bonds reported on a 1099-INT and 1099-OID. And what if you die or become incapacitated? (Certainly something to consider for an investment intended for old age!) Will your spouse be willing and able to continue the spreadsheet and wade through the 1099s?

A completely different problem, unrelated to tax reporting, has to do with how TIPS in taxable are affected by high rates of inflation. If held in a traditional or Roth IRA, for a given tax rate, TIPS are guaranteed to return a constant after tax real return regardless of the rate of inflation. This isn't the case for TIPS (funds as well as individual bonds) held in a taxable account. Their after tax real return falls as the rate of inflation increases. See my post, Re: Is it time to give-up on TIPS? for an illustration.
grok87 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3366301#p3366301]this post[/url] wrote:I think by law brokers need to do all these calcs for you. I bought some 5 year tips last year in taxable on the secondary market and fidelity handled the tax aspect just fine.
Wait until they mature and see if capital gains are reported properly. Schwab screwed this up for TIPS maturing in 2014 and 2015. (I had none maturing in 2016.) It reported cost basis without adjusting for OID. If I'd blindly used what Schwab reported on the 1099-B, I'd have owed a bundle of additional tax. See first two posts in the thread, Schwab 1099 Problems for Maturing TIPS, for details.

* The OID shown on these tables for the year of purchase and liquidation are only for TIPS bought at initial auction and held to maturity. They don't apply for the first or last year for TIPS acquired or liquidated at other times.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Kevin M » Sat May 13, 2017 1:36 pm

#Cruncher, thanks for the insight into difficulties of tax reporting for TIPS.

So the question remains whether it makes sense to hold I Bonds at 0% real for 30 years when you can buy a 30-year TIPS at about 1% real. If I wanted a 30-year real-return security, I'd make space in my IRAs for TIPS. Even the 7-year TIPS yield is about 0.3%, so I don't see much sense in holding I Bonds at 0% other than as a parking spot while waiting for higher real yields, or perhaps as part of an emergency fund or real fixed income likely to be used within a few years; that's the way I view my I Bonds.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sat May 13, 2017 7:00 pm

Kevin M wrote:#Cruncher, thanks for the insight into difficulties of tax reporting for TIPS.

So the question remains whether it makes sense to hold I Bonds at 0% real for 30 years when you can buy a 30-year TIPS at about 1% real. If I wanted a 30-year real-return security, I'd make space in my IRAs for TIPS. Even the 7-year TIPS yield is about 0.3%, so I don't see much sense in holding I Bonds at 0% other than as a parking spot while waiting for higher real yields, or perhaps as part of an emergency fund or real fixed income likely to be used within a few years; that's the way I view my I Bonds.

Kevin
Kevin,
I've been thinking about your point about whether buying ibonds at 0% yield and holding for 30 years makes sense when you can buy 30 year tips @1% yield in taxable.

I'm looking forward to #Cruncher's comparison table (again i would personally consider this on topic for this post).

But one thing it would be interesting (but hard!) to factor is is the possibility of periods of deflation over that 30 year horizon. Ibonds as i understand it will never go down in value even in deflationary periods. 30 year bonds will of course never drop below initial par, but they can lose value if there is deflation say between years 10-15 or something like that.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Phineas J. Whoopee » Sat May 13, 2017 8:20 pm

grok87 wrote:...
But one thing it would be interesting (but hard!) to factor is is the possibility of periods of deflation over that 30 year horizon. Ibonds as i understand it will never go down in value even in deflationary periods. 30 year bonds will of course never drop below initial par, but they can lose value if there is deflation say between years 10-15 or something like that.
TIPS most certainly can drop below initial par should there be deflation. It's just at maturity they pay out the greater of the adjusted value or the initial value. Before then both the market value and the principal can go below what was auctioned, which of course reduces the nominal value of the coupon.

You're correct that the nominal value of Series I Savings Bonds never goes down.

PJW

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sat May 13, 2017 8:39 pm

Phineas J. Whoopee wrote:
grok87 wrote:...
But one thing it would be interesting (but hard!) to factor is is the possibility of periods of deflation over that 30 year horizon. Ibonds as i understand it will never go down in value even in deflationary periods. 30 year bonds will of course never drop below initial par, but they can lose value if there is deflation say between years 10-15 or something like that.
TIPS most certainly can drop below par should there be deflation. It's just at maturity they pay out the greater of the adjusted value or the initial value. Before then both the market value and the principal can go below what was auctioned, which of course reduces the nominal value of the coupon.

You're correct that the nominal value of Series I Savings Bonds never goes down.

PJW
thanks, yes what you said was what i was trying to say.

So to give a concrete example, let's looks at a simplified example for convenience.

years 1-5: total inflation of 28% (roughly 5% a year)'
years 6-10: total deflation of 5% (roughly 1% a year)
years 11-15: total inflation of 28% (roughly 3% a year)'
years 16-20: total deflation of 5% (roughly 1% a year)
years 21-25: total inflation of 28% (roughly 3% a year)'
years 26-30: total deflation of 5% (roughly 1% a year)

It averages out to 2% inflation. So I guess in a tax-deferred account the 30 year tip annual average return is 3%- i.e. the 1% real yield plus 2% inflation.

the ibond has 0% real yield but skips all the deflationary periods. so it gets annual average inflation of 2.5%. Plus the 0% real yield = 2.5% average annual return.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by triceratop » Sat May 13, 2017 9:00 pm

Kevin M wrote:
grok87 wrote: Re the placement question, I guess maybe Ibonds?
Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred. For example, assuming a constant tax rate of 25% and 2% average inflation, $10K in the TIPS in taxable grows to $19,580, while $10K in the I Bond tax-deferred grows to $16,085 after tax.

