Behavior of TIPS versus Treasuries in March

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Northern Flicker
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Re: Possible Move from CDs to TIPS in 2024

Post by Northern Flicker »

vineviz wrote: Wed Jul 22, 2020 7:54 am
Elysium wrote: Wed Jul 22, 2020 7:00 am If you must hold TIPS fund, then at that age I would consider Vanguard Short Term TIPS fund instead of interm-term or longer. They will have lower returns but will closely match inflation, and given current real yields you can expect them to return inflation matching, which is why you would own TIPS anyway, and the real returns is a bonus which unfortunately we do not have at this time. This will meet your spending needs in near term without worrying about losing to inflation. Not so great may be, but not so bad either.
This approach also exposes the investor to considerably more interest rate risk.

It essentially amounts to a speculative bet that real interest rates will go up from here: accepting a lower real yield now in hope for higher real yields later on. Whether such market speculation is desirable or not is up to the investor, but I think it's important to understand that the bet is being placed.
On the other hand, the longer duration TIPS fund exposes a retiree to more liquidity risk and term risk. What matters is not the particular fund(s) as the duration of the combined portfolio.

The main problem with a TIPS ladder is the difficulty in building it because of the limited maturities available. If you have an 10-year rolling ladder to cover 30 years of expenses then the duration is about 5.5 years and the reinvestment risk from falling rates is not particularly different from an intermediate TIPS fund.
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vineviz
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Re: Possible Move from CDs to TIPS in 2024

Post by vineviz »

Northern Flicker wrote: Thu Jul 23, 2020 3:02 pm On the other hand, the longer duration TIPS fund exposes a retiree to more liquidity risk and term risk. What matters is not the particular fund(s) as the duration of the combined portfolio.
On the contrary, matching the bond duration to the investment horizon reduces term risk and - as we already discussed - the so-called "liquidity risk' is essentially a red herring.
Northern Flicker wrote: Thu Jul 23, 2020 3:02 pmThe main problem with a TIPS ladder is the difficulty in building it because of the limited maturities available. If you have an 10-year rolling ladder to cover 30 years of expenses then the duration is about 5.5 years and the reinvestment risk from falling rates is not particularly different from an intermediate TIPS fund.
So don't build a rolling ladder: a non-rolling ladder of individual TIPS offers the perfect opportunity for retirees to match their future consumption patter with bond cash flows, eliminating both interest rate risk and inflation risk for whatever portion of their retirement income they want to be risk-free.
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Re: Possible Move from CDs to TIPS in 2024

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vineviz wrote: Thu Jul 23, 2020 5:14 pm So don't build a rolling ladder: a non-rolling ladder of individual TIPS offers the perfect opportunity for retirees to match their future consumption patter with bond cash flows, eliminating both interest rate risk and inflation risk for whatever portion of their retirement income they want to be risk-free.
I agree with you. 8-)

That said, while I do use an LMP/RP strategy, I do it with a healthy appreciation of the unknowns in my future consumption patterns. Sure, I can use current expenditures to predict essential living expenses. From this I can subtract expected SS for DW and I to arrive at a base target. That said, I see two major sources of "lumpiness." First is the age at which the first spouse dies and the monthly social security income drops, while tax rates increase. Second is the unknowable costs of LTC. I can look at statistics and reasonably conclude that funds to cover ten years (combined) of SNF at $100K per year "should" be sufficient, so add $1M to LMP to cover that (I'm just pulling round numbers out of the air here to illustrate a point). When will it occur? Will the first spouse still be around and generate household expenses in parallel with the SNF fees? Who knows. Could be age 75, could be age 95, or anywhere else. That's why I just use a ten year rolling ladder. Sure, it introduces reinvestment risk, but what are we talking about? Maybe a percent or two on an annual basis rolled in over ten years? I can live with that.
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Northern Flicker
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Re: Possible Move from CDs to TIPS in 2024

Post by Northern Flicker »

vineviz wrote: Thu Jul 23, 2020 5:14 pm
Northern Flicker wrote: Thu Jul 23, 2020 3:02 pm On the other hand, the longer duration TIPS fund exposes a retiree to more liquidity risk and term risk. What matters is not the particular fund(s) as the duration of the combined portfolio.
On the contrary, matching the bond duration to the investment horizon reduces term risk and - as we already discussed - the so-called "liquidity risk' is essentially a red herring.
I get it. Because it is a law of the universe that once you decide what your 30-year or N-year (for some N) schedule of expenses will be, there is absolutely no possibility of anything causing the rate at which you incur expenses to be accelerated (duration of liabilities to be shortened). Based on this law, the duration of your TIPS portfolio will be absolutely guaranteed to match the duration of your liabilities, so you won't ever be taking any term risk or liquidity risk with the strategy. Crystal clear.

