What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

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gilgamesh
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What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Sun Apr 14, 2019 8:17 pm

Basically 4% SWR generates $4 inflation adjusted income for every $100 in the portfolio. It is typically said to be good for a 30 year retirement. The portfolio will survive if the retiree’s 30 year period is no worse than any previous 30 year period - so it’s not guaranteed.

If TIPS yield is zero, it will take $120 (20% more) to generate $4 inflation adjusted income for 30 years. So we need 20% more of TIPS with zero yield to generate $4 for 30 years. What should the TIPS yield be for the portfolio to generate $4 for every $100 over the 30 year period?

Is it 0.66666....%?....as in $100 provides $3.3333.... thus make up the difference with a yield of 0.66666...% or more complicated. I don’t think it is as...

Does one have to build a TIPS ladder and figure out the lifetime (30 years) yield as each rung matures yearly. Excess over $4 adjusted to inflation has to be re-invested in TIPS...what is this ‘break-even’ TIPS yield?



Thanks!


P.S: Of course, the SWR although not guaranteed to last 30 years most of the times will have substantial amounts left over after 30 years, where as TIPS spending depletes the portfolio but guarantees income...however, this exercise can be of practical use if only partial portfolio is involved. Anyhow, I am not interested in the merits of the “strategy” but rather wondering on what the ‘break-even’ yield is mostly for academic reasons.

ThrustVectoring
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by ThrustVectoring » Sun Apr 14, 2019 8:59 pm

It's more complicated. You're spending down the portfolio over time, so thirty years from now you'll only get the interest in the last year's worth of TIPS bonds, not on the entire starting portfolio.

The math also depends on how much of the yield is from the coupon versus a premium/discount to par. To get it exactly correct, you'd be looking up CUSIPS and market quotes for the TIPS bonds you're buying, getting the exact real cashflows for each payment, and verifying that things line up. I don't have the patience for that in this scenario, but I did set up a super basic spreadsheet that details how much you'd need to buy each year based off the coupon rate (assuming constant coupon rate and all purchases at par).

View-only share link: https://docs.google.com/spreadsheets/d/ ... sp=sharing

Very roughly speaking, you need a coupon more like 1.3% than 0.66%
Current portfolio: 60% VTI / 40% VXUS

AlohaJoe
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by AlohaJoe » Sun Apr 14, 2019 8:59 pm

I didn't quite follow all of your math or what it was trying to show...but I think it is a lot simpler than what you're doing.

Use the RATE function in a spreadsheet

Code: Select all

=rate(30, -4, 100, 0, 1)
=1.31%
That's 1.31% real for the entire portfolio. Right now, TIPS are much lower than that, 0.95% at 30-years and less for shorter maturities.

pdavi21
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by pdavi21 » Sun Apr 14, 2019 9:21 pm

EDIT: Wrong rate. It's really around 1.2-1.3%. Too many factors to calculate easily. The withdrawals should be at least monthly.

It would be 0.667, but your principal declines as you withdraw.

EDIT: realistically, your returns will not be constant which will push your required real returns higher than the theorhetical answer
Last edited by pdavi21 on Mon Apr 15, 2019 12:03 am, edited 3 times in total.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by bhsince87 » Sun Apr 14, 2019 10:53 pm

Pretty sure that TIPS were not even considered as part of the 4% SWR calculations. That was based on common stocks and bonds.
Retirement: When you reach a point where you have enough. Or when you've had enough.

AlohaJoe
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by AlohaJoe » Sun Apr 14, 2019 11:12 pm

pdavi21 wrote:
Sun Apr 14, 2019 9:21 pm
I don't think these numbers are accurate. I came up with 1% constant real return to make it through year 30 with nothing left last time I calculated.
1% constant real returns run out of money after 28.5 years; it doesn't last 30 years. If nothing else, it would be extremely surprising if the answer happened to be a nice round number like that.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 6:46 am

AlohaJoe wrote:
Sun Apr 14, 2019 8:59 pm
I didn't quite follow all of your math or what it was trying to show...but I think it is a lot simpler than what you're doing.