Even at 3% inflation and a lower 15% tax rate on the I Bonds in retirement, still assuming 25% tax rate on TIPS, you end up with $24,432 with TIPS in taxable and $22,132 with the I Bond.

You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years, but then you lose the supposedly "tax-deferred space" of the I Bond, and you pay your taxes on the I Bond redemption much sooner. This is why I don't understand why people buy I Bonds at 0% real thinking they'll hold them for 30 years.

Kevin
Kevin,
Thanks for the many wonderful posts on fixed income. Hoping you can clarify a bit how you compute that number for TIPS; 30-years at 3% * 75% yield gives me $19494. What am I missing? I understand how the I-bond after-tax number is obtained.

And beyond that, isn't there an advantage to I-bonds in that all tax is deferred until maturity? That is, if you know you'll be in a lower tax bracket you'll likely be better off even with the lower real yield. Since this is for a Liability Matching Portfolio it isn't unreasonable to make reasonable assumptions about being in a lower tax bracket. I've heard too that there is a tendency for people to overestimate the tax bracket they're likely to fall into in the future.
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sat May 13, 2017 9:56 pm

triceratop wrote:
Kevin M wrote:
grok87 wrote: Re the placement question, I guess maybe Ibonds?
Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred. For example, assuming a constant tax rate of 25% and 2% average inflation, $10K in the TIPS in taxable grows to $19,580, while $10K in the I Bond tax-deferred grows to $16,085 after tax.

Even at 3% inflation and a lower 15% tax rate on the I Bonds in retirement, still assuming 25% tax rate on TIPS, you end up with $24,432 with TIPS in taxable and $22,132 with the I Bond.

You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years, but then you lose the supposedly "tax-deferred space" of the I Bond, and you pay your taxes on the I Bond redemption much sooner. This is why I don't understand why people buy I Bonds at 0% real thinking they'll hold them for 30 years.

Kevin
Kevin,
Thanks for the many wonderful posts on fixed income. Hoping you can clarify a bit how you compute that number for TIPS; 30-years at 3% * 75% yield gives me $19494. What am I missing? I understand how the I-bond after-tax number is obtained.

And beyond that, isn't there an advantage to I-bonds in that all tax is deferred until maturity? That is, if you know you'll be in a lower tax bracket you'll likely be better off even with the lower real yield. Since this is for a Liability Matching Portfolio it isn't unreasonable to make reasonable assumptions about being in a lower tax bracket. I've heard too that there is a tendency for people to overestimate the tax bracket they're likely to fall into in the future.
triceratop, i think the math you are doing is 10,000*(1+75%*3%)^30=10,000*(1.0225)^30

I think the math Kevin is doing is more like: 10,000*[(1+75%*1%)*(1+75%*2%)]^30=10,000*1.0075^30*1.015^30

I'm not completely sure which is right without doing a detailed cashflow analysis. In actual fact neither is really right since for the bond in question coupons need to be reinvested and its not clear what the yield on those reinvested coupons would be
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by gilgamesh » Sat May 13, 2017 10:16 pm

'Thus, for Alice, her TreasuryDirect account would be a cost-effective investment account to accumulate TIPS. From age 25 to 34, at a relatively modest salary, Alice would buy the 10-year TIPS, at USD 5,000 a year. From age 35 to 44, as her compensation grew, she would roll over the maturing 10-year TIPS into 30-year TIPS each year, and she would buy an additional USD 5,000 of the 30-year TIPS. From age 45 to 54, she would buy USD 10,000 each year of the 30-year TIPS. Finally, from age 55 to 64, she would buy USD 10,000 each year of the 30-year TIPS. As she turns 65, she would have built up a 30-year laddered TIPS portfolio, with USD 10,000 of TIPS securities maturing in each of the next 30 years. Since these TIPS securities have coupons and inflation-adjusted principal amounts, the nominal amounts would be much different from the face amount of USD 10,000; but in real terms, meaning on an inflation-adjusted basis, each maturing tranche of the laddered portfolio would provide the same purchasing power of a real USD 10,000."

If one is buying $10k each year and does not adjust that amount to inflation, then each rung of the ladder will not have the same purchasing power. I think this is correct?

For simplicity sake, just to point out what I'm trying to say, I'll take her purchases from ages 45-54 and 55-64. She is purchasing $10k each time, but the $10k she purchased at age 45, ten years later at age 55 'internally' already 'accounts' for inflation over the last 10 years. At age 55, to make all ladders to have the same purchasing power, shouldn't the amount invested not be $10,000 but $10,000 plus inflation to date.

So, the deposit amounts have to vary over the years based on the buying power of the initial $5k at age 25, on each of the subsequent years, to keep the purchasing power equal to $10k at age 25. Age 25 being today as SS estimate was obtained today, and thus TIPS will remain 1/3rd of SS, through out.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Kevin M » Sun May 14, 2017 10:24 am

triceratop wrote:
Kevin M wrote:
grok87 wrote: Re the placement question, I guess maybe Ibonds?
Open to corrections, but you'll probably come out better with a 30-year TIPS at 1% real in taxable than an I Bond at 0% real tax deferred. For example, assuming a constant tax rate of 25% and 2% average inflation, $10K in the TIPS in taxable grows to $19,580, while $10K in the I Bond tax-deferred grows to $16,085 after tax.
<snip>
Kevin,
Thanks for the many wonderful posts on fixed income. Hoping you can clarify a bit how you compute that number for TIPS; 30-years at 3% * 75% yield gives me $19494. What am I missing? I understand how the I-bond after-tax number is obtained.
You are using the approximate relationship between real return and nominal return:

r = R - I

or

R = r + I

where r is real return, R is nominal return, and I is inflation rate. The actual relationship is

r = (1+R) / (1+ I) -1

or

R = (1+r) * (1+I) - 1

The results from these formulas are quite close. For r = 1% and I = 2%, R = 3.02% for the actual formula compared to 3.00% for the approximate formula. That explains the small difference in your result compared to my result.