I'm not ssying it is a bad strategy, but let's not gloss over the risks with hidden assumptions.
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Re: Possible Move from CDs to TIPS in 2024

Post by vineviz »

Northern Flicker wrote: Fri Jul 24, 2020 1:21 am
I get it. Because it is a law of the universe that once you decide what your 30-year or N-year (for some N) schedule of expenses will be, there is absolutely no possibility of anything causing the rate at which you incur expenses to be accelerated (duration of liabilities to be shortened).
Obviously it's possible for investors to misestimate duration and/or magnitude of their future expenses, but that has nothing to do with interest rate risk.

Financial planning requires making decisions in the face of uncertainty, and one key to doing that successfully is avoiding overconfidence in our assumptions, models, and forecasts. Of course our expectations about future expenses can change, which is why we build in adaptability and resiliency to our plans. But another key to successful financial planning is a focus on controlling the major risks that are controllable. Both interest rate risk and inflation risk are at least partly (and often mostly) controllable risks for most investors.
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

Obviously it's possible for investors to misestimate duration and/or magnitude of their future expenses, but that has nothing to do with interest rate risk.
Example: a married couple, both same age retires and by age 70, assets are in a 30-year TIPS ladder designed to supplement the SS they delayed to age 70, and the combination was designed to be sufficient to meet conservatively projected expenses.

But a health event leads to one of them dying at age 80 after 5 years of high long-term care expenses that well exceed the liquidity from maturing bonds and interest payments from the TIPS ladder. The total outlay of assets over this individual's lifespan does not increase, but what was projected as 25-30 years of expenses may now be compressed into 5 years, a much shorter duration that invalidates the term risk immunity from matching the duration of liabilities and assets.

To meet expenses, they would need to sell bonds with an aggregate duration greater than the short term duration of the LTC expenses, exposing those bonds to significant interest rate risk and liquidity risk.
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vineviz
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

Northern Flicker wrote: Fri Jul 24, 2020 1:25 pm
To meet expenses, they would need to sell bonds with an aggregate duration greater than the short term duration of the LTC expenses, exposing those bonds to significant interest rate risk and liquidity risk.
Building strawman arguments isn't going to change the fact that you're using the name of a concept ("interest rate risk") to refer to something that is a completely different concept.

It's equivalent to complaining that your health insurance won't cover the cost of rebuilding the transmission in your car.
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Northern Flicker
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

vineviz wrote: Fri Jul 24, 2020 1:33 pm
Northern Flicker wrote: Fri Jul 24, 2020 1:25 pm
To meet expenses, they would need to sell bonds with an aggregate duration greater than the short term duration of the LTC expenses, exposing those bonds to significant interest rate risk and liquidity risk.
Building strawman arguments isn't going to change the fact that you're using the name of a concept ("interest rate risk") to refer to something that is a completely different concept.

It's equivalent to complaining that your health insurance won't cover the cost of rebuilding the transmission in your car.
Interest rate risk is the risk that you need to sell a bond when prevailing interest rates have risen leading to a lower bond price. Liquidity risk is the risk of getting substantially less than would be predicted by interest rates alone because sellers are more numerous than buyers. The two are related because illiquidity leads to a rise in yields.

You seem to be suggesting that these risks don't exist because we can label the scenarios in which the risks materialize as strawman arguments.
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vineviz
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

Northern Flicker wrote: Fri Jul 24, 2020 2:04 pm Interest rate risk is the risk that you need to sell a bond when prevailing interest rates have risen leading to a lower bond price.
No, it's not.

Interest rate risk is the the risk that a change in interest rates will cause an unexpected loss in bond value. The untimely illness or death of an investor has nothing to do with interest rate risk, unless you think that a change in interest rates directly causes the illness or death.

People face all sorts of risks, some of which are huge and important. No one is suggesting that people ignore those risks when building their financial plans. Suggesting otherwise is the strawman argument you're making.

However, confusing one kind of risk with another kind of risk makes it harder and not easier to construct a plan that adequately addresses the actual risks an investor faces.
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Northern Flicker
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

vineviz wrote: Interest rate risk is the the risk that a change in interest rates will cause an unexpected loss in bond value. The untimely illness or death of an investor has nothing to do with interest rate risk, unless you think that a change in interest rates directly causes the illness or death.
It can defeat the immunization against interest rate risk that liability matching provides. If you want to say that shorter duration bond portfolios have more interest rate risk than longer duration bond portfolios because they don't match the duration of liabilities then you also have to accept that longer duration bond portfolios take the interest rate risk associated with liabilities having an outcome that has a much shorter duration than projected.

