30 yr tips auction 2/15: 1.0% yield?

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garlandwhizzer
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by garlandwhizzer »

gmaynardkrebs » Wed Apr 18, 2018 8:05 am

A real yield of less than 1% on the 30Y suggests something quite ominous to me about equities. The 30 year real yield stands as the market's best estimate about about future growth over the next 30 years. I can't see how one can square that with the high rate of real growth in earnings upon which today's high stock market valuations are premised. Yes, P/E expansion may be able to make up for some or perhaps all of the difference, but given today's near-record valuations, that's pretty thin gruel for optimism about future equity returns.
1+

Astute observation. I'd like to add one more point. Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low. Many of the wealthy do not need asset appreciation, rather they value long term capital preservation in real inflation-adjusted terms. Quitting the game when you're well ahead and avoiding all risk with a TIPS ladder as Bernstein advocates.

Garland Whizzer
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

garlandwhizzer wrote: Wed Apr 18, 2018 1:00 pm
gmaynardkrebs » Wed Apr 18, 2018 8:05 am

A real yield of less than 1% on the 30Y suggests something quite ominous to me about equities. The 30 year real yield stands as the market's best estimate about about future growth over the next 30 years. I can't see how one can square that with the high rate of real growth in earnings upon which today's high stock market valuations are premised. Yes, P/E expansion may be able to make up for some or perhaps all of the difference, but given today's near-record valuations, that's pretty thin gruel for optimism about future equity returns.
1+

Astute observation. I'd like to add one more point. Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low. Many of the wealthy do not need asset appreciation, rather they value long term capital preservation in real inflation-adjusted terms. Quitting the game when you're well ahead and avoiding all risk with a TIPS ladder as Bernstein advocates.

Garland Whizzer
I hear you but i think what you are saying is that folks buying 30 year tips, for example, are overpaying for inflation protection. I find little to no evidence that that is the case. The break even inflation (bei) rate for 30 year tips is 2.17% the same as for the 5 years and the 10 years.

The puzzle is why is the yield curve so flat.
RIP Mr. Bogle.
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gmaynardkrebs
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

grok87 wrote: Wed Apr 18, 2018 4:23 pm
garlandwhizzer wrote: Wed Apr 18, 2018 1:00 pm
gmaynardkrebs » Wed Apr 18, 2018 8:05 am

A real yield of less than 1% on the 30Y suggests something quite ominous to me about equities. The 30 year real yield stands as the market's best estimate about about future growth over the next 30 years. I can't see how one can square that with the high rate of real growth in earnings upon which today's high stock market valuations are premised. Yes, P/E expansion may be able to make up for some or perhaps all of the difference, but given today's near-record valuations, that's pretty thin gruel for optimism about future equity returns.
1+

Astute observation. I'd like to add one more point. Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low. Many of the wealthy do not need asset appreciation, rather they value long term capital preservation in real inflation-adjusted terms. Quitting the game when you're well ahead and avoiding all risk with a TIPS ladder as Bernstein advocates.

Garland Whizzer
I hear you but i think what you are saying is that folks buying 30 year tips, for example, are overpaying for inflation protection. I find little to no evidence that that is the case. The break even inflation (bei) rate for 30 year tips is 2.17% the same as for the 5 years and the 10 years.

The puzzle is why is the yield curve so flat.
I don't think I follow you on the overpaying for TIPS point. Since the breakeven rate is calculated by simple subtraction of the real rate from the nominal rate, by definition you can't "overpay" for inflation protection if you are paying the market price.Now, If inflation turns out to lower than the market predicted, then you could say that in retrospect you overpaid, but that's just saying that markets are not infallible, which is of course true.