As grok87 indicates, both really are approximations since they assume that the coupons are reinvested at the yield to maturity (r real and R nominal), which of course is unlikely, but that's the typical assumption in these simplified models.
triceratop wrote:And beyond that, isn't there an advantage to I-bonds in that all tax is deferred until maturity? That is, if you know you'll be in a lower tax bracket you'll likely be better off even with the lower real yield. Since this is for a Liability Matching Portfolio it isn't unreasonable to make reasonable assumptions about being in a lower tax bracket. I've heard too that there is a tendency for people to overestimate the tax bracket they're likely to fall into in the future.
Sure. That's exactly what this part of the previous reply was addressing:
Kevin M wrote:Even at 3% inflation and a lower 15% tax rate on the I Bonds in retirement, still assuming 25% tax rate on TIPS, you end up with $24,432 with TIPS in taxable and $22,132 with the I Bond.
So with the stated assumptions, you still come out ahead with TIPS in taxable. I used a higher inflation rate in this example because higher inflation reduces the advantage of TIPS in taxable, since the tax drag is higher with higher nominal rates. At 5% inflation I Bonds win by a small amount (again, assuming a 25% tax on TIPS and a lower 15% tax on I Bonds in retirement).

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by triceratop » Sun May 14, 2017 10:52 am

Thanks, Kevin. Too focused on the misunderstanding of the first part to digest the second. :oops:
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Sun May 14, 2017 1:27 pm

grok87 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3367573#p3367573]this post[/url] wrote:So to give a concrete example, let's looks at a simplified example for convenience.
years 1-5: total inflation of 28% (roughly 5% a year)'
years 6-10: total deflation of -5% (roughly 1% a year)
years 11-15: total inflation of 28% (roughly 5% a year)
years 16-20: total deflation of -5% (roughly 1% a year)
years 21-25: total inflation of 28% (roughly 5% a year)
years 26-30: total deflation of -5% (roughly 1% a year)
It averages out to 2% inflation. So I guess in a tax-deferred account the 30 year tip annual average return is 3%- i.e. the 1% real yield plus 2% inflation. the ibond has 0% real yield but skips all the deflationary periods. so it gets annual average inflation of 2.5%. Plus the 0% real yield = 2.5% average annual return.
(Grok, I fixed two typos in your table and added color while I was at it. :wink: )

In my opinion, it's very unlikely the CPI would decline over any five year period. The last time this happened was Jan 1932 - Jan 1937. (Determined using my CPI spreadsheet.) It's more likely that the CPI would occasionally decline for one of the six month periods used to "index" I Bonds. This has happened twice since I Bonds were introduced in 1998: -2.78% from 218.783 in Sep 2008 to 212.709 in March 2009; and -0.80% from 238.031 in Sep 2014 to 236.119 in March 2015. For six months following this, an I Bond with a 0% fixed rate would not decline in value. (See Can I ever lose money in I bonds?) The following table illustrates this for a hypothetical $1,000 0% fixed rate I Bond purchased in November 1998.