Use the RATE function in a spreadsheet

Code: Select all

=rate(30, -4, 100, 0, 1)
=1.31%
That's 1.31% real for the entire portfolio. Right now, TIPS are much lower than that, 0.95% at 30-years and less for shorter maturities.
This sounds about right to me...and average is good enough. I assume the extra yield is used to purchase another TIPS as late as possible, so after year 1 we buy a 29 year TIPS (in the secondary market) and on the second year the excess is used to buy a 28 year TIPS and so forth, right?

In real life it would be a lot more complicated like ‘thrust vectoring’ mentioned...

Second question...if 1.31% is “equivalent” to 4% and 0% is “equivalent” to 3.33% SWR, how does one calculate the “equivalent” for various TIPS yield. For instance take 0.6% yield, what “SWR” will make this last 30 years?


Third question... Currently If one were to build a 30 year TIPS ladder in real life, what is the “average” yield (although average yield in real life most likely doesn’t guarantee a constant WR adjusted to inflation last 30 years) for such a ladder? May need #cruncher for this :D

dbr
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by dbr » Mon Apr 15, 2019 8:13 am

gilgamesh wrote:
Mon Apr 15, 2019 6:46 am

Second question...if 1.31% is “equivalent” to 4% and 0% is “equivalent” to 3.33% SWR, how does one calculate the “equivalent” for various TIPS yield. For instance take 0.6% yield, what “SWR” will make this last 30 years?

I think I used the PMT function to do this. RATE does the same math. The answer for 0.50% real in my table is 3.6% withdrawal rate. 3.3% at 0.00% real, etc.

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by AlohaJoe » Mon Apr 15, 2019 9:31 am

gilgamesh wrote:
Mon Apr 15, 2019 6:46 am
Second question...if 1.31% is “equivalent” to 4% and 0% is “equivalent” to 3.33% SWR, how does one calculate the “equivalent” for various TIPS yield. For instance take 0.6% yield, what “SWR” will make this last 30 years?
As dbr said, you can use the PMT spreadsheet function. The NPER function is the other one that's useful.

"How long would my portfolio of $925,000 last if I pulled out $42,000 a year and it was all invested in TIPS with a real yield of 0.95%?"

Code: Select all

=NPER(0.95%, -42000, 925000, 0, 1)
=24.56399859
24 and a half years.

Or, for your question,

Code: Select all

=PMT(0.6%, 30, 100, 0, 1)
=-0.0363
3.63%

Topic Author
gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 10:08 am

AlohaJoe wrote:
Mon Apr 15, 2019 9:31 am
gilgamesh wrote:
Mon Apr 15, 2019 6:46 am
Second question...if 1.31% is “equivalent” to 4% and 0% is “equivalent” to 3.33% SWR, how does one calculate the “equivalent” for various TIPS yield. For instance take 0.6% yield, what “SWR” will make this last 30 years?
As dbr said, you can use the PMT spreadsheet function. The NPER function is the other one that's useful.

"How long would my portfolio of $925,000 last if I pulled out $42,000 a year and it was all invested in TIPS with a real yield of 0.95%?"

Code: Select all

=NPER(0.95%, -42000, 925000, 0, 1)
=24.56399859
24 and a half years.

Or, for your question,

Code: Select all

=PMT(0.6%, 30, 100, 0, 1)
=-0.0363
3.63%
Thanks...I have never used a spreadsheet, so that's an issue. If #cruncher ever runs the current yield scenario, I would guess the 'break-even' the way I am looking will be around 3.6%.

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by AlohaJoe » Mon Apr 15, 2019 10:13 am

gilgamesh wrote:
Mon Apr 15, 2019 10:08 am
Thanks...I have never used a spreadsheet, so that's an issue. If #cruncher ever runs the current yield scenario, I would guess the 'break-even' the way I am looking will be around 3.6%.
The same functions -- PMT, NPER, and RATE -- also exist on every financial calculator ever made. Every platform -- Windows, Mac, Linux, iOS, Android, etc -- has financial calculators that you can download for free. You can also find lots of web pages that will do the calculations for you as well. Here's a random one I found for NPER: http://www.endmemo.com/financial/nper.php

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Phineas J. Whoopee
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by Phineas J. Whoopee » Mon Apr 15, 2019 1:16 pm

Ain't none.

