When the Fed stops what do you do?

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restingonmylaurels
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When the Fed stops what do you do?

Post by restingonmylaurels » Fri Jan 12, 2018 11:46 am

Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?

Appreciate any thoughts on the downside to this approach.

livesoft
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Re: When the Fed stops what do you do?

Post by livesoft » Fri Jan 12, 2018 11:50 am

It reads like you want to put all your eggs in one basket. What if you are wrong? What would be the consequences to your retirement?

I prefer to just keep on doing what works for me right now.
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Re: When the Fed stops what do you do?

Post by BolderBoy » Fri Jan 12, 2018 11:54 am

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Appreciate any thoughts on the downside to this approach.
Remembering that, "Nobody knows nothing.", that the market is smarter than you and I and the market usually has any news that you hear or thoughts you have, already baked in, then perhaps a GRADUAL increase in your long term bond exposure won't hurt you.

Perhaps...
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Re: When the Fed stops what do you do?

Post by jebmke » Fri Jan 12, 2018 11:57 am

What if inflation jumps to 15%?
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Re: When the Fed stops what do you do?

Post by triceratop » Fri Jan 12, 2018 12:01 pm

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?

Appreciate any thoughts on the downside to this approach.
1. Treasuries (the ones you are talking about) pay nominal interest. What if inflation in years 10-30 exceed the interest payments?

2. A 30-year treasury today yields 2.91%, according to treasury.gov. You will take significant losses when 30-year rates increase 1.09%. Notice your plan has you buying treasuries today because rates will increase in the future. This suggests you do not understand the underlying bond math.

3. What if you are wrong?
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Re: When the Fed stops what do you do?

Post by aristotelian » Fri Jan 12, 2018 12:29 pm

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?

Appreciate any thoughts on the downside to this approach.
What about moving into EE Bonds, since you can get 3.5% right now?

restingonmylaurels
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Re: When the Fed stops what do you do?

Post by restingonmylaurels » Fri Jan 12, 2018 12:58 pm

I will jump in with a quick update on the replies to far:

Inflation seems to be the predominant concern but I am allowing for a moderate increase in inflation by having a necessary SWR lower than the interest rate of the 30-year Treasuries.

I would buy these bonds when the rate hike cycle ends, not now.

Is there not still an annual limit to the purchase of EE bonds?

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Re: When the Fed stops what do you do?

Post by nisiprius » Fri Jan 12, 2018 12:59 pm

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020.
In February 2014, Bloomberg polled 67 economists on what was going to happen to the 10-year Treasury rate over the next six months. 67 out of 67, 100%, said it would rise. It fell. I assume they, too, had watched the Fed closely for years. Don't rely on forecasts, your own or anyone else's.
When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%.
When the moon is in the seventh house, and Jupiter aligns with Mars... but let's say it happens. It's only 2.91% today, but let's say 4%.
Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?
No, because an X% yield does not mean an X% safe withdrawal rate. That was, if you like, the big discovery of the 1990s. Before that it was generally assumed that if your retirement portfolio earned X% you could safely withdraw X% per year. (Dave Ramsey still says so, but he's wrong).

I'm very conservative myself. If the 30-year TIPS were earning earning comfortably more than 1.31% real, then arguably you could do it with 100% TIPS. But it isn't. And of course the problem with TIPS is that it's hard-edged. If TIPS are earning >1.31% and you withdraw 4% real every year, it will last exactly 30 years and then hit the wall.

If you were to put numbers on "more that sufficient to live on" one might be able to make some kind of judgement. For example, if you can live adequately on a 2% withdrawal rate, inflation-adjusted, then I think yeah, probably, if we don't get anything much worse than period of inflation we've actually experienced historically.

(However, as Taleb points out, by definition, it is always true that "the worst to date" was worse than whatever had been the worst to date before it).
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Re: When the Fed stops what do you do?

Post by DrGoogle2017 » Fri Jan 12, 2018 1:30 pm

When interest rate hits 6%,that’s when I might worry.

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Re: When the Fed stops what do you do?