You are trying to define it away as a different risk by focusing on the cause of liability duration shortening. Whatever the cause, if such an outcome materializes, it introduces interest rate risk and liquidity risk into a bond portfolio with a longer duration than that of liability outcomes.
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

Northern Flicker wrote: Fri Jul 24, 2020 4:12 pm You are trying to define it away as a different risk by focusing on the cause of liability duration shortening. Whatever the cause, if such an outcome materializes, it introduces interest rate risk and liquidity risk into a bond portfolio with a longer duration than that of liability outcomes.
I’ll say, once again, that you’re talking about one risk but calling it by the name of a completely different risk.

“Interest rate risk” has a well defined meaning, and that meaning has nothing to do with the possibility that your spouse might have a health crisis and die.
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Re: Behavior of TIPS versus Treasuries in March

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I'll say it again differently. If risk 1 being managed depends on a certain class of outcomes, and risk 2 materializing causes the assumption about the outcomes to be invalidated, then risk 2 materializing reactivates exposure to risk 1. It still takes risk 1 to materialize as well. They are two different risks.

A flu vaccine may have the risk of not producing immunity for all types of flu that may materialize. If you received a vaccine that did not protect against the type of flu in your community, it does not mean you will get the flu. But the separate risk of getting it from exposure to someone who has that strain of flu is activated.

The strains of flu observed were a different outcome than was projected when the vaccine was formulated.

If you use duration matching to immunize against interest rate risk, and liabilities turn out to be much shorter (or for that matter much longer) than projected, you then experience an activation of interest rate risk and liquidity risk (that in turn may or may not materialize).

Insurance companies use liability matching effectively. Their liabilities are averaged over a pool of participants, reducing variance of outcome (the central limit theorem implies that the uncertainty of their average liabilities for many types of risk tends to zero in the limit if you repeat the pool selection repeatedly for a sufficiently large actuarial pool).

A retiree who does liability matching is an actuarial pool of size 1 or 2. Insurance products can be used to make the duration of some liabilities more predictable.
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vineviz
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Re: Behavior of TIPS versus Treasuries in March

Post by vineviz »

Northern Flicker wrote: Fri Jul 24, 2020 5:28 pm If you use duration matching to immunize against interest rate risk, and liabilities turn out to be much shorter (or for that matter much longer) than projected, you then experience an activation of interest rate risk and liquidity risk (that in turn may or may not materialize).
I think there's a cogent point that you're trying to make, but confusion about the nature of risk in general and "interest rate risk" in particular is obfuscating that point.

Yes, when investors are estimating their investment horizon they should definitely be cognizant of the fact that it is specially that: an estimate. Not only should a prudent investor update their estimate when facts change or new information comes to light (e.g. an unexpectedly dire prognosis for life expectancy), they should also take reasonable steps to build adaptability and resiliency into their financial plan.

None of that has anything to do with interest rate risk, and it certainly has nothing to do with the OP's question about the "behavior of TIPS versus Treasuries in March". A question which is - still - the nominal topic of this thread.
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Re: Behavior of TIPS versus Treasuries in March

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vineviz wrote: Fri Jul 24, 2020 7:03 pm A question which is - still - the nominal topic of this thread.
Really hoping that pun was intended :mrgreen:
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Re: Behavior of TIPS versus Treasuries in March

Post by Northern Flicker »

vineviz wrote: Fri Jul 24, 2020 7:03 pm
Northern Flicker wrote: Fri Jul 24, 2020 5:28 pm If you use duration matching to immunize against interest rate risk, and liabilities turn out to be much shorter (or for that matter much longer) than projected, you then experience an activation of interest rate risk and liquidity risk (that in turn may or may not materialize).
I think there's a cogent point that you're trying to make, but confusion about the nature of risk in general and "interest rate risk" in particular is obfuscating that point.

Yes, when investors are estimating their investment horizon they should definitely be cognizant of the fact that it is specially that: an estimate. Not only should a prudent investor update their estimate when facts change or new information comes to light (e.g. an unexpectedly dire prognosis for life expectancy), they should also take reasonable steps to build adaptability and resiliency into their financial plan.

None of that has anything to do with interest rate risk, and it certainly has nothing to do with the OP's question about the "behavior of TIPS versus Treasuries in March". A question which is - still - the nominal topic of this thread.
Well it has to do with the justification for the claim that long-term bonds have less interest rate risk than say intermediate term bonds and the claim that they have essentially no liquidity risk because their duration is aligned with liabilities.
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nedsaid
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Re: Behavior of TIPS versus Treasuries in March

