Bonds for Retirement

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Topic Author
UberGrub
Posts: 75
Joined: Wed Aug 21, 2019 3:47 pm

Bonds for Retirement

Post by UberGrub » Thu Nov 07, 2019 1:17 pm

Hello,
Right now the difference between TIPs and nominal bonds is basically our current inflation. So inflation protection seems to be pretty cheap.
If you're in retirement, should all of your IT and LT bonds be in TIPs form (ST should track inflation fine) then?

That way you'd have protection from unanticipated inflation.

Or should you still keep some in nominal to protect against deflation? Is unanticipated deflation even much of a risk you should protect against in retirement?

Thank you for the help.

dbr
Posts: 30542
Joined: Sun Mar 04, 2007 9:50 am

Re: Bonds for Retirement

Post by dbr » Thu Nov 07, 2019 1:58 pm

The argument can be made that any bond should be inflation indexed. A result is that the only bonds available are Treasuries which occupy a tiny corner of the bond market hence are not diversified, if that matters. TIPS and I bonds are the only explicitly inflation indexed investment available in the US though SS and some pensions or annuities are inflation indexed. It might be better to focus on inflation indexed income streams rather than inflation indexed investments, for example by delaying SS claim as long as possible.

I think in reality the investor has to assess how large a risk unanticipated inflation is to him. Probably an accumulating investor largely invested in stocks at an early age does not need to worry about the inflation indexing of bonds. A person who chooses to fund retirement using a liquidating bond ladder would be a fool not to use only TIPS excepting perhaps an inflation indexed annuity would be a better choice.

KlangFool
Posts: 13941
Joined: Sat Oct 11, 2008 12:35 pm

Re: Bonds for Retirement

Post by KlangFool » Thu Nov 07, 2019 2:03 pm

OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool

Topic Author
UberGrub
Posts: 75
Joined: Wed Aug 21, 2019 3:47 pm

Re: Bonds for Retirement

Post by UberGrub » Thu Nov 07, 2019 2:09 pm

dbr wrote:
Thu Nov 07, 2019 1:58 pm
A person who chooses to fund retirement using a liquidating bond ladder would be a fool not to use only TIPS excepting perhaps an inflation indexed annuity would be a better choice.
Yes that makes sense. It's what I was thinking. Thanks.

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SimpleGift
Posts: 3395
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Bonds for Retirement

Post by SimpleGift » Thu Nov 07, 2019 2:38 pm

Even if one does not use a liquidating bond ladder, a retiree with more than 50% bonds in their portfolio (in orange, chart below) is certainly more exposed to unexpected inflation risk than those with higher stock allocations — and thus might consider adding inflation-indexed bonds to their nominal bond allocation.
  • Image
    Note: From a Forum poll in 2015, n = 217.
    Source: Bogleheads
In historical periods of high unexpected inflation like the oil shocks of the 1970s, both stocks and nominal bonds suffered mightily — and inflation-indexed bonds (had they been available) would have been one of the few asset classes to shine. Just my two cents.

pascalwager
Posts: 1548
Joined: Mon Oct 31, 2011 8:36 pm

Re: Bonds for Retirement

Post by pascalwager » Thu Nov 07, 2019 2:47 pm

KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
I don't know what stocks are going to do at any given time. Yes, they could eventually rise; but even so, I don't want my bonds to degrade when inflation-protected versions are readily available.

KlangFool
Posts: 13941
Joined: Sat Oct 11, 2008 12:35 pm

Re: Bonds for Retirement

Post by KlangFool » Thu Nov 07, 2019 2:56 pm

pascalwager wrote:
Thu Nov 07, 2019 2:47 pm
KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
I don't know what stocks are going to do at any given time. Yes, they could eventually rise; but even so, I don't want my bonds to degrade when inflation-protected versions are readily available.
pascalwager,

1) Why do you think that is a good idea?

2) Why do you think that will work?

3) I keep my 30 years fixed 3.49% mortgage for inflation protection.

4) My plan is to keep 10 years of expense in bond/fixed income. If the stock does not beat inflation for 10 years, we have a bigger problem than the bond degrading.

I really want to learn and understand why this will work. So, please educate me.

KlangFool

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Phineas J. Whoopee
Posts: 8690
Joined: Sun Dec 18, 2011 6:18 pm

Re: Bonds for Retirement

Post by Phineas J. Whoopee » Thu Nov 07, 2019 4:02 pm

My analysis of my own portfolio and life prospects, not something somebody sold me but my analysis for myself, shows the greatest long-term investing risk I face is inflation, but it is not the only risk.

Here's my asset allocation, which of course I will revisit periodically but I think it will get the job done the way it is:

25% Total US Stock
15% Total International Stock
40% inflation-linked fixed income
20% nominal fixed income.

This is what I did and why, and a couple of years later I answered some questions about it.

For the record, I think an age-based asset allocation will be far easier for most investors to commit to and carry out.