Post by willthrill81 » Fri Jan 12, 2018 1:52 pm

aristotelian wrote:
Fri Jan 12, 2018 12:29 pm
restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?

Appreciate any thoughts on the downside to this approach.
What about moving into EE Bonds, since you can get 3.5% right now?
You can only buy $10k of EE bonds per person per year. I doubt that the inflation-adjusted principal in 20 years will be enough to retire on.

But my guess is your tongue was in your cheek. 8-)
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Re: When the Fed stops what do you do?

Post by aristotelian » Fri Jan 12, 2018 2:04 pm

willthrill81 wrote:
Fri Jan 12, 2018 1:52 pm
aristotelian wrote:
Fri Jan 12, 2018 12:29 pm
restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?

Appreciate any thoughts on the downside to this approach.
What about moving into EE Bonds, since you can get 3.5% right now?
You can only buy $10k of EE bonds per person per year. I doubt that the inflation-adjusted principal in 20 years will be enough to retire on.

But my guess is your tongue was in your cheek. 8-)
No, was not tongue in cheek. Did not realize OP was proposing shifting entire portfolio to 30 year Treasuries.

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Re: When the Fed stops what do you do?

Post by grabiner » Fri Jan 12, 2018 10:47 pm

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?
This is taking an unnecessary risk; you don't know what inflation will be 20 years from now. Rather than using long-term Treasuries, you can use long-term TIPS, which yield about 1% above inflation.

In any case, a 4% bond yield does not make for a safe 4% withdrawal rate, because the 4% SWR rule of thumb assumes withdrawals growing with inflation. Given any TIPS yield and time horizon, you can work out how much you would need in TIPS to get a given withdrawal rate; for example, if TIPS yield zero, you can withdraw 4% growing with inflation for 25 years risk-free.
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Re: When the Fed stops what do you do?

Post by willthrill81 » Fri Jan 12, 2018 11:13 pm

grabiner wrote:
Fri Jan 12, 2018 10:47 pm
In any case, a 4% bond yield does not make for a safe 4% withdrawal rate, because the 4% SWR rule of thumb assumes withdrawals growing with inflation. Given any TIPS yield and time horizon, you can work out how much you would need in TIPS to get a given withdrawal rate; for example, if TIPS yield zero, you can withdraw 4% growing with inflation for 25 years risk-free.
By my calculations, a portfolio with zero volatility would need a real rate of return of about 1.22% in order to be completely exhausted in 30 years with 4% plus inflation withdrawals. As the volatility increases, so would the needed real return in order to compensate for the volatility drag.

According to the Portfolio Charts SWR calculator using data back to 1970, the SWR for a 100% LTT portfolio was 3.4%. I was surprised to see that a 100% ITT or STT portfolio yielded a higher SWR of 3.8%.
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Re: When the Fed stops what do you do?

Post by sport » Sat Jan 13, 2018 3:57 am

restingonmylaurels wrote:
Fri Jan 12, 2018 12:58 pm
IInflation seems to be the predominant concern but I am allowing for a moderate increase in inflation by having a necessary SWR lower than the interest rate of the 30-year Treasuries.
Who says that an inflation increase has to be "moderate"? You may not be old enough to remember what happened to inflation between 1980 and 1985 or so. I remember 6 year CDs at 12% and money market funds at 18% on an inverted interest rate curve. I still have a bank statement from 1985 that shows a CD with a 14.3% yield. I keep that statement as a reminder of what can happen.

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Re: When the Fed stops what do you do?