Four percent was an empirical result, based on examining past returns and inflation. It was the highest rate, four percent of the initial portfolio adjusted for inflation each subsequent year, which in the worst examined historical case resulted in complete depletion of the portfolio after thirty years but not before. The study examined several asset allocations. Toward the mid ranges it made little difference.

It was a response to claims that seven percent would get the job done for three decades. It wouldn't have.

Nothing guarantees thirty year portfolio survival, and even the original study didn't insist there would be anything left after thirty years.

Four percent is a planning strategy, not a spending tactic.

PJW

FactualFran
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by FactualFran » Mon Apr 15, 2019 1:52 pm

gilgamesh wrote:
Mon Apr 15, 2019 6:46 am
AlohaJoe wrote:
Sun Apr 14, 2019 8:59 pm
I didn't quite follow all of your math or what it was trying to show...but I think it is a lot simpler than what you're doing.

Use the RATE function in a spreadsheet

Code: Select all

=rate(30, -4, 100, 0, 1)
=1.31%
That's 1.31% real for the entire portfolio. Right now, TIPS are much lower than that, 0.95% at 30-years and less for shorter maturities.
This sounds about right to me...and average is good enough. I assume the extra yield is used to purchase another TIPS as late as possible, so after year 1 we buy a 29 year TIPS (in the secondary market) and on the second year the excess is used to buy a 28 year TIPS and so forth, right?
There is no extra yield involved in the value returned by the rate function. The value returned is the constant annual inflation-adjusted rate of return an investment would need to have for the investment to support annual inflation-adjusted withdrawals for 30 years with the initial withdrawal being 4% of the starting balance.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 2:01 pm

FactualFran wrote:
Mon Apr 15, 2019 1:52 pm
gilgamesh wrote:
Mon Apr 15, 2019 6:46 am
AlohaJoe wrote:
Sun Apr 14, 2019 8:59 pm
I didn't quite follow all of your math or what it was trying to show...but I think it is a lot simpler than what you're doing.

Use the RATE function in a spreadsheet

Code: Select all

=rate(30, -4, 100, 0, 1)
=1.31%
That's 1.31% real for the entire portfolio. Right now, TIPS are much lower than that, 0.95% at 30-years and less for shorter maturities.
This sounds about right to me...and average is good enough. I assume the extra yield is used to purchase another TIPS as late as possible, so after year 1 we buy a 29 year TIPS (in the secondary market) and on the second year the excess is used to buy a 28 year TIPS and so forth, right?
There is no extra yield involved in the value returned by the rate function. The value returned is the constant annual inflation-adjusted rate of return an investment would need to have for the investment to support annual inflation-adjusted withdrawals for 30 years with the initial withdrawal being 4% of the starting balance.
If inflation is zero for year 1, then @ maturity one rung of the 30 year TIPS ladder pays $4, but the average 1.31% yield also pays $1.31. So, don't we have $5.31 at the end of year 1 and that extra $1.31 has to be re-invested?

FactualFran
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by FactualFran » Mon Apr 15, 2019 3:02 pm

gilgamesh wrote:
Mon Apr 15, 2019 2:01 pm
FactualFran wrote:
Mon Apr 15, 2019 1:52 pm
There is no extra yield involved in the value returned by the rate function. The value returned is the constant annual inflation-adjusted rate of return an investment would need to have for the investment to support annual inflation-adjusted withdrawals for 30 years with the initial withdrawal being 4% of the starting balance.
If inflation is zero for year 1, then @ the end of the year one rung of the 30 year TIPS ladder matures to pay $4, but the average 1.31% yield pays $1.31 also. So, don't we have $5.31 at the end of year 1 and that extra $1.31 has to be re-invested?
I don't understand the hypothetical bond ladder. If each of the 30 rungs has a principal of $4, then the entire ladder has a principal of $120. Interest payments of $1.31 from the ladder indicates an average coupon rate of 1.09% (=1.31/120).