However, you are right that the flat yield curve for nominals presents virtually the same puzzle. I use the TIPS rate because future equity returns are usually expressed in real terms.
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

gmaynardkrebs wrote: Wed Apr 18, 2018 4:49 pm
grok87 wrote: Wed Apr 18, 2018 4:23 pm
garlandwhizzer wrote: Wed Apr 18, 2018 1:00 pm
gmaynardkrebs » Wed Apr 18, 2018 8:05 am

A real yield of less than 1% on the 30Y suggests something quite ominous to me about equities. The 30 year real yield stands as the market's best estimate about about future growth over the next 30 years. I can't see how one can square that with the high rate of real growth in earnings upon which today's high stock market valuations are premised. Yes, P/E expansion may be able to make up for some or perhaps all of the difference, but given today's near-record valuations, that's pretty thin gruel for optimism about future equity returns.
1+

Astute observation. I'd like to add one more point. Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low. Many of the wealthy do not need asset appreciation, rather they value long term capital preservation in real inflation-adjusted terms. Quitting the game when you're well ahead and avoiding all risk with a TIPS ladder as Bernstein advocates.

Garland Whizzer
I hear you but i think what you are saying is that folks buying 30 year tips, for example, are overpaying for inflation protection. I find little to no evidence that that is the case. The break even inflation (bei) rate for 30 year tips is 2.17% the same as for the 5 years and the 10 years.

The puzzle is why is the yield curve so flat.
I don't think I follow you on the overpaying for TIPS point. Since the breakeven rate is calculated by simple subtraction of the real rate from the nominal rate, by definition you can't "overpay" for inflation protection if you are paying the market price.Now, If inflation turns out to lower than the market predicted, then you could say that in retrospect you overpaid, but that's just saying that markets are not infallible, which is of course true.

However, you are right that the flat yield curve for nominals presents virtually the same puzzle. I use the TIPS rate because future equity returns are usually expressed in real terms.
My apologies.

When I read this quote

“Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low.”

I thought you were arguing that real yields are being driven down abnormally low and break-even inflation rates abnormally high due to investor demand for tips for wealth preservation.
RIP Mr. Bogle.
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gmaynardkrebs
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

grok87 wrote: Thu Apr 19, 2018 6:56 am My apologies.
When I read this quote
“Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low.”
I thought you were arguing that real yields are being driven down abnormally low and break-even inflation rates abnormally high due to investor demand for tips for wealth preservation.
Apologies not needed! I agree with you that the quote, which was from another poster, is not correct as of today. Interestingly, it is somewhat the case in the UK today, due to government rules, which have better worker protection than our own. In effect, pension funds are required to inflation proof their portfolios, so as to be sure to meet their long term liabilities. Whereas in the US, state pension funds are allowed to take on absurd levels of equity risk in order to spare their wealthiest citizens from the odious burden of paying taxes to meet the pension obligations owed to the police and firefighters who risked their lives to protect them.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Snowjob »

My problem is one that Nedsaid has brought up before.

I think most people just don't have excess savings to dedicate to building a TIP's ladder over their career. Great, if equities do well and I have a ton of money when I hit my 50's I'll buy myself a TIP's ladder, but with a 30+ year working career at a non executive salary its hard to commit to both a 1% for 30 years return in retirement AND a 1% for 30 years during the accumulation phase.
garlandwhizzer
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by garlandwhizzer »

My point about the low level of 30 year TIPS real return (0.87%) is that the vast majority of experienced investors believe they have a 99+% chance of producing higher 30 year returns with a well-constructed, well-diversified balanced portfolio. It is very difficult, essentially impossible, to construct a such a portfolio that has an "expected return" of less than 1% real over 30 years. Granted, 99+% is not 100%, and granted there is sometimes a significant difference between "expected return" and real long term inflation adjusted return which is what TIPS offer. My point is that some investors choose guaranteed security with very low return over much higher expected return with less than guaranteed certainty. Bernstein argues that it is a rational retirement choice and although I do not choose to do so, hard to argue with him.