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FIREchief wrote: Thu Jul 23, 2020 12:43 pm
nedsaid wrote: Thu Jul 23, 2020 7:54 am Each asset class has its own unique risks. With TIPS, it is that TIPS have less liquidity than nominal US Treasuries. This unique risk showed up in 2008-2009 and again in March 2020. Fortunately, TIPS bonds rebounded rather quickly each time.
You're correct, however I would suggest that a "risk" that shows up once every ten years and disappears in a month or two, and is associated with zero risk of default, would be RISK with a very small "r."
Well, TIPS did drop 10-12% in 2008-2009 as my foggy memory banks recall. Maybe sort of a small "r". For bonds, that is a significant drop. Not bad as stocks dropped 50%. But still a risk.
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Re: Behavior of TIPS versus Treasuries in March

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nedsaid wrote: Fri Jul 24, 2020 10:53 pm
FIREchief wrote: Thu Jul 23, 2020 12:43 pm
nedsaid wrote: Thu Jul 23, 2020 7:54 am Each asset class has its own unique risks. With TIPS, it is that TIPS have less liquidity than nominal US Treasuries. This unique risk showed up in 2008-2009 and again in March 2020. Fortunately, TIPS bonds rebounded rather quickly each time.
You're correct, however I would suggest that a "risk" that shows up once every ten years and disappears in a month or two, and is associated with zero risk of default, would be RISK with a very small "r."
Well, TIPS did drop 10-12% in 2008-2009 as my foggy memory banks recall. Maybe sort of a small "r". For bonds, that is a significant drop. Not bad as stocks dropped 50%. But still a risk.
Yes, but if a zero default risk bond falls sharply only because of a very brief period of illiquidity, it's really not any meaningful risk. OTOH, if a corporate bond with default risk drops because of a combination of rapidly falling nominal rates coupled with economic uncertainty, it's a much more meaningful risk. All bonds are NOT created equal. 8-)
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Re: Possible Move from CDs to TIPS in 2024

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vineviz wrote: Thu Jul 23, 2020 5:14 pm So don't build a rolling ladder: a non-rolling ladder of individual TIPS offers the perfect opportunity for retirees to match their future consumption patter with bond cash flows, eliminating both interest rate risk and inflation risk for whatever portion of their retirement income they want to be risk-free.
+1000

IMHO, this is THE scenario for which TIPS are perfectly suited. Dire warnings of perils from unexpected expenses are moot unless one has unwisely put *all* or most of their assets into the ladder (if you can’t cover today’s surprises without cashing out future rungs, you did it wrong).

That’s not to imply that TIPS aren’t useful for other applications — just that they’re a slam dunk for this particular one.
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Re: Possible Move from CDs to TIPS in 2024

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GettingCloser wrote: Sat Jul 25, 2020 8:54 am
vineviz wrote: Thu Jul 23, 2020 5:14 pm So don't build a rolling ladder: a non-rolling ladder of individual TIPS offers the perfect opportunity for retirees to match their future consumption patter with bond cash flows, eliminating both interest rate risk and inflation risk for whatever portion of their retirement income they want to be risk-free.
+1000

IMHO, this is THE scenario for which TIPS are perfectly suited. Dire warnings of perils from unexpected expenses are moot unless one has unwisely put *all* or most of their assets into the ladder (if you can’t cover today’s surprises without cashing out future rungs, you did it wrong).

That’s not to imply that TIPS aren’t useful for other applications — just that they’re a slam dunk for this particular one.
Indeed, there are multiple ways to approach the retirement income puzzle.

The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)). The more uncertain the investor is about their future cash flows (timing and magnitude) the more this approach should appeal to them IMHO.

Most investors can probably go one step further by setting up a non-rolling TIPS ladder to cover ONLY the portion of their non-discretionary expenses that Social Security (or other income streams) won't cover. For most retired Americans this bare-minimum spending is probably in the range of $25k to $55k per year, so whatever position of that that Social Security doesn't cover can be invested in a non-rolling TIPS ladder (with maybe some sort of low-cost longevity insurance in place as well). The balance of their retirement wealth can be invested in a "risk portfolio" that is maybe 75% or more in stocks. Some folks call this the "safety first" approach. Because these non-discretionary expenses are typically easiest to estimate, there should only be minor amounts of the model risk or assumption risk that Northern Flicker has been attempting to describe.

Investors with very low anticipated withdrawal rates could expand the TIPS ladder if they were particularly risk-averse and/or wanted to maximize their potential end-or-retirement bequests. Investors with very high anticipated withdrawal rates might need to consider foregoing some inflation protection and liquidity by annuitizing part of the "safety first" portfolio to avoid creating a plan with a high risk of shortfall.