Someone who
  • started with $10,000,
  • took $400 from it,
  • invested the remaining $9,600,
  • had a 1.31% return on the investment for year 1 (the value returned by the rate function adjusted by the presumed inflation of zero for the year),
would have had at the end of 1 an account with a balance of $9,726.

$400 would be withdrawn from that balance for year 2 (the same as the initial withdrawal because the presumed inflation was zero). If the annual return adjusted for inflation continued to be 1.31% and the annual withdrawal continued to be adjusted for inflation, then the account would be depleted in exactly 30 years.

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by Ketawa » Mon Apr 15, 2019 3:09 pm

gilgamesh wrote:
Mon Apr 15, 2019 2:01 pm
If inflation is zero for year 1, then @ maturity one rung of the 30 year TIPS ladder pays $4, but the average 1.31% yield also pays $1.31. So, don't we have $5.31 at the end of year 1 and that extra $1.31 has to be re-invested?
Technically, it is $4 taken out at the start, year 0. Then $96 invested at 1.31% yield. Then take out $4. Repeat. No need to think about rungs or reinvestment of interest, just imagine that the TIPS yield curve is flat and you can exchange any TIPS for any others with different maturities earning the same yield.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 3:23 pm

FactualFran wrote:
Mon Apr 15, 2019 3:02 pm
gilgamesh wrote:
Mon Apr 15, 2019 2:01 pm
FactualFran wrote:
Mon Apr 15, 2019 1:52 pm
There is no extra yield involved in the value returned by the rate function. The value returned is the constant annual inflation-adjusted rate of return an investment would need to have for the investment to support annual inflation-adjusted withdrawals for 30 years with the initial withdrawal being 4% of the starting balance.
If inflation is zero for year 1, then @ the end of the year one rung of the 30 year TIPS ladder matures to pay $4, but the average 1.31% yield pays $1.31 also. So, don't we have $5.31 at the end of year 1 and that extra $1.31 has to be re-invested?
I don't understand the hypothetical bond ladder. If each of the 30 rungs has a principal of $4, then the entire ladder has a principal of $120. Interest payments of $1.31 from the ladder indicates an average coupon rate of 1.09% (=1.31/120).

Someone who
  • started with $10,000,
  • took $400 from it,
  • invested the remaining $9,600,
  • had a 1.31% return on the investment for year 1 (the value returned by the rate function adjusted by the presumed inflation of zero for the year),
would have had at the end of 1 an account with a balance of $9,726.

$400 would be withdrawn from that balance for year 2 (the same as the initial withdrawal because the presumed inflation was zero). If the annual return adjusted for inflation continued to be 1.31% and the annual withdrawal continued to be adjusted for inflation, then the account would be depleted in exactly 30 years.
Sorry, I made a mistake with my question...but you still answered it.

I should have said the principal to be $3.33 and interest payment of $1.31 for a total of $4.64...0.64 more than needed. I also didn't take $4 out first. You are right...there is no $120, only $100.

Going by your example, out of that $9726, $126 is outside of TIPS sitting as cash. Shouldn't one buy another TIPS with the same 1.31% return? that's what I meant by having to buy further TIPS at the same rate that matures on the final year?

Thanks!

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 3:27 pm

Ketawa wrote:
Mon Apr 15, 2019 3:09 pm
gilgamesh wrote:
Mon Apr 15, 2019 2:01 pm
If inflation is zero for year 1, then @ maturity one rung of the 30 year TIPS ladder pays $4, but the average 1.31% yield also pays $1.31. So, don't we have $5.31 at the end of year 1 and that extra $1.31 has to be re-invested?
Technically, it is $4 taken out at the start, year 0. Then $96 invested at 1.31% yield. Then take out $4. Repeat. No need to think about rungs or reinvestment of interest, just imagine that the TIPS yield curve is flat and you can exchange any TIPS for any others with different maturities earning the same yield.
By the same token the yield in cash can be used to purchase any TIPS earning the same yield...yup! that completes the picture. it doesn't matter what maturity the cash buys.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 4:01 pm

Now that the arithmetic is done, it helps me visualize parts of an entire puzzle...