Post by nisiprius » Sat Jan 13, 2018 8:22 am

sport wrote:
Sat Jan 13, 2018 3:57 am
restingonmylaurels wrote:
Fri Jan 12, 2018 12:58 pm
IInflation seems to be the predominant concern but I am allowing for a moderate increase in inflation by having a necessary SWR lower than the interest rate of the 30-year Treasuries.
Who says that an inflation increase has to be "moderate"? You may not be old enough to remember what happened to inflation between 1980 and 1985 or so. I remember 6 year CDs at 12% and money market funds at 18% on an inverted interest rate curve. I still have a bank statement from 1985 that shows a CD with a 14.3% yield. I keep that statement as a reminder of what can happen.
Here's mine. (That, for those of you who don't know, is a "bankbook," a literal small book, about the size and stiffness of a passport. They would stuff it into an accounting machine to print out the interest, very up-to-date. You can't see it in this scan but it had a sort of notched edge: every time they entered interest, it would extend a long physical notch on the side that basically recorded the location of the last line printed, so that the next time they stuffed it in, it knew where to print the next line. You can see if you look closely that the lines are not quite evenly spaced.

Image

And the point is: we did not rejoice at the time. It didn't even seem like a great rate.

And another point is: it wasn't the worst inflation in my lifetime. The worst was when I was a little kid, though, and didn't remember it in terms of numbers. But I do remember TV newsmen (it was always "men" then, of course) with pictures behind them of a big dollar bill and a little dollar bill, talking about "the shrinking dollar" and asking my mom to explain it.
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Re: When the Fed stops what do you do?

Post by CurlyDave » Sat Jan 13, 2018 8:52 am

sport wrote:
Sat Jan 13, 2018 3:57 am
...Who says that an inflation increase has to be "moderate"? You may not be old enough to remember what happened to inflation between 1980 and 1985 or so. I remember 6 year CDs at 12% and money market funds at 18% on an inverted interest rate curve. I still have a bank statement from 1985 that shows a CD with a 14.3% yield. I keep that statement as a reminder of what can happen.
I can remember home mortgage rates in the 14 and 15% range.

I had a mortgage at 6.5% and considered myself lucky. The thought of moving, or even refinancing, was far, far from my mind.

Even if inflation is moderate, many do not appreciate the compounding effect. (1.03)^30 = 2.43. So, 3% inflation over 30 years means that one would need to withdraw 2.43 x 4% or 9.72% of your original capital every year. Throw in a few 10% years and even modest living gets to be pretty expensive.

And, even worse, the market basket of things older people consume (medical care for instance), typically inflates at a much faster rate than the CPI.

Are you ready for the double whammy? Taxes inflate faster than the CPI. This is because of the progressive nature of the tax structure.

IMHO, inflation is the largest threat to a retirement out there. At 72, I fight back by holding 100% equities in investible assets, lots of real estate, and no bonds. Although we do have a nice income floor of SS and pensions.

* * * * * * * * * * * * * * *

One of the ways that governments reduce their debt burden is by inflating it away. A few years of 10% inflation and a 100+% debt/GDP ratio suddenly starts to look a lot more reasonable. This has been going on since the days of the Roman empire. Don't look for it to stop anytime soon.

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Re: When the Fed stops what do you do?

Post by ThrustVectoring » Sat Jan 13, 2018 10:47 pm

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?
The 4% SWR is inflation-adjusted, while 30-year treasuries aren't. Over the long run you need the return of equities.

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Re: When the Fed stops what do you do?

Post by Call_Me_Op » Sun Jan 14, 2018 8:20 am

restingonmylaurels wrote:
Fri Jan 12, 2018 11:46 am
Have watched the Fed closely for years, I believe they will continue on their program of Fed funds rate rises until they hit 3.0% in 2020. Thinking ahead while also looking back at the last decade’s low interest rate environment, I am considering the following investment strategy change to enjoy an almost risk-free retirement while protecting against the next iteration of low interest rates for long periods.

When the Fed funds rate reaches 3% and allowing for a slight flattening of the yield curve from today, 30-year Treasuries will be somewhere north of 4%. Knowing that a 4% SWR will be more than sufficient to live on (so leaving extra room for taxes and inflation), does it not make sense to move all or most of one’s investments to 30-year Treasuries that match or exceed the SWR?
Does not make sense for several reasons. First, when people talk about "the 4% rule", they are assuming that the portfolio increases with inflation, as does the 4% you are withdrawing. The coupons for 30 year treasuries do not increase with inflation. Moreover, if the inflation rate were to experience an unexpected increase, you could well be hosed.
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