Currently the yield curve is almost flat for both Treasuries and TIPS. You aren't getting paid much to take on duration risk (which TIPS are not immune from) in 30 year TIPS yields. This is only a problem is you have to sell the TIPS before maturity and rates are higher when you sell in which case you suffer principal loss. Personally, I'm 71 and will be long dead when 30 year TIPS mature, so I'm not interested. For those who want a guaranteed secure 30 year positive real inflation adjusted yield they are the only way I know of to get there.

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gmaynardkrebs
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

Snowjob wrote: Thu Apr 19, 2018 12:54 pm My problem is one that Nedsaid has brought up before.

I think most people just don't have excess savings to dedicate to building a TIP's ladder over their career. Great, if equities do well and I have a ton of money when I hit my 50's I'll buy myself a TIP's ladder, but with a 30+ year working career at a non executive salary its hard to commit to both a 1% for 30 years return in retirement AND a 1% for 30 years during the accumulation phase.
I completely understand, but I have to raise an unpleasant question, which you have undoubtedly thought of already. Is taking more risk really the answer? Sure great, if it works out; but we both know it might not; moreover with equities, the distribution of returns can be sharply and disastrously negative. When it comes to the minimum needed just to get by, a miss is NOT as good as a mile. Falling short by 40% not just 4 times worse than falling behind by 10%, it's 50 X worse if it means losing your home, your medical care, and your basic human right to a decent retirement. So, I worry about the many hard working people like yourself who are forced into the casino, simply because the big shots on Wall St (and Vanguard, and Fidelity and virtually the entire financial industry) enrich themselves by selling hope via equities instead of a genuine solution via annuities, TIPS ladders, or whatever solutions are out there (eg, Merton.) Sorry for the rant, but it's just a terrible situation IMHO.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

garlandwhizzer wrote: Thu Apr 19, 2018 4:06 pm My point about the low level of 30 year TIPS real return (0.87%) is that the vast majority of experienced investors believe they have a 99+% chance of producing higher 30 year returns with a well-constructed, well-diversified balanced portfolio. It is very difficult, essentially impossible, to construct a such a portfolio that has an "expected return" of less than 1% real over 30 years. Granted, 99+% is not 100%, and granted there is sometimes a significant difference between "expected return" and real long term inflation adjusted return which is what TIPS offer. ...
Garland Whizzer
It's really a matter of risk tolerance/aversion. No matter how great is T, the risk averse TIPS investor sometimes beats the less risk averse investor in equities. To the TIPS investor, the equity investor beats him trivially. When he applies his own yardstick to the worth of the equity guys' victories and nets them against the worth of his own (fewer) victories, what the equity guy achieved is irrelevant.
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

gmaynardkrebs wrote: Thu Apr 19, 2018 7:47 am
grok87 wrote: Thu Apr 19, 2018 6:56 am My apologies.
When I read this quote
“Another thing these ridiculously low long term real yields show is that there is a great deal of very risk averse wealth in the investing world chasing after a limited supply of long term inflation-adjusted safety even if its real yield is laughably low.”
I thought you were arguing that real yields are being driven down abnormally low and break-even inflation rates abnormally high due to investor demand for tips for wealth preservation.
Apologies not needed! I agree with you that the quote, which was from another poster, is not correct as of today. Interestingly, it is somewhat the case in the UK today, due to government rules, which have better worker protection than our own. In effect, pension funds are required to inflation proof their portfolios, so as to be sure to meet their long term liabilities. Whereas in the US, state pension funds are allowed to take on absurd levels of equity risk in order to spare their wealthiest citizens from the odious burden of paying taxes to meet the pension obligations owed to the police and firefighters who risked their lives to protect them.
thanks.
i've also heard that the uk situation for index linked gilts has something to do with how they are taxed...
RIP Mr. Bogle.
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

Snowjob wrote: Thu Apr 19, 2018 12:54 pm My problem is one that Nedsaid has brought up before.