Your point is a powerful one, which is that the retirement plan needs to balance the particular circumstances of the investor: one size doesn't fit all.
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Re: Possible Move from CDs to TIPS in 2024

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vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
I like this plan the best. MAYBE just get the duration matched funds...VAIPX and LTPZ and call it a day?
Buying individual TIPS is probably optimal, but funds are simple and flexible.
I have lots of time between now and 2024 to figure it out.
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Re: Possible Move from CDs to TIPS in 2024

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hudson wrote: Sat Jul 25, 2020 10:15 am
vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
I like this plan the best. MAYBE just get the duration matched funds...VAIPX and LTPZ and call it a day?
Buying individual TIPS is probably optimal, but funds are simple and flexible.
I have lots of time between now and 2024 to figure it out.
you could always start out with funds and move into individual tips as they come up for auction...
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Re: Possible Move from CDs to TIPS in 2024

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hudson wrote: Sat Jul 25, 2020 10:15 am Buying individual TIPS is probably optimal, but funds are simple and flexible.
Buying individual TIPS is also simple and flexible. Other than a few days every ten years, they have been highly liquid and can easily be bought and sold at any time. If bought at auction, the purchase fees are zero and there is zero expense ratios. Even if bought in the secondary market, the bid/ask it typically very small and will likely offset a fund's ER in a year or less.
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Re: Possible Move from CDs to TIPS in 2024

Post by xerxes101 »

FIREchief wrote: Sat Jul 25, 2020 1:36 pm
hudson wrote: Sat Jul 25, 2020 10:15 am Buying individual TIPS is probably optimal, but funds are simple and flexible.
Buying individual TIPS is also simple and flexible. Other than a few days every ten years, they have been highly liquid and can easily be bought and sold at any time. If bought at auction, the purchase fees are zero and there is zero expense ratios. Even if bought in the secondary market, the bid/ask it typically very small and will likely offset a fund's ER in a year or less.
FIREchief, thanks for this info. What is the minimum initial investment if one decides to go that route? Also, what brokerage do you use? I am assuming Fidelity or Schwab should carry it.
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Re: Possible Move from CDs to TIPS in 2024

Post by FIREchief »

xerxes101 wrote: Sat Jul 25, 2020 2:08 pm
FIREchief wrote: Sat Jul 25, 2020 1:36 pm
hudson wrote: Sat Jul 25, 2020 10:15 am Buying individual TIPS is probably optimal, but funds are simple and flexible.
Buying individual TIPS is also simple and flexible. Other than a few days every ten years, they have been highly liquid and can easily be bought and sold at any time. If bought at auction, the purchase fees are zero and there is zero expense ratios. Even if bought in the secondary market, the bid/ask it typically very small and will likely offset a fund's ER in a year or less.
FIREchief, thanks for this info. What is the minimum initial investment if one decides to go that route? Also, what brokerage do you use? I am assuming Fidelity or Schwab should carry it.
I use Fidelity. The "minimum investment" through any brokerage for either auction or secondary market would be a single $1000 face value bond. With negative real rates, that will be slightly over $1000 as the bond will pay a minimum of .125% annual coupon. You don't pay any other premium when buying at auction. If buying in the secondary market, you'll get a slightly better price if buying more bonds at once. Sometimes the best price is for a minimum quantity of 25, 50, 100, 150, etc. If you get to the purchase page at your brokerage, the "depth of book" link will show you the current ask prices for the various quantities being offered. I've generally purchased in quantities of at least 25, but have bought/sold as little as 1 or 2 to fine tune my portfolio as my plans have solidified. The extra cost/reduced proceeds have never amounted to much.
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Re: Possible Move from CDs to TIPS in 2024

Post by GettingCloser »

vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
Perhaps I’m missing your point, but I would not recommend using TIPS funds for the entirety of one’s bond allocation, because they don’t make good “ballast” for rebalancing. I’m told that many Bogleheads tried that approach in the run-up to 2008, and ended up regretting it.
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Re: Possible Move from CDs to TIPS in 2024

Post by vineviz »

GettingCloser wrote: Sun Jul 26, 2020 1:39 am
vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
Perhaps I’m missing your point, but I would not recommend using TIPS funds for the entirety of one’s bond allocation, because they don’t make good “ballast” for rebalancing. I’m told that many Bogleheads tried that approach in the run-up to 2008, and ended up regretting it.
The "bonds as ballast" metaphor is problematic because it can encourage investors to undertake suboptimal behaviors.

For working investors, bonds play two primary roles: de-risking and diversification against equities. And the best "actor" for those roles is almost certainly long-term nominal Treasuries. This is because the primary goal of working investors is the accumulation of wealth that can provide for income later.

When these same investors transition into retirement the goal reverses: the decumulatio of wealth to provide for income now. There are different ways to approach this problem, but all of them require that investors let go of some of the habits that made them successful earlier. In retirement, the primary role of bonds is its original one: providing a predictable stream of income to the investor. To the extent that the investor's income needs rise (or fall) with inflation, no bonds provide a more predictable stream of real income than TIPS.