Code: Select all

        Inflation    ----- Grows To -----
             Rate    No Floor     w Floor

Code: Select all

                     1,000.00    1,000.00
Nov 1998    0.86%    1,008.60    1,008.60
May 1999    0.86%    1,017.27    1,017.27
Nov 1999    1.76%    1,035.17    1,035.17
May 2000    1.91%    1,054.94    1,054.94
Nov 2000    1.52%    1,070.98    1,070.98
May 2001    1.44%    1,086.40    1,086.40
Nov 2001    1.19%    1,099.33    1,099.33
May 2002    0.28%    1,102.41    1,102.41
Nov 2002    1.23%    1,115.97    1,115.97
May 2003    1.77%    1,135.72    1,135.72
Nov 2003    0.54%    1,141.85    1,141.85
May 2004    1.19%    1,155.44    1,155.44
Nov 2004    1.33%    1,170.81    1,170.81
May 2005    1.79%    1,191.77    1,191.77
Nov 2005    2.85%    1,225.74    1,225.74
May 2006    0.50%    1,231.87    1,231.87
Nov 2006    1.55%    1,250.96    1,250.96
May 2007    1.21%    1,266.10    1,266.10
Nov 2007    1.53%    1,285.47    1,285.47
May 2008    2.42%    1,316.58    1,316.58
Nov 2008    2.46%    1,348.97    1,348.97
May 2009   (2.78%)   1,311.47    1,348.97 <---
Nov 2009    1.53%    1,331.54    1,369.61
May 2010    0.77%    1,341.79    1,380.16
Nov 2010    0.37%    1,346.75    1,385.27
May 2011    2.30%    1,377.73    1,417.13
Nov 2011    1.53%    1,398.81    1,438.81
May 2012    1.10%    1,414.20    1,454.64
Nov 2012    0.88%    1,426.64    1,467.44
May 2013    0.59%    1,435.06    1,476.10
Nov 2013    0.59%    1,443.53    1,484.81
May 2014    0.92%    1,456.81    1,498.47
Nov 2014    0.74%    1,467.59    1,509.56
May 2015   (0.80%)   1,455.85    1,509.56 <---
Nov 2015    0.77%    1,467.06    1,521.18
May 2016    0.08%    1,468.23    1,522.40
Nov 2016    1.38%    1,488.49    1,543.41
May 2017    0.98%    1,503.08    1,558.54
                     --------    --------
Annual increase         2.16%       2.35%
(Inflation rates from What have rates been in the past?) Over this 19 year period, the 0% floor feature added about 0.2% points to the annual growth of the I Bond. However, 19 years is a pretty short sample to estimate this would be the effect in the future. I would expect statistically the probable effect should vary inversely with the overall inflation rate. E.g., it's more likely to have six month periods of negative CPI change if the overall inflation rate is 2% than if it is 5%.
triceratop in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3367586#p3367586]this post[/url] wrote:Kevin, ... Hoping you can clarify a bit how you compute that number for TIPS; 30-years at 3% * 75% yield gives me $19494. What am I missing?
I see that Kevin as well as Grok have answered your question. But I'll pile on and add another way to look at it. Assume you buy $1,000 principal amount of a new hypothetical 1-year TIPS with a 1% coupon paid annually. Also assume the CPI rises 2% over the next year so that at maturity the principal is $1,020. At that time you also get $10.20 from the 1% coupon (1020 * 1%). Therefore you receive a total of $1,030.20. This is an increase of 3.02%, not 3%. Subtracting 25% tax gives an after tax gain of 2.265% (3.02% * 75%). This is how Kevin got the $19,580 in his post above. (10000 * 1.02265 ^ 30).
gilgamesh in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3367645#p3367645]this post[/url] wrote:
Peter Tsui in the [url=http://www.indexologyblog.com/2017/04/13/how-to-build-a-tips-ladder-portfolio-for-millennials/]article[/url] cited in original post wrote:... each maturing tranche of the laddered portfolio would provide the same purchasing power of a real USD 10,000.
So, the deposit amounts have to vary over the years based on the buying power of the initial $5k at age 25, on each of the subsequent years, to keep the purchasing power equal to $10k at age 25.
You're correct, Gilgamesh. I'm not sure the author you quote understands how TIPS work. He seems to think they are all indexed to the same value of the Consumer Price Index (CPI) regardless of when they are issued. (What value does he think that is? Maybe he thinks it is 100, the CPI average for 1982-1984?) If so, he is incorrect.

Every TIPS is based off the CPI for a date near when it is first issued. For example, the first 30-year TIPS, the 3.625% April 2028 is based on the 4/15/1998 CPI value of 161.74. The next one issued, the 3.875% April 2029 is based on the 4/15/1999 CPI value of 164.39333. If one wants the same purchasing power of both issues, one needs to buy 1.64% more (164.39333 / 161.74 - 1) face value of the later one. This no big deal over one year. But if one wanted to buy the same purchasing power of the latest 30-year TIPS issued, the 0.875% Feb 2047 with a base CPI of 241.3925 as of 2/15/2017, one would need to buy about 49% more (241.3925 / 161.74 - 1) face value than the one issued 19 years earlier.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by gilgamesh » Sun May 14, 2017 3:40 pm

#Cruncher wrote:
gilgamesh in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3367645#p3367645]this post[/url] wrote:
Peter Tsui in the [url=http://www.indexologyblog.com/2017/04/13/how-to-build-a-tips-ladder-portfolio-for-millennials/]article[/url] cited in original post wrote:... each maturing tranche of the laddered portfolio would provide the same purchasing power of a real USD 10,000.
So, the deposit amounts have to vary over the years based on the buying power of the initial $5k at age 25, on each of the subsequent years, to keep the purchasing power equal to $10k at age 25.
You're correct, Gilgamesh. I'm not sure the author you quote understands how TIPS work. He seems to think they are all indexed to the same value of the Consumer Price Index (CPI) regardless of when they are issued. (What value does he think that is? Maybe he thinks it is 100, the CPI average for 1982-1984?) If so, he is incorrect.

Every TIPS is based off the CPI for a date near when it is first issued. For example, the first 30-year TIPS, the 3.625% April 2028 is based on the 4/15/1998 CPI value of 161.74. The next one issued, the 3.875% April 2029 is based on the 4/15/1999 CPI value of 164.39333. If one wants the same purchasing power of both issues, one needs to buy 1.64% more (164.39333 / 161.74 - 1) face value of the later one. This no big deal over one year. But if one wanted to buy the same purchasing power of the latest 30-year TIPS issued, the 0.875% Feb 2047 with a base CPI of 241.3925 as of 2/15/2017, one would need to buy about 49% more (241.3925 / 161.74 - 1) face value than the one issued 19 years earlier.
Thank you for confirming this.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Stormbringer » Sun May 14, 2017 3:54 pm

Wouldn't EE's have a place in this ladder? I seem to recall that if you hold them for 20 years you effectively get 3.5%, which is higher than most other options at that duration right now.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sun May 14, 2017 4:18 pm

Stormbringer wrote:Wouldn't EE's have a place in this ladder? I seem to recall that if you hold them for 20 years you effectively get 3.5%, which is higher than most other options at that duration right now.
so there was a big thread on EE bonds recently
viewtopic.php?t=217081

i'm a bit divided on EE bonds- haven't bought any yet. I have a problem getting excited about an investment that does nothing for 19.9 years and then has a huge payoff at 20 years. a lot can happen in 20 years...
RIP Mr. Bogle.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sun May 14, 2017 4:19 pm

#Cruncher wrote:Over this 19 year period, the 0% floor feature added about 0.2% points to the annual growth of the I Bond. However, 19 years is a pretty short sample to estimate this would be the effect in the future. I would expect statistically the probable effect should vary inversely with the overall inflation rate. E.g., it's more likely to have six month periods of negative CPI change if the overall inflation rate is 2% than if it is 5%.
thanks
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Stormbringer » Sun May 14, 2017 6:06 pm

grok87 wrote:Roll your own pension
It seems to me that it is fundamentally impossible to "roll your own" life annuity without anyone to pool longevity risk with.