I think most people just don't have excess savings to dedicate to building a TIP's ladder over their career. Great, if equities do well and I have a ton of money when I hit my 50's I'll buy myself a TIP's ladder, but with a 30+ year working career at a non executive salary its hard to commit to both a 1% for 30 years return in retirement AND a 1% for 30 years during the accumulation phase.
a couple of thoughts.
i recently posted about the "3-legged stool approach" to saving for retirement
viewtopic.php?t=245377
i think for many folks whose earnings are completely covered by social security, then social security may be enough to mostly cover the two legs of the stool. so not much if any of a tips ladder would be needed.

the 1% real return sounds terrible i know. but if one buys into the idea that one should always have SOME bonds in ones portfolio, then its really just a question of WHICH bonds. David Swensen argues to "take your risk on the equity side" and stick to tips/treasuries for your bonds. He doesn't advocate a tips ladder or anything like that. but i guess my view is, if you are going to have some bonds why not pick ones that play a useful clear role in funding your retirement like 30 year tips instead of the total bond market index.
RIP Mr. Bogle.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Snowjob »

gmaynardkrebs wrote: Thu Apr 19, 2018 4:08 pm
Snowjob wrote: Thu Apr 19, 2018 12:54 pm My problem is one that Nedsaid has brought up before.

I think most people just don't have excess savings to dedicate to building a TIP's ladder over their career. Great, if equities do well and I have a ton of money when I hit my 50's I'll buy myself a TIP's ladder, but with a 30+ year working career at a non executive salary its hard to commit to both a 1% for 30 years return in retirement AND a 1% for 30 years during the accumulation phase.
I completely understand, but I have to raise an unpleasant question, which you have undoubtedly thought of already. Is taking more risk really the answer? Sure great, if it works out; but we both know it might not; moreover with equities, the distribution of returns can be sharply and disastrously negative. When it comes to the minimum needed just to get by, a miss is NOT as good as a mile. Falling short by 40% not just 4 times worse than falling behind by 10%, it's 50 X worse if it means losing your home, your medical care, and your basic human right to a decent retirement. So, I worry about the many hard working people like yourself who are forced into the casino, simply because the big shots on Wall St (and Vanguard, and Fidelity and virtually the entire financial industry) enrich themselves by selling hope via equities instead of a genuine solution via annuities, TIPS ladders, or whatever solutions are out there (eg, Merton.) Sorry for the rant, but it's just a terrible situation IMHO.
If your looking for a rough split like Grok has laid out 20k SS 20k Tips and 20k from your risk portfolio, its going to be very hard to get there if you are saving the first 20k a year in TIP's for your 30 year work career. that is the problem between the 60k of regular expenses, 20k of savings, 20k of mortgate thats 100 of the guys 120k a year salary, not to mention raising kids and anything else. whatever is left is peanuts to try and fund the "risk porfolio" which actually needs to grow to the same amount for Grok's plan to work. The only way to get there is to bet that you will have those golden equity returns for the 30 year working career. So if by choosing to save via TIP's each year you are making a bet on 30 years of great equity returns, why not take a much more traditional balanced approach so you don't NEED crazy equity returns during your working career. Then just transition to TIPs or inflation adjusted annuities etc over time and more aggressively as you near retirement. Wall street sells the equity dream because it works for them but the reality is, it mostly has worked for us also, we just focus on the few periods it hasn't because we all want a guarantee.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Snowjob »

grok87 wrote: Thu Apr 19, 2018 10:30 pm
Snowjob wrote: Thu Apr 19, 2018 12:54 pm My problem is one that Nedsaid has brought up before.