One reason I often recommend a non-rolling TIPS ladder (matched to the expected cash flow needs of the investor) is that it removes any confusion about the role of these bonds in the portfolio. With TIPS funds, the investor has to work a little harder to keep clarity about what those funds are doing for them. They aren't providing "ballast" so much as they are providing a "safety net" or "income floor".

What does that mean in practice? I'd say that whatever portion of the bond portfolio gets allocated for TIPS funds should excluded from rebalancing in retirement. The dollar amount allocated to TIPS should be fixed using some formula or rule of thumb based on the number of real dollars of income that the investor desires.

Many (most?) investors will NOT end up putting all their bonds into TIPS funds, which is totally fine. What would I tell an investor who thinks a 50/50 allocation is about the right risk level for them and who puts, say, 25% of their portfolio into at long-term TIPS fund? I'd probably tell them to put up a conceptual firewall between that TIPS allocation and the rest of the portfolio: the TIPS allocation is in one "bucket" (man, I hate that concept) and other "bucket" is the risk portfolio that is 75% stocks and 25% nominal bonds. Rebalancing within that second bucket is fine, but the TIPS bucket isn't for that.
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Re: Possible Move from CDs to TIPS in 2024

Post by hudson »

vineviz wrote: Sun Jul 26, 2020 6:39 am no bonds provide a more predictable stream of real income than TIPS.

non-rolling TIPS ladder (matched to the expected cash flow needs of the investor

They aren't providing "ballast" so much as they are providing a "safety net" or "income floor".

The dollar amount allocated to TIPS should be fixed using some formula or rule of thumb based on the number of real dollars of income that the investor desires.
Thanks again vineviz!
I took out lots of text and left the stuff that's important to me. I don't rebalance.

Is there a (short/simple/basic) example of what a non-rolling TIPS ladder would look like for a 75 year old in 2024? Maybe a "buy TIPS from Vanguard" version and maybe a mutual fund/ETF version?
GettingCloser
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Re: Possible Move from CDs to TIPS in 2024

Post by GettingCloser »

vineviz wrote: Sun Jul 26, 2020 6:39 am put up a conceptual firewall between that TIPS allocation and the rest of the portfolio: the TIPS allocation is in one "bucket" (man, I hate that concept) and other "bucket" is the risk portfolio that is 75% stocks and 25% nominal bonds. Rebalancing within that second bucket is fine, but the TIPS bucket isn't for that.
Ok, I 100% agree with that (in fact, that’s exactly what I’m doing, except that my non-ladder AA is 80/20).
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Re: Behavior of TIPS versus Treasuries in March

Post by dbr »

The non-rolling TIPS ladder or Liability Matching Portfolio is not a portfolio at all but rather a poor man's annuity that does allow the funds to be retrieved in an emergency but does not pool longevity risk and therefore is committed to being terminated at a fixed time. Its huge advantage is known future inflation indexed income. Right now at low real interest rates such a ladder is expensive, but that's the way the cookie crumbles.
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Re: Behavior of TIPS versus Treasuries in March

Post by #Cruncher »

dbr wrote: Sun Jul 26, 2020 10:05 amRight now at low real interest rates such a [non-rolling TIPS] ladder is expensive, ...
Yes, indeed! I've updated my TIPS Ladder Spreadsheet Excel file with the just-auctioned 0.125% July 2030 TIPS and Friday's WSJ TIPS Quotes. It shows the default ladder has a purchase cost of $976,000 for 30,000 constant dollars per year over 30 years; i.e., a premium of $76,000 over par. This corresponds to a -0.528% [*] Internal Rate of Return.

* Calculated in cell M55 on the "Ladder" sheet with the Excel IRR function.
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Re: Possible Move from CDs to TIPS in 2024

Post by bigskyguy »

hudson wrote: Sun Jul 26, 2020 7:04 am
vineviz wrote: Sun Jul 26, 2020 6:39 am no bonds provide a more predictable stream of real income than TIPS.

non-rolling TIPS ladder (matched to the expected cash flow needs of the investor

They aren't providing "ballast" so much as they are providing a "safety net" or "income floor".

The dollar amount allocated to TIPS should be fixed using some formula or rule of thumb based on the number of real dollars of income that the investor desires.
Thanks again vineviz!
I took out lots of text and left the stuff that's important to me. I don't rebalance.