If current 30 year TIPS ladder average yield corresponds to 3.6% withdrawal and I use 66% of my portfolio to build one. Say I can increase stock exposure on the remaining 34% and have a SWR of 4.2%, then the average equivalent SWR is ~3.8%....helps me visualize part of the cost.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 4:05 pm

I know #cruncher has a spread sheet that can analyze any complicated 30 year TIPS ladder to the last $1...it'd be neat to know what the current equivalent SWR on a 30 year TIPS ladder is

Although for planning purposes it will have very little to no effect.

dbr
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by dbr » Mon Apr 15, 2019 5:46 pm

gilgamesh wrote:
Mon Apr 15, 2019 4:01 pm
Now that the arithmetic is done, it helps me visualize parts of an entire puzzle...

If current 30 year TIPS ladder average yield corresponds to 3.6% withdrawal and I use 66% of my portfolio to build one. Say I can increase stock exposure on the remaining 34% and have a SWR of 4.2%, then the average equivalent SWR is ~3.8%....helps me visualize part of the cost.
SWR is too uncertain a thing to start parsing things down to tenths of a %. Also after about 50/50 there probably is not an increase in SWR with stock allocation -- it actually goes down a little at high stock. If you are getting out of the coffin corner at less than 30% stock that would be different, but then that takes you up to 3.5%-4.0% not higher (and there am I parsing tenths).

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by Horton » Mon Apr 15, 2019 6:24 pm

Check out the TIPS Ladder Builder spreadsheet at the link below. You can enter the current real yield curve to give you an idea of the replacement rate for a 30 year stream of payments. I think it would be on the order of 3.7-3.8%. You could play around with the rates or use the goal seek function to find what would generate a 4% withdrawal rate.

https://www.flexibleretirementplanner.c ... nal-tools/

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 7:05 pm

dbr wrote:
Mon Apr 15, 2019 5:46 pm
gilgamesh wrote:
Mon Apr 15, 2019 4:01 pm
Now that the arithmetic is done, it helps me visualize parts of an entire puzzle...

If current 30 year TIPS ladder average yield corresponds to 3.6% withdrawal and I use 66% of my portfolio to build one. Say I can increase stock exposure on the remaining 34% and have a SWR of 4.2%, then the average equivalent SWR is ~3.8%....helps me visualize part of the cost.
SWR is too uncertain a thing to start parsing things down to tenths of a %. Also after about 50/50 there probably is not an increase in SWR with stock allocation -- it actually goes down a little at high stock. If you are getting out of the coffin corner at less than 30% stock that would be different, but then that takes you up to 3.5%-4.0% not higher (and there am I parsing tenths).
Yeah! I agree...the typical consensus is, even a pseudo LMP requires a large nest egg compared to other concepts...it is not, as the difference is in 10ths - hardly worthntalking about.

However, after 50/50 there’s some increase in SWR survival percentage...the 5th post here shows a table
viewtopic.php?t=273181
Last edited by gilgamesh on Mon Apr 15, 2019 7:49 pm, edited 3 times in total.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Mon Apr 15, 2019 7:06 pm

Horton wrote:
Mon Apr 15, 2019 6:24 pm
Check out the TIPS Ladder Builder spreadsheet at the link below. You can enter the current real yield curve to give you an idea of the replacement rate for a 30 year stream of payments. I think it would be on the order of 3.7-3.8%. You could play around with the rates or use the goal seek function to find what would generate a 4% withdrawal rate.

https://www.flexibleretirementplanner.c ... nal-tools/
This is very nice...never saw that before. I will play around with it. Thanks!

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by #Cruncher » Mon Apr 15, 2019 11:05 pm

gilgamesh wrote:
Mon Apr 15, 2019 4:05 pm
I know #cruncher has a spread sheet that can analyze any complicated 30 year TIPS ladder to the last $1...it'd be neat to know what the current equivalent SWR on a 30 year TIPS ladder is
The latest published version of my TIPS Ladder Builder spreadsheet using WSJ TIPS Quotes 2/22/2019 shows a 2020 - 2049 30-year 30,000 constant dollar / year ladder would cost $787,000. This corresponds to a 3.8% withdrawal rate. Using today's WSJ TIPS Quotes 4/15/2019 the cost rises a bit to $797,000 -- still a withdrawal rate of about 3.8%.