You'll end up with something that produces a stream of income that eventually runs out. Additionally, the amount of investment needed would be much higher than an SPIA, because the insurance company only has to plan based on the average life expectancy of a pool of annuitants, whereas an individual has to plan based on how long they themselves *might* live -- a much longer time period.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sun May 14, 2017 9:30 pm

Stormbringer wrote:
grok87 wrote:Roll your own pension
It seems to me that it is fundamentally impossible to "roll your own" life annuity without anyone to pool longevity risk with.

You'll end up with something that produces a stream of income that eventually runs out. Additionally, the amount of investment needed would be much higher than an SPIA, because the insurance company only has to plan based on the average life expectancy of a pool of annuitants, whereas an individual has to plan based on how long they themselves *might* live -- a much longer time period.
i think you raise a good point.

1) I would actually be interested in buying a deferred inflation-indexed annuity but i don't think any exist.

2) probably in your 80s the case for annuitizing becomes more compelling as the mortality credits get larger and offset the insurance companies expense loads and credit risk.

3) if one sticks to the ladder and if one has a certain level of assets relative to income need, then the surplus funds after death can go to one's heirs
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by Stormbringer » Mon May 15, 2017 4:37 am

grok87 wrote:1) I would actually be interested in buying a deferred inflation-indexed annuity but i don't think any exist.
I don't know of any that exist either, but you should be able to achieve the same effect by normal saving and investing and then converting the desired sum into an inflation indexed SPIA upon retirement.
2) probably in your 80s the case for annuitizing becomes more compelling as the mortality credits get larger and offset the insurance companies expense loads and credit risk.
This gets to a fundamental difficulty in retirement planning -- we don't know how long we will live.

With a pension, it doesn't matter (financially speaking) because that risk has been transferred to someone else. For the pension fund, they *do* have a pretty good idea how long people will live on average and can plan around that. One person lives to be 100, but someone else dies when they are 60. It averages out for the fund.

When individuals save and invest for retirement, their statistical life expectancy is of limited usefulness because they don't know where they will fall on the bell curve. This forces each individual to save enough to last them until the are 90 or so, even though as a group they might only live to be 80 on average. Anyone who wants a secure retirement must save more than they are likely to need.
3) if one sticks to the ladder and if one has a certain level of assets relative to income need, then the surplus funds after death can go to one's heirs
True, but this is a quality that distinguishes this approach from an actual pension. As a group, the fact that a surplus exists at all is a consequence of the over-saving in #2 above.

There is nothing wrong with leaving an estate, and that is highly desirable for many people. But it isn't for everyone. Some people have no kids. Others endure a lifetime of lower standards of living in order to over-save for a retirement that doesn't last very long.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by dcabler » Mon May 15, 2017 5:44 am

Stormbringer wrote:
grok87 wrote:1) I would actually be interested in buying a deferred inflation-indexed annuity but i don't think any exist.
I don't know of any that exist either, but you should be able to achieve the same effect by normal saving and investing and then converting the desired sum into an inflation indexed SPIA upon retirement.

They do exist. If you go to immediateannuities.com and enter the usual info, on the second page there is a selection for inflation adjustment, along with more requested details (I use a fake name/email address at this point). :D The issue, if I recall correctly from another thread, is that the inflation adjustment doesn't apply until the annuity is in payout mode.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by #Cruncher » Mon May 15, 2017 5:05 pm

grok87 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3367634#p3367634]this post[/url] wrote:... for the bond in question coupons need to be reinvested and its not clear what the yield on those reinvested coupons would be
Reinvestment of coupons usually isn't very important for TIPS held in a taxable account for two reasons: Firstly the coupons are usually small; and secondly only part of them are available to reinvest after taxes are paid on both the interest itself and the increase in principal due to inflation (aka OID). To illustrate this, consider the example from this post by Kevin M of a 1% $10,000 30-year TIPS with 2% inflation subject to a tax rate of 25%. He shows it growing to a nominal value of $19,580 at maturity. (10000 * 1.02265 ^ 30 where 2.265% = 75% * 3.02% and 3.02% = 1.01 * 1.02 - 1). Here is a table showing that growth year by year assuming interest, net of taxes, is reinvested in the same TIPS while yields remain at 1%. (Scroll down to see that the final value is the same $19,580.)