Is there a (short/simple/basic) example of what a non-rolling TIPS ladder would look like for a 75 year old in 2024? Maybe a "buy TIPS from Vanguard" version and maybe a mutual fund/ETF version?
You can go to "eyebonds.info" (Thanks to #Cruncher), go to the Downloads tab, and download a very updated TIPS Ladder Builder. Play with it for a bit, and I think you'll answer your question. Without a doubt (for me), this is the most functional and comprehensive tool to build a ladder of TIPS with what is available on the secondary TIPS market.
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Re: Possible Move from CDs to TIPS in 2024

Post by FIREchief »

GettingCloser wrote: Sun Jul 26, 2020 1:39 am
vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
Perhaps I’m missing your point, but I would not recommend using TIPS funds for the entirety of one’s bond allocation, because they don’t make good “ballast” for rebalancing. I’m told that many Bogleheads tried that approach in the run-up to 2008, and ended up regretting it.
My fixed income is 100% TIPS. I never rebalance. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Possible Move from CDs to TIPS in 2024

Post by hudson »

grok87 wrote: Sat Jul 25, 2020 1:21 pm
hudson wrote: Sat Jul 25, 2020 10:15 am
vineviz wrote: Sat Jul 25, 2020 9:57 am The simplest and most flexible approach is probably just an old-fashioned stock/bond portfolio (e.g. 50% stock fund and 50% duration-matched TIPS fund(s)).
I like this plan the best. MAYBE just get the duration matched funds...VAIPX and LTPZ and call it a day?
Buying individual TIPS is probably optimal, but funds are simple and flexible.
I have lots of time between now and 2024 to figure it out.
you could always start out with funds and move into individual tips as they come up for auction...
Thanks grok87!
That sounds like a good way to ease into my probable 2024 movement to TIPS.
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Rolling TIPS Ladder/LMP...EXPENSIVE

Post by hudson »

dbr wrote: Sun Jul 26, 2020 10:05 am The
non-rolling TIPS ladder or Liability Matching Portfolio
is not a portfolio at all but rather a poor man's annuity that does allow the funds to be retrieved in an emergency but does not pool longevity risk and therefore is committed to being terminated at a fixed time. Its huge advantage is known future inflation indexed income. Right now at low real interest rates such a ladder is expensive, but that's the way the cookie crumbles.
A fund would be a rolling ladder, so the non-rolling ladder would be individual TIPS.
Maybe in 2024, things will be different. If not, I'll likely take the plunge anyway.
Maybe the "poor man's annuity" would be safer than a SPIA?
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Re: Possible Move from CDs to TIPS in 2024

Post by hudson »

bigskyguy wrote: Sun Jul 26, 2020 11:28 am
hudson wrote: Sun Jul 26, 2020 7:04 am
vineviz wrote: Sun Jul 26, 2020 6:39 am no bonds provide a more predictable stream of real income than TIPS.

non-rolling TIPS ladder (matched to the expected cash flow needs of the investor

They aren't providing "ballast" so much as they are providing a "safety net" or "income floor".

The dollar amount allocated to TIPS should be fixed using some formula or rule of thumb based on the number of real dollars of income that the investor desires.
Thanks again vineviz!
I took out lots of text and left the stuff that's important to me. I don't rebalance.

Is there a (short/simple/basic) example of what a non-rolling TIPS ladder would look like for a 75 year old in 2024? Maybe a "buy TIPS from Vanguard" version and maybe a mutual fund/ETF version?
You can go to "eyebonds.info" (Thanks to #Cruncher), go to the Downloads tab, and download a very updated TIPS Ladder Builder. Play with it for a bit, and I think you'll answer your question. Without a doubt (for me), this is the most functional and comprehensive tool to build a ladder of TIPS with what is available on the secondary TIPS market.
Thanks bigskyguy! I'll look it over. I bookmarked your contribution for future reference.
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by dbr »

hudson wrote: Sun Jul 26, 2020 4:48 pm
dbr wrote: Sun Jul 26, 2020 10:05 am The
non-rolling TIPS ladder or Liability Matching Portfolio
is not a portfolio at all but rather a poor man's annuity that does allow the funds to be retrieved in an emergency but does not pool longevity risk and therefore is committed to being terminated at a fixed time. Its huge advantage is known future inflation indexed income. Right now at low real interest rates such a ladder is expensive, but that's the way the cookie crumbles.
A fund would be a rolling ladder, so the non-rolling ladder would be individual TIPS.
Maybe in 2024, things will be different. If not, I'll likely take the plunge anyway.
Maybe the "poor man's annuity" would be safer than a SPIA?
It's safer because there is no credit or "agency" risk meaning the insurance company is not going to default when that is the US Treasury. It is certainly safer because it is inflation indexed and insurance company inflation indexed SPIAs don't exist anymore, if ever, though fixed COLA riders can be had. The annuity is much safer because it insures longevity risk and the ladder does not unless you think you are probably going to die before the ladder is exhausted or you have a plan where other resources pick up at that time.
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by hudson »