I think most people just don't have excess savings to dedicate to building a TIP's ladder over their career. Great, if equities do well and I have a ton of money when I hit my 50's I'll buy myself a TIP's ladder, but with a 30+ year working career at a non executive salary its hard to commit to both a 1% for 30 years return in retirement AND a 1% for 30 years during the accumulation phase.
a couple of thoughts.
i recently posted about the "3-legged stool approach" to saving for retirement
viewtopic.php?t=245377
i think for many folks whose earnings are completely covered by social security, then social security may be enough to mostly cover the two legs of the stool. so not much if any of a tips ladder would be needed.

the 1% real return sounds terrible i know. but if one buys into the idea that one should always have SOME bonds in ones portfolio, then its really just a question of WHICH bonds. David Swensen argues to "take your risk on the equity side" and stick to tips/treasuries for your bonds. He doesn't advocate a tips ladder or anything like that. but i guess my view is, if you are going to have some bonds why not pick ones that play a useful clear role in funding your retirement like 30 year tips instead of the total bond market index.
Yes I agree with this approach, save normally but use TIP's for the majority of your bond component, I think that is the only way for someone to get there unless you have tons of income you don't know what to do with. Saving your TIP's run each year for 30 years in retirement is pretty inefficient and for most people unrealistic. No matter how you slice it, most of us will live and die on the performance of equities over our working career and its only performance vs expectations that has a chance of being upset. performance vs a benchmark 1% real over 30 years is virtually impossible to screw up during the accumulation side, remember your not withdrawing during the accumulation phase so you don't have that crazy draw down risk.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

What impresses me is the "we rely on equities because we have to" sentiment that is so prevalent here and in virtually every discussion on the more enlightened financial sites like BH. Truly, it is pervasive. I'd just like to point out that the US is the only advanced western country where ordinary folks like us rely so fundamentally and pervasively on equities. Most Europeans citizens hold very few equities. They seem to do just fine. I'd like to hear more from our UK and EU friends on this board how that is accomplished.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Grt2bOutdoors »

gmaynardkrebs wrote: Fri Apr 20, 2018 8:11 am What impresses me is the "we rely on equities because we have to" sentiment that is so prevalent here and in virtually every discussion on the more enlightened financial sites like BH. Truly, it is pervasive. I'd just like to point out that the US is the only advanced western country where ordinary folks like us rely so fundamentally and pervasively on equities. Most Europeans citizens hold very few equities. They seem to do just fine. I'd like to hear more from our UK and EU friends on this board how that is accomplished.
It's called employer and government pensions. Look at the pension plans of Switzerland and Germany to see why they do "just fine". But then again, its also a reason why Italy has a huge debt problem.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

Grt2bOutdoors wrote: Fri Apr 20, 2018 11:54 am
gmaynardkrebs wrote: Fri Apr 20, 2018 8:11 am What impresses me is the "we rely on equities because we have to" sentiment that is so prevalent here and in virtually every discussion on the more enlightened financial sites like BH. Truly, it is pervasive. I'd just like to point out that the US is the only advanced western country where ordinary folks like us rely so fundamentally and pervasively on equities. Most Europeans citizens hold very few equities. They seem to do just fine. I'd like to hear more from our UK and EU friends on this board how that is accomplished.
It's called employer and government pensions. Look at the pension plans of Switzerland and Germany to see why they do "just fine". But then again, its also a reason why Italy has a huge debt problem.
If you are saying that the entire German pension system, public and private, is government funded, that is incorrect. Moreover, even purely private tiers do not rely on primarily, of at all, on equity investments.
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

Snowjob wrote: Fri Apr 20, 2018 5:57 am Yes I agree with this approach, save normally but use TIP's for the majority of your bond component, I think that is the only way for someone to get there unless you have tons of income you don't know what to do with. Saving your TIP's run each year for 30 years in retirement is pretty inefficient and for most people unrealistic.
Thanks.

Well let's dig into this a bit perhaps...
So again, as per this post
viewtopic.php?t=245377
If one does not have a pension, I'm advocating building a tips ladder to replace 1/6th of your salary. When to start is debatable but let's say you start 30 years before retirement and build each rung a year at at time (as opposed to say starting 15 years before retirement and building two rungs each year).

let's use some actual numbers so we can follow the math:

Age 35
Salary: $90k
Target real income per year in 30 years: $15 k
Assumed 30 year tips real yield: 1%
Discount Factor for present value of $15k = 1/1.01^30 = 0.742
Amount to invest in 30 year tips now: $15k * 0.742 = $11.1 k

so the question is how realistic is it to save $11.1k per year in TIPS?