Code: Select all

Year  Yield    Price   Interest     OID       Tax       Buy    Principal

Code: Select all

   0                                                           10,000.00
   1  1.000%  100.000%   102.00   200.00    (75.50)    26.50   10,226.50
   2  1.000%  100.000%   104.31   204.53    (77.21)    27.10   10,458.13
   3  1.000%  100.000%   106.67   209.16    (78.96)    27.71   10,695.01
   4  1.000%  100.000%   109.09   213.90    (80.75)    28.34   10,937.25
   5  1.000%  100.000%   111.56   218.74    (82.58)    28.98   11,184.98
   6  1.000%  100.000%   114.09   223.70    (84.45)    29.64   11,438.32
   7  1.000%  100.000%   116.67   228.77    (86.36)    30.31   11,697.40
   8  1.000%  100.000%   119.31   233.95    (88.32)    31.00   11,962.34
   9  1.000%  100.000%   122.02   239.25    (90.32)    31.70   12,233.29
  10  1.000%  100.000%   124.78   244.67    (92.36)    32.42   12,510.37
  11  1.000%  100.000%   127.61   250.21    (94.45)    33.15   12,793.73
  12  1.000%  100.000%   130.50   255.87    (96.59)    33.90   13,083.51
  13  1.000%  100.000%   133.45   261.67    (98.78)    34.67   13,379.85
  14  1.000%  100.000%   136.47   267.60   (101.02)    35.46   13,682.91
  15  1.000%  100.000%   139.57   273.66   (103.31)    36.26   13,992.82
  16  1.000%  100.000%   142.73   279.86   (105.65)    37.08   14,309.76
  17  1.000%  100.000%   145.96   286.20   (108.04)    37.92   14,633.88
  18  1.000%  100.000%   149.27   292.68   (110.49)    38.78   14,965.33
  19  1.000%  100.000%   152.65   299.31   (112.99)    39.66   15,304.30
  20  1.000%  100.000%   156.10   306.09   (115.55)    40.56   15,650.94
  21  1.000%  100.000%   159.64   313.02   (118.16)    41.47   16,005.43
  22  1.000%  100.000%   163.26   320.11   (120.84)    42.41   16,367.96
  23  1.000%  100.000%   166.95   327.36   (123.58)    43.38   16,738.69
  24  1.000%  100.000%   170.73   334.77   (126.38)    44.36   17,117.82
  25  1.000%  100.000%   174.60   342.36   (129.24)    45.36   17,505.54
  26  1.000%  100.000%   178.56   350.11   (132.17)    46.39   17,902.04
  27  1.000%  100.000%   182.60   358.04   (135.16)    47.44   18,307.52
  28  1.000%  100.000%   186.74   366.15   (138.22)    48.51   18,722.19
  29  1.000%  100.000%   190.97   374.44   (141.35)    49.61   19,146.25
  30  1.000%  100.000%   195.29   382.92   (144.55)    50.74   19,579.91
The next to right column shows that only a small amount is being reinvested each year. Take year 1 for example: $102.00 interest is received; but out of this $75.50 tax must be paid (302 * 25%); leaving only $26.50 to reinvest. (To make this model simple I'm assuming TIPS can be purchased in any amount, ignoring the usual $1,000 increment. I'm also ignoring the fact that with the current rising yield curve, the yield of the TIPS would likely fall as it nears maturity.)

Now suppose that after 10 years, TIPS yields increase from 1.0% to1.5%. Reinvestment at this higher yield will lead to a higher balance at the end of 30 years. But as shown in the following table, because of the small amount being reinvested, the increase is only $51 -- from $19,580 to $19,631!

Code: Select all

Year  Yield    Price   Interest     OID       Tax       Buy    Principal

Code: Select all

   0                                                           10,000.00
   1  1.000%  100.000%   102.00   200.00    (75.50)    26.50   10,226.50
   2  1.000%  100.000%   104.31   204.53    (77.21)    27.10   10,458.13
   3  1.000%  100.000%   106.67   209.16    (78.96)    27.71   10,695.01
   4  1.000%  100.000%   109.09   213.90    (80.75)    28.34   10,937.25
   5  1.000%  100.000%   111.56   218.74    (82.58)    28.98   11,184.98
   6  1.000%  100.000%   114.09   223.70    (84.45)    29.64   11,438.32
   7  1.000%  100.000%   116.67   228.77    (86.36)    30.31   11,697.40
   8  1.000%  100.000%   119.31   233.95    (88.32)    31.00   11,962.34
   9  1.000%  100.000%   122.02   239.25    (90.32)    31.70   12,233.29
  10  1.500%   91.416%   124.78   244.67    (92.36)    35.46   12,513.42
  11  1.500%   91.787%   127.64   250.27    (94.48)    36.13   12,799.81
  12  1.500%   92.164%   130.56   256.00    (96.64)    36.80   13,092.61
  13  1.500%   92.546%   133.54   261.85    (98.85)    37.49   13,391.95
  14  1.500%   92.934%   136.60   267.84   (101.11)    38.19   13,697.98
  15  1.500%   93.328%   139.72   273.96   (103.42)    38.89   14,010.83
  16  1.500%   93.728%   142.91   280.22   (105.78)    39.61   14,330.66
  17  1.500%   94.134%   146.17   286.61   (108.20)    40.34   14,657.62
  18  1.500%   94.546%   149.51   293.15   (110.67)    41.08   14,991.86
  19  1.500%   94.964%   152.92   299.84   (113.19)    41.84   15,333.53
  20  1.500%   95.389%   156.40   306.67   (115.77)    42.60   15,682.80
  21  1.500%   95.820%   159.96   313.66   (118.41)    43.37   16,039.82
  22  1.500%   96.257%   163.61   320.80   (121.10)    44.16   16,404.78
  23  1.500%   96.701%   167.33   328.10   (123.86)    44.96   16,777.83
  24  1.500%   97.151%   171.13   335.56   (126.67)    45.76   17,159.15
  25  1.500%   97.609%   175.02   343.18   (129.55)    46.59   17,548.92
  26  1.500%   98.073%   179.00   350.98   (132.49)    47.42   17,947.32
  27  1.500%   98.544%   183.06   358.95   (135.50)    48.26   18,354.53
  28  1.500%   99.022%   187.22   367.09   (138.58)    49.12   18,770.74
  29  1.500%   99.507%   191.46   375.41   (141.72)    49.99   19,196.14
  30  1.500%  100.000%   195.80   383.92   (144.93)    50.87   19,630.93
grok87 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3366301#p3366301]this post[/url] wrote:
#Cruncher wrote:
Kevin M in same post wrote:You could win with the I Bond if real rates increase enough, and you redeem your I Bond to buy TIPS at a higher yield after a few years ...
I may try to model this, calculating how much TIPS yields would have to increase after X years for this to be better than simply buying 30-year TIPS in the first place. But, if I do, it will be in a new thread since it is off topic..
Personally i wouldn't consider it off topic since it relates to how best to construct a tips ladder using taxable funds so feel free to include it here.
OK, I'll include my model here, Grok. Originally I thought I needed to include the effect of higher yields on reinvested TIPS coupons. But from my analysis above, this has little effect. Therefore, for simplicity I'll ignore it. Here is an example for the same 1% 30-yearTIPS. But instead of $10,000, I'll just do the comparison per $1.