PJW

pascalwager
Posts: 1548
Joined: Mon Oct 31, 2011 8:36 pm

Re: Bonds for Retirement

Post by pascalwager » Thu Nov 07, 2019 4:48 pm

KlangFool wrote:
Thu Nov 07, 2019 2:56 pm
pascalwager wrote:
Thu Nov 07, 2019 2:47 pm
KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
I don't know what stocks are going to do at any given time. Yes, they could eventually rise; but even so, I don't want my bonds to degrade when inflation-protected versions are readily available.
pascalwager,

1) Why do you think that is a good idea?

2) Why do you think that will work?

3) I keep my 30 years fixed 3.49% mortgage for inflation protection.

4) My plan is to keep 10 years of expense in bond/fixed income. If the stock does not beat inflation for 10 years, we have a bigger problem than the bond degrading.

I really want to learn and understand why this will work. So, please educate me.

KlangFool
As I recall, the US stock market annualized return was negative for a decade following Y2k. It will work and is a good idea because my fixed income will be protected from inflation--no matter what stocks do.

KlangFool
Posts: 13941
Joined: Sat Oct 11, 2008 12:35 pm

Re: Bonds for Retirement

Post by KlangFool » Thu Nov 07, 2019 5:07 pm

pascalwager wrote:
Thu Nov 07, 2019 4:48 pm
KlangFool wrote:
Thu Nov 07, 2019 2:56 pm
pascalwager wrote:
Thu Nov 07, 2019 2:47 pm
KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
I don't know what stocks are going to do at any given time. Yes, they could eventually rise; but even so, I don't want my bonds to degrade when inflation-protected versions are readily available.
pascalwager,

1) Why do you think that is a good idea?

2) Why do you think that will work?

3) I keep my 30 years fixed 3.49% mortgage for inflation protection.

4) My plan is to keep 10 years of expense in bond/fixed income. If the stock does not beat inflation for 10 years, we have a bigger problem than the bond degrading.

I really want to learn and understand why this will work. So, please educate me.

KlangFool
As I recall, the US stock market annualized return was negative for a decade following Y2k. It will work and is a good idea because my fixed income will be protected from inflation--no matter what stocks do.
pascalwager,

Okay. Thanks.

KlangFool

andrew99999
Posts: 509
Joined: Fri Jul 13, 2018 8:14 pm

Re: Bonds for Retirement

Post by andrew99999 » Fri Nov 08, 2019 3:27 am

KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
Couple of quick questions about cash -

When you say cash, can I assume you are talking about high interest savings account?

What figure (years of expenses or portfolio percentage) do you have in mind for this once you hit retirement?
PassiveInvestingAustralia.com

KlangFool
Posts: 13941
Joined: Sat Oct 11, 2008 12:35 pm

Re: Bonds for Retirement

Post by KlangFool » Fri Nov 08, 2019 8:00 am

andrew99999 wrote:
Fri Nov 08, 2019 3:27 am
KlangFool wrote:
Thu Nov 07, 2019 2:03 pm
OP,

1) I use stock to protect against inflation. I do not use a bond for that.

2) I use cash to protect against deflation.

3) I use gold jewelry to protect against hyperinflation.

So, I do not understand why do you think you need to use the bond to protect against inflation. What is your AA? Is it 100% in bond?

KlangFool
Couple of quick questions about cash -

When you say cash, can I assume you are talking about high interest savings account?

What figure (years of expenses or portfolio percentage) do you have in mind for this once you hit retirement?
1) checking account and MMA.

2) The plan is to increase to 2 years.

KlangFool

hudson
Posts: 1961
Joined: Fri Apr 06, 2007 9:15 am

Inflation Protection

Post by hudson » Fri Nov 08, 2019 10:48 am

UberGrub wrote:
Thu Nov 07, 2019 1:17 pm
Hello,
Right now the difference between TIPs and nominal bonds is basically our current inflation. So inflation protection seems to be pretty cheap.
If you're in retirement, should all of your IT and LT bonds be in TIPs form (ST should track inflation fine) then?

That way you'd have protection from unanticipated inflation.

Or should you still keep some in nominal to protect against deflation? Is unanticipated deflation even much of a risk you should protect against in retirement?

Thank you for the help.
These are just my un-expert thoughts.

I like TIPS but they aren't paying enough. The Sep. 2019 inflation rate was 1.7%.
I'm retired; my portfolio is fixed income heavy.
I like intermediate CDs and Intermediate funds that pay out around 3%.
I like CDs because they are predictable.
I think that having a mortgage could be inflation protection. That worked for me in the 70s; but I'm not going to borrow any more money.
My Social Security is inflation protected. My pension is somewhat protected...sometimes.
Stocks give me heartburn; I'm not sure that they protect against inflation.
I'm not frugal but I can easily cut the non-essentials...is that inflation protection?
I used to be about 20% in the Vanguard TIPS fund; If I become convinced that that's a good thing, I could go back in a day....but I'd have to pay capital gains on my current holding.
I don't know how to protect from deflation.
Right now, I like where I am. If major changes come, I'll just take the hit and adjust the sails.

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