Well lets assume you save 20% per year for retirement and get an employer match of 6% for a total of 26% or $23.4 k. You could put $11.1k of this in the TIPs and the other $12.3k in stocks. That seems a bit conservative to start at 53/47. But of course that ignores any retirement savings that one may have built up before age 35. Let's assume this prior amount totals to $230k. So now you have $230k + $23.4k or $253.4 k. if one follows age in bonds then your target bond allocation would be 35% of that or $88.7 k. So the $11.1k of 30 year tips would only represent about 12.5% of ones bonds.
RIP Mr. Bogle.
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Grt2bOutdoors »

gmaynardkrebs wrote: Fri Apr 20, 2018 5:29 pm
Grt2bOutdoors wrote: Fri Apr 20, 2018 11:54 am
gmaynardkrebs wrote: Fri Apr 20, 2018 8:11 am What impresses me is the "we rely on equities because we have to" sentiment that is so prevalent here and in virtually every discussion on the more enlightened financial sites like BH. Truly, it is pervasive. I'd just like to point out that the US is the only advanced western country where ordinary folks like us rely so fundamentally and pervasively on equities. Most Europeans citizens hold very few equities. They seem to do just fine. I'd like to hear more from our UK and EU friends on this board how that is accomplished.
It's called employer and government pensions. Look at the pension plans of Switzerland and Germany to see why they do "just fine". But then again, its also a reason why Italy has a huge debt problem.
If you are saying that the entire German pension system, public and private, is government funded, that is incorrect. Moreover, even purely private tiers do not rely on primarily, of at all, on equity investments.
No that’s not what I’m saying. What I’m saying is those European pension plans are robust, unlike some other plans - corporate or municipal stateside.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Snowjob »

grok87 wrote: Fri Apr 20, 2018 8:18 pm
Snowjob wrote: Fri Apr 20, 2018 5:57 am Yes I agree with this approach, save normally but use TIP's for the majority of your bond component, I think that is the only way for someone to get there unless you have tons of income you don't know what to do with. Saving your TIP's run each year for 30 years in retirement is pretty inefficient and for most people unrealistic.
Thanks.

Well let's dig into this a bit perhaps...
So again, as per this post
viewtopic.php?t=245377
If one does not have a pension, I'm advocating building a tips ladder to replace 1/6th of your salary. When to start is debatable but let's say you start 30 years before retirement and build each rung a year at at time (as opposed to say starting 15 years before retirement and building two rungs each year).

let's use some actual numbers so we can follow the math:

Age 35
Salary: $90k
Target real income per year in 30 years: $15 k
Assumed 30 year tips real yield: 1%
Discount Factor for present value of $15k = 1/1.01^30 = 0.742
Amount to invest in 30 year tips now: $15k * 0.742 = $11.1 k

so the question is how realistic is it to save $11.1k per year in TIPS?

Well lets assume you save 20% per year for retirement and get an employer match of 6% for a total of 26% or $23.4 k. You could put $11.1k of this in the TIPs and the other $12.3k in stocks. That seems a bit conservative to start at 53/47. But of course that ignores any retirement savings that one may have built up before age 35. Let's assume this prior amount totals to $230k. So now you have $230k + $23.4k or $253.4 k. if one follows age in bonds then your target bond allocation would be 35% of that or $88.7 k. So the $11.1k of 30 year tips would only represent about 12.5% of ones bonds.
Funny, I can relate that age / salary profile remarkably well.

My assumptions
- Soc. Sec. 20k (we are supposed to get that haircut, and I may not make 65 at the same salary level so have been using 20k as a reasonable assumption
- Pension 0k (this is where the TIP's come in, I'd need 20k a year to replace this
- Risk portfolio -- everything else.