Code: Select all

  1  Term                                    30
  2  TIPS yield                            1.0%
  3  Inflation                             2.0%
  4  Tax rate                             25.0%
  5  I Bond fixed rate                     0.0%
  6  $1 of TIPS grows to                 1.9580                                Formulas for 20
  7  Years until higher TIPS yield            5        10        15        20  ---------------
  8  $1 I Bond grows pre tax             1.1041    1.2190    1.3459    1.4859  =  1.02 ^ 20
  9  Tax upon redemption                (0.0260)  (0.0547)  (0.0865)  (0.1215) = -25% * (1.4859 - 1)
 10  $1 I Bond grows after tax           1.0781    1.1642    1.2594    1.3645  =  1.4859 - 0.1215
 11  New TIPS after tax nominal yield    2.416%    2.633%    2.986%    3.678%  = (1.958/1.3645)^(1/10)-1
 12  New TIPS pretax nominal yield       3.221%    3.511%    3.981%    4.903%  =  3.678% / 75%
 13  New TIPS pretax yield               1.197%    1.481%    1.942%    2.847%  =  1.04903 / 1.02 - 1
The table shows that if 0% fixed rate I Bonds are redeemed after 5, 10, 15, or 20 years and the proceeds invested in new TIPS; the TIPS yield to breakeven is 1.2%, 1.5%, 1.9%, and 2.8% respectively.

For anyone wishing to try out this simple model with other assumptions, here are the steps:
  • Select all, copy, and paste the following at cell A1 of a blank spreadsheet:

    Code: Select all

    Term
    TIPS yield
    Inflation
    Tax rate
    I Bond fixed rate
    $1 of TIPS grows to
    Years until higher TIPS yield
    $1 I Bond grows pre tax
    Tax upon redemption
    $1 I Bond grows after tax
    New TIPS after tax nominal yield
    New TIPS pretax nominal yield
    New TIPS pretax yield
  • Select all, copy, and paste the following at cell B1:

    Code: Select all

    30
    0.01
    0.02
    0.25
    0
    =(1+(1-B4)*((1+B2)*(1+B3)-1))^B1
    5
    =((1+$B3)*(1+$B5))^B7
    =-$B4*(B8-1)
    =B8+B9
    =($B6/B10)^(1/($B1-B7))-1
    =B11/(1-$B4)
    =(1+B12)/(1+$B3)-1
  • Revise the constants, if necessary, in cells B1:B5.
  • Replace the years 5, 10, 15, & 20 in cells B7:E7 if desired.
  • Copy the formulas in cells B8:B13 to the right.

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grok87
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Mon May 15, 2017 7:11 pm

dcabler wrote:
Stormbringer wrote:
grok87 wrote:1) I would actually be interested in buying a deferred inflation-indexed annuity but i don't think any exist.
I don't know of any that exist either, but you should be able to achieve the same effect by normal saving and investing and then converting the desired sum into an inflation indexed SPIA upon retirement.

They do exist. If you go to immediateannuities.com and enter the usual info, on the second page there is a selection for inflation adjustment, along with more requested details (I use a fake name/email address at this point). :D The issue, if I recall correctly from another thread, is that the inflation adjustment doesn't apply until the annuity is in payout mode.
thanks. looks like it is just principal life. Not much of a market with only one provider. due to state guarantee fund limits ($250 K net present value) currently a 65 year old male could only buy about $9,000 of annual income.
RIP Mr. Bogle.

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by dalmatiandan » Wed May 31, 2017 10:08 am

Hello all,

First time caller, long time listener here...

Does building a 30-year TIPS ladder over 30 years have a purpose outside of specific Liability Matching?

For instance, say that the goal AA at the beginning of retirement is 40/60 stocks/bonds and a 50/50 fixed-income split between nominal, like BND, and inflation-protected, like a TIPS ladder (so 30% of total portfolio would be in TIPS).

Much has been written here about building a floor in retirement with a TIPS ladder if your expenses are known, but what if you want more generally to build towards that goal allocation of inflation protection in your portfolio, to the tune of buying new 30-year TIPS each year so that TIPS make up an increasing *percentage* amount of your FI allocation? This is not liability matching per se, but more like a glidepath to TIPS protection.

30 years from retirement, buy a 30 year TIPS equal to 1% of the portfolio. The next year, buy a 30 year TIPS such that the two rungs now equal 2% of the portfolio, and so on and so on until in 30 years you've reached 30% of the portfolio.