Phineas J. Whoopee wrote:
Mon Apr 15, 2019 1:16 pm
Nothing guarantees thirty year portfolio survival, ...
Short of government default, a TIPS ladder has only a minor risk of not providing a constant dollar withdrawal every year. This minor risk is for the gap years 2030, 2031, and 2033 - 2039 when no TIPS mature. By default the spreadsheet covers these years with extra purchases of the
  • April 2029 to cover the years 2030 - 2031.
  • April 2032 to cover the years 2033 - 2036.
  • February 2040 to cover the years 2037 - 2039.
The only risks are
  • The extra TIPS maturing in 2029 can't be reinvested at a 0% real yield or better to mature in 2030 - 2031.
  • The extra TIPS maturing in 2032 can't be reinvested at a 0% real yield or better to mature in 2033 - 2036.
  • The extra TIPS maturing in 2040 can't be sold at par or better in 2037 - 2039.

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by AlohaJoe » Mon Apr 15, 2019 11:56 pm

#Cruncher wrote:
Mon Apr 15, 2019 11:05 pm
The only risks are
  • The extra TIPS maturing in 2029 can't be reinvested at a 0% real yield or better to mature in 2030 - 2031.
  • The extra TIPS maturing in 2032 can't be reinvested at a 0% real yield or better to mature in 2033 - 2036.
  • The extra TIPS maturing in 2040 can't be sold at par or better in 2037 - 2039.
I don't know how liquid the TIPS secondary market is but it seems like the risk is even smaller than that already small risk, since you could always cash in the 2029 TIPS & reinvest it early if the current market conditions are suitable. e.g. if you are afraid that yields in 2029 will be negative you could sell your 2029 TIPS in 2020 and buy a new issue 10-year TIPS that matures in 2030.

Assuming the secondary market is pretty decent it seems like the risk is actually something more like "real yields are low enough every year from now until 2029, that you never have a chance to 'early reinvest' your 2029 TIPS".

I guess you'd probably want a spreadsheet to help you decide whether that made sense or not.

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gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Tue Apr 16, 2019 7:42 am

#Cruncher wrote:
Mon Apr 15, 2019 11:05 pm
gilgamesh wrote:
Mon Apr 15, 2019 4:05 pm
I know #cruncher has a spread sheet that can analyze any complicated 30 year TIPS ladder to the last $1...it'd be neat to know what the current equivalent SWR on a 30 year TIPS ladder is
The latest published version of my TIPS Ladder Builder spreadsheet using WSJ TIPS Quotes 2/22/2019 shows a 2020 - 2049 30-year 30,000 constant dollar / year ladder would cost $787,000. This corresponds to a 3.8% withdrawal rate. Using today's WSJ TIPS Quotes 4/15/2019 the cost rises a bit to $797,000 -- still a withdrawal rate of about 3.8%.

Thanks!...3.8% it is then.

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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by FactualFran » Tue Apr 16, 2019 1:50 pm

gilgamesh wrote:
Mon Apr 15, 2019 3:23 pm
Going by your example, out of that $9726, $126 is outside of TIPS sitting as cash. Shouldn't one buy another TIPS with the same 1.31% return? that's what I meant by having to buy further TIPS at the same rate that matures on the final year?
The example I gave did not specifically involve TIPS. It involved an investment with a constant inflation-adjusted return. That is not a realistic situation. It is even less realistic with a TIPS ladder.

Rungs of a TIPS ladder are bought and sold in units of $1,000 of par value, rather than in terms any dollar amount, which can be done with a mutual fund, perhaps with a minimum amount specific to the fund. Rungs of a TIPS ladder mature and the maturity amount is included in the withdrawal amount as used in a withdrawal rate study. Rungs of a TIPS ladder make coupon payments and the coupon payments somehow end up being including in the periodic withdrawal amount.