So using that 20k and your 1% tips assumption, we need to save about 15k a year for TIPs for 30 years which is nearly 17%. Matching on the 401k is only 3%. so saving at a rouhly 50/50 ratio would require total contributions of 14% +3% match in stock +17% tips. Thats 31% of income.

Given the other costs -- student loans, housing, raising kids, life etc its a hard sell.

Its doable, you are buying security each step of the way at the cost of expected growth, and by doing so exposing yourself to employment risk those last 10-15 years when you are in your 50s and 60s and may not have the income stability to finish the job. Nothings perfect. I guess Id rather just go 80-20 or 75-25 from the start Equities & Tips and just save as much as I can, hope for the best and if I make it to my 50% with enough, convert some of that extra $ to the tips ladder.
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gmaynardkrebs
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by gmaynardkrebs »

Snowjob wrote: Mon Apr 23, 2018 8:34 am
grok87 wrote: Fri Apr 20, 2018 8:18 pm
Snowjob wrote: Fri Apr 20, 2018 5:57 am Yes I agree with this approach, save normally but use TIP's for the majority of your bond component, I think that is the only way for someone to get there unless you have tons of income you don't know what to do with. Saving your TIP's run each year for 30 years in retirement is pretty inefficient and for most people unrealistic.
Thanks.

Well let's dig into this a bit perhaps...
So again, as per this post
viewtopic.php?t=245377
If one does not have a pension, I'm advocating building a tips ladder to replace 1/6th of your salary. When to start is debatable but let's say you start 30 years before retirement and build each rung a year at at time (as opposed to say starting 15 years before retirement and building two rungs each year).

let's use some actual numbers so we can follow the math:

Age 35
Salary: $90k
Target real income per year in 30 years: $15 k
Assumed 30 year tips real yield: 1%
Discount Factor for present value of $15k = 1/1.01^30 = 0.742
Amount to invest in 30 year tips now: $15k * 0.742 = $11.1 k

so the question is how realistic is it to save $11.1k per year in TIPS?

Well lets assume you save 20% per year for retirement and get an employer match of 6% for a total of 26% or $23.4 k. You could put $11.1k of this in the TIPs and the other $12.3k in stocks. That seems a bit conservative to start at 53/47. But of course that ignores any retirement savings that one may have built up before age 35. Let's assume this prior amount totals to $230k. So now you have $230k + $23.4k or $253.4 k. if one follows age in bonds then your target bond allocation would be 35% of that or $88.7 k. So the $11.1k of 30 year tips would only represent about 12.5% of ones bonds.
Funny, I can relate that age / salary profile remarkably well.

My assumptions
- Soc. Sec. 20k (we are supposed to get that haircut, and I may not make 65 at the same salary level so have been using 20k as a reasonable assumption
- Pension 0k (this is where the TIP's come in, I'd need 20k a year to replace this
- Risk portfolio -- everything else.

So using that 20k and your 1% tips assumption, we need to save about 15k a year for TIPs for 30 years which is nearly 17%. Matching on the 401k is only 3%. so saving at a rouhly 50/50 ratio would require total contributions of 14% +3% match in stock +17% tips. Thats 31% of income.

Given the other costs -- student loans, housing, raising kids, life etc its a hard sell.

Its doable, you are buying security each step of the way at the cost of expected growth, and by doing so exposing yourself to employment risk those last 10-15 years when you are in your 50s and 60s and may not have the income stability to finish the job. Nothings perfect. I guess Id rather just go 80-20 or 75-25 from the start Equities & Tips and just save as much as I can, hope for the best and if I make it to my 50% with enough, convert some of that extra $ to the tips ladder.
If it were me, I'd save more -- yeah, I know. However, equities are risky -- and I don't mean the risk that they might not reach quite what you has hoped. I mean less than you need to avoid being in real serious trouble in retirement. A lot of people say that they are willing to take a 5% Monte Carlo sim chance on that happening. But when I see some of the very poor elderly in my area, I don't want to be anywhere near that. The best thing to do would be to look hard for a higher paying job, if possible. But if not, you really got to take a hard look at your expenses. It beats the alternative, as far away down the road as it seems.
Snowjob
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by Snowjob »

gmaynardkrebs wrote: Mon Apr 23, 2018 9:00 am
Snowjob wrote: Mon Apr 23, 2018 8:34 am ... assumptions
- Soc. Sec. 20k (we are supposed to get that haircut, and I may not make 65 at the same salary level so have been using 20k as a reasonable assumption
- Pension 0k (this is where the TIP's come in, I'd need 20k a year to replace this
- Risk portfolio -- everything else.