This has the benefit of not overloading on TIPS "early" in accumulation. As the portfolio grows, the $$ amount of TIPS purchased would grow proportionally while also slowly increasing 1% at a time. Even if I knew my floor in retirement was say $10,000, I would not put that much into inflation protected investments this early.

Of course, the first individual TIPS to mature would be small and would not serve the specific purpose of liability matching as illustrated in other posts here, where the ladder rungs are all equal in terms of 2017 dollars, but rather it's a general inflation protection as a portion of the portfolio. In addition, once the ladder has been built, you would also be earning coupons from all of the other rungs, and in the first year of retirement can make the decision to consume the ladder or extend it.

Let's assume it's in a tax-advantaged account and you use the pre-retirement thrown-off coupons to purchase future TIPS (or can be held in a ST TIPS fund or reinvested elsewhere).

Input appreciated. I have enjoyed the discussions all through this board's archives on TIPS ladders and a great many other things.

Dan

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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Wed May 31, 2017 3:16 pm

dalmatiandan wrote:Hello all,

First time caller, long time listener here...

Does building a 30-year TIPS ladder over 30 years have a purpose outside of specific Liability Matching?

For instance, say that the goal AA at the beginning of retirement is 40/60 stocks/bonds and a 50/50 fixed-income split between nominal, like BND, and inflation-protected, like a TIPS ladder (so 30% of total portfolio would be in TIPS).

Much has been written here about building a floor in retirement with a TIPS ladder if your expenses are known, but what if you want more generally to build towards that goal allocation of inflation protection in your portfolio, to the tune of buying new 30-year TIPS each year so that TIPS make up an increasing *percentage* amount of your FI allocation? This is not liability matching per se, but more like a glidepath to TIPS protection.

30 years from retirement, buy a 30 year TIPS equal to 1% of the portfolio. The next year, buy a 30 year TIPS such that the two rungs now equal 2% of the portfolio, and so on and so on until in 30 years you've reached 30% of the portfolio...
Dan
Sounds like a good approach to me.

I think the main point, of both your approach and the original article's approach is: start buying 30 year tips early. We have been in a low interest rate environment for what, 8 years now? I get concerned when people say they like the tips ladder approach but plan to wait till 5 years before retirement to start building it.
RIP Mr. Bogle.

dalmatiandan
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by dalmatiandan » Sat Jun 03, 2017 5:22 pm

grok87 wrote:
Sounds like a good approach to me.

I think the main point, of both your approach and the original article's approach is: start buying 30 year tips early. We have been in a low interest rate environment for what, 8 years now? I get concerned when people say they like the tips ladder approach but plan to wait till 5 years before retirement to start building it.
Thanks, grok87! Lots of great information here and it has really helped suppress some apprehensions about beginning to add inflation protection too early. I like to do all changes very slowly, so this is a great perspective.

Dan

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bobcat2
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by bobcat2 » Sun Jun 04, 2017 1:38 pm

Attempting to build a 30 year TIPS ladder as a replacement for a pension is an inefficient expensive planning objective.

It would be much more reasonable and inexpensive to build a 20 year TIPS ladder and leave extra assets for purchasing a longevity annuity that begins payouts in the 21st year. You could purchase the annuity at age 65 or purchase it in chunks over time between the ages of 65-85.

Because a TIPS ladder is duration matching income to spending, you can accomplish the same objective by duration matching a combination of TIPS funds to the spending. One advantage of this would be that you could begin investing large amounts in the safe assets at a later date such as 15 years before retirement instead of 20-30 years before retirement. This allows for a somewhat higher allocation to growth assets for a longer period in your retirement portfolio.

Finally, do you really want a retirement plan where your future 91 year old self is managing a TIPS ladder, rather than receiving a monthly annuity benefit automatically deposited in your checking account? :wink:

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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grok87
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Sun Jun 04, 2017 4:05 pm

bobcat2 wrote:Attempting to build a 30 year TIPS ladder as a replacement for a pension is an inefficient expensive planning objective.

It would be much more reasonable and inexpensive to build a 20 year TIPS ladder and leave extra assets for purchasing a longevity annuity that begins payouts in the 21st year. You could purchase the annuity at age 65 or purchase it in chunks over time between the ages of 65-85.

Because a TIPS ladder is duration matching income to spending, you can accomplish the same objective by duration matching a combination of TIPS funds to the spending. One advantage of this would be that you could begin investing large amounts in the safe assets at a later date such as 15 years before retirement instead of 20-30 years before retirement. This allows for a somewhat higher allocation to growth assets for a longer period in your retirement portfolio.

Finally, do you really want a retirement plan where your future 91 year old self is managing a TIPS ladder, rather than receiving a monthly annuity benefit automatically deposited in your checking account? :wink:

BobK
Thanks Bob. you raise some interesting points.

I guess i don't think building the tips ladder during your working years keeps you from converting it at some point to an inflation-indexed annuity (say in your 80s). The market value of a duration matched tips ladder should provide a good approximation to the price fluctuations of the annuity
RIP Mr. Bogle.

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grok87
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Re: LMP-3: Roll your own pension- Build a tips ladder!

Post by grok87 » Wed Mar 28, 2018 12:51 pm

Some of those that responded here may find this new thread interesTing:

Grok's LMP-4: The 3-legged stool approach to retirement planning
[link fixed by admin LadyGeek]

“The 3-legged stool approach to retirement planning”
As it situated the idea of a tips ladder in the broader context of a portfolio that includes social security and a traditional stock/bond portfolio.

Cheers,
Grok
RIP Mr. Bogle.

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