Ignoring the detailedl characteristics of a TIPS ladder, if TIPS were available with a range of maturities of 1 to 29 years, they all had a yield of 1.31%, and the coupon payments could be invested in a TIPS with the same maturity and the same yield, then it would be possible to take the initial $9,600 to be invested (from the example) and split it unevenly between the rungs of the bond ladder by putting
  • $394.83 (=$400/1.0131)) in a TIPS maturing in 1 year,
  • $389.72 (=$400/1.0131^2) in a TIPS maturing in 2 years,
  • $384.68 (=$400/1.0131^3) in a TIPS maturing in 3 years, and so on to
  • $274.25 (=$400/1.0131^29) in a TIPS maturing in 29 years.
The maturity value of each rung, consisting of original principal plus reinvested coupon payments, would be $400 adjusted for inflation.

Topic Author
gilgamesh
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Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Tue Apr 16, 2019 2:45 pm

FactualFran wrote:
Tue Apr 16, 2019 1:50 pm
gilgamesh wrote:
Mon Apr 15, 2019 3:23 pm
Going by your example, out of that $9726, $126 is outside of TIPS sitting as cash. Shouldn't one buy another TIPS with the same 1.31% return? that's what I meant by having to buy further TIPS at the same rate that matures on the final year?
.....
Ignoring the detailedl characteristics of a TIPS ladder, if TIPS were available with a range of maturities of 1 to 29 years, they all had a yield of 1.31%, and the coupon payments could be invested in a TIPS with the same maturity and the same yield, then it would be possible to take the initial $9,600 to be invested (from the example) and split it unevenly between the rungs of the bond ladder by putting
  • $394.83 (=$400/1.0131)) in a TIPS maturing in 1 year,
  • $389.72 (=$400/1.0131^2) in a TIPS maturing in 2 years,
  • $384.68 (=$400/1.0131^3) in a TIPS maturing in 3 years, and so on to
  • $274.25 (=$400/1.0131^29) in a TIPS maturing in 29 years.
The maturity value of each rung, consisting of original principal plus reinvested coupon payments, would be $400 adjusted for inflation.
Neat!

Topic Author
gilgamesh
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Joined: Sun Jan 10, 2016 9:29 am

Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Wed Apr 17, 2019 7:08 am

The corollary is that, the worst 30 year average real return, factoring ‘sequence risk’ is 1.31% for the Bengen AA, yikes!... 2.69% is return of principal.

Isn’t that right?
Last edited by gilgamesh on Wed Apr 17, 2019 12:35 pm, edited 1 time in total.

Topic Author
gilgamesh
Posts: 1328
Joined: Sun Jan 10, 2016 9:29 am

Re: What TIPS yield is equivalent to 4% SWR but guarantees 30 year portfolio survival?

Post by gilgamesh » Wed Apr 17, 2019 8:06 am

So, annual real income from TIPS vs SWR isn’t the big issue...after all, above 1.31% average TIPS yield, an AA with TIPS floor will support a higher annual income than what a 4% SWR applied to the whole portfolio will support.

The bigger issue is the fact we are guaranteed to be left with zero dollars at the end of 30 years for the TIPS side of the portfolio, where as 75% of the times a 4% SWR leaves a balance twice the starting principal etc.

Is this a decent way to approximate that “loss” for the overall portfolio (TIPS floor plus side portfolio)?

4% is the SWR based on worst 30 year period. 6.6% is the SWR based on average returns.
https://www.kitces.com/blog/safe-withdr ... p-reviews/

6.6% SWR corresponds to 5.62% average real return factoring sequence risk.

Current SWR for TIPS is 3.8% corresponding to an average return factoring sequence risk of 0.93%

If portfolio is 50% TIPS ladder and the other 50% the same AA as Trinity study, then the average return factoring sequence risk for that portfolio is 3.275%

This means the TIPS floor about halves the final balance after 30 years based on average performances. (A $100 grows to $515 @5.62% & 263 @3.3%)

Is there a better/alternative approximation method to quantify the average reduction in the end balance @ 30 years, with a TIPS floor? Thanks!

***lifetime ruin probability (LRP)***

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