So using that 20k and your 1% tips assumption, we need to save about 15k a year for TIPs for 30 years which is nearly 17%. Matching on the 401k is only 3%. so saving at a rouhly 50/50 ratio would require total contributions of 14% +3% match in stock +17% tips. Thats 31% of income.

Given the other costs -- student loans, housing, raising kids, life etc its a hard sell.

Its doable, you are buying security each step of the way at the cost of expected growth, and by doing so exposing yourself to employment risk those last 10-15 years when you are in your 50s and 60s and may not have the income stability to finish the job. Nothings perfect. I guess Id rather just go 80-20 or 75-25 from the start Equities & Tips and just save as much as I can, hope for the best and if I make it to my 50% with enough, convert some of that extra $ to the tips ladder.
If it were me, I'd save more -- yeah, I know. However, equities are risky -- and I don't mean the risk that they might not reach quite what you has hoped. I mean less than you need to avoid being in real serious trouble in retirement. A lot of people say that they are willing to take a 5% Monte Carlo sim chance on that happening. But when I see some of the very poor elderly in my area, I don't want to be anywhere near that. The best thing to do would be to look hard for a higher paying job, if possible. But if not, you really got to take a hard look at your expenses. It beats the alternative, as far away down the road as it seems.
Yes, I agree. I think if this person was starting at 35 and wanted to build a TIPs ladder across time, saving more would be the answer -- and that is most likely achieved by getting a higher paying job. Thankfully, I prioritized saving / investing in my 20's and and not forced with this uncomfortable reality right now. Unfortunately -- get a higher paying job is not the reasonable answer for everyone, as we all can't make it -- the higher you climb the less jobs are available at that income level. I think either way the person will not end up destitute, if your saving and investing for your career you can always sell, downsize and cut your costs to right the ship. If your making an average of 90k for your career, you don't really have an excuse for ending up eating cat food.
MtnBiker
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by MtnBiker »

grok87 wrote: Tue Apr 17, 2018 12:14 pmNow at 0.85%
Now back up to 1.01%

https://www.treasury.gov/resource-cente ... =realyield
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

MtnBiker wrote: Tue Apr 24, 2018 6:10 pm
grok87 wrote: Tue Apr 17, 2018 12:14 pmNow at 0.85%
Now back up to 1.01%

https://www.treasury.gov/resource-cente ... =realyield
yep
RIP Mr. Bogle.
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grok87
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Re: 30 yr tips auction 2/15: 1.0% yield?

Post by grok87 »

grok87 wrote: Tue Apr 24, 2018 7:39 pm
MtnBiker wrote: Tue Apr 24, 2018 6:10 pm
grok87 wrote: Tue Apr 17, 2018 12:14 pmNow at 0.85%
Now back up to 1.01%

https://www.treasury.gov/resource-cente ... =realyield
yep
and now at 0.89%.

so far my bet to double up at the february auction to snag those tasty 1.0% yields is looking good. We'll see where we are in a few weeks at the june auction...
RIP Mr. Bogle.
MtnBiker
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Joined: Sun Nov 16, 2014 3:43 pm

Re: 30 yr tips auction 2/15: 1.0% yield?

Post by MtnBiker »

grok87 wrote: Tue May 29, 2018 6:13 am so far my bet to double up at the february auction to snag those tasty 1.0% yields is looking good. We'll see where we are in a few weeks at the june auction...
:sharebeer
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