dbr wrote: Sun Jul 26, 2020 5:32 pm
hudson wrote: Sun Jul 26, 2020 4:48 pm
dbr wrote: Sun Jul 26, 2020 10:05 am The
non-rolling TIPS ladder or Liability Matching Portfolio
is not a portfolio at all but rather a poor man's annuity that does allow the funds to be retrieved in an emergency but does not pool longevity risk and therefore is committed to being terminated at a fixed time. Its huge advantage is known future inflation indexed income. Right now at low real interest rates such a ladder is expensive, but that's the way the cookie crumbles.
A fund would be a rolling ladder, so the non-rolling ladder would be individual TIPS.
Maybe in 2024, things will be different. If not, I'll likely take the plunge anyway.
Maybe the "poor man's annuity" would be safer than a SPIA?
It's safer because there is no credit or "agency" risk meaning the insurance company is not going to default when that is the US Treasury. It is certainly safer because it is inflation indexed and insurance company inflation indexed SPIAs don't exist anymore, if ever, though fixed COLA riders can be had. The annuity is much safer because it insures longevity risk and the ladder does not unless you think you are probably going to die before the ladder is exhausted or you have a plan where other resources pick up at that time.
Thanks DBR!
So....then....
The TIPS non-rolling ladder has the advantage for those who have other resources outside of the TIPS ladder.
A SPIA has the advantage for someone who needs surefire income for life.
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by vineviz »

hudson wrote: Sun Jul 26, 2020 6:17 pm The TIPS non-rolling ladder has the advantage for those who have other resources outside of the TIPS ladder.
A SPIA has the advantage for someone who needs surefire income for life.
And many investors find that a combination of the two (TIPS ladder + annuity) suits their situation. Building a 20-year TIPS ladder to cover ages 65 to 84, plus a deferred income annuity that starts paying at age 85 for longevity insurance, plus a "risk portfolio" of stocks and nominal bonds can bring it all together for many households.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by hudson »

vineviz wrote: Sun Jul 26, 2020 7:39 pm
hudson wrote: Sun Jul 26, 2020 6:17 pm The TIPS non-rolling ladder has the advantage for those who have other resources outside of the TIPS ladder.
A SPIA has the advantage for someone who needs surefire income for life.
And many investors find that a combination of the two (TIPS ladder + annuity) suits their situation. Building a 20-year TIPS ladder to cover ages 65 to 84, plus a deferred income annuity that starts paying at age 85 for longevity insurance, plus a "risk portfolio" of stocks and nominal bonds can bring it all together for many households.
Thanks Vineviz!
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by dbr »

vineviz wrote: Sun Jul 26, 2020 7:39 pm
hudson wrote: Sun Jul 26, 2020 6:17 pm The TIPS non-rolling ladder has the advantage for those who have other resources outside of the TIPS ladder.
A SPIA has the advantage for someone who needs surefire income for life.
And many investors find that a combination of the two (TIPS ladder + annuity) suits their situation. Building a 20-year TIPS ladder to cover ages 65 to 84, plus a deferred income annuity that starts paying at age 85 for longevity insurance, plus a "risk portfolio" of stocks and nominal bonds can bring it all together for many households.
I remember discussion of the deferred income annuity where the question asked was whether those annuities are structured so that the deferred income would be inflation indexed. What is the present situation for someone considering this approach?
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by vineviz »

dbr wrote: Mon Jul 27, 2020 10:08 am I remember discussion of the deferred income annuity where the question asked was whether those annuities are structured so that the deferred income would be inflation indexed. What is the present situation for someone considering this approach?
When you buy a deferred income annuity, the initial payout is set in nominal dollars at the time of purchase. That probably means that you should to make some projection for expected inflation between the date of purchase and the first payout date. In other words, if I'd cover my expenses with $1,000/month today then if I'm buying a deferred annuity which starts in 15 years I should probably buy one that pays $1,250 a month.

That's fine if actual inflation over the next 15 years perfectly matches expected inflation, but if inflation is unexpectedly high during the intervening years you could end up disappointed. So my advice is usually to buy the deferred annuity no more than 10 - 15 years in advance if you can, and preferably stagger the purchases. Going back to the example from the previous paragraph, maybe buy $625 worth of income today and plan to buy the other $625 in 7-10 years. That way you cover some ground on realized inflation. In the meantime, keep the cash that you're allocating for the future purchase in duration-matched inflation-protected bonds (either an individual 30-year TIPS or in inflation-indexed bond funds, like a combination of LTPZ and LQDI).

Then there's the question of how the payout itself gets adjusted for inflation. There is no commercial CPI-linked deferred annuity (which is why delaying your filing age for Social Security is so important), so your options are no adjustment or some fixed amount of increase (e.g. 1%, 2%, etc.). Assuming the deferred annuity starts paying out at age 85, my advice is to get the biggest COLA that the insurance company offers. This is typically 4% or 5%. This typically doesn't lower the payout very much (because, actuarially, the insurance company knows you're not likely to live long enough for that payout to balloon out of control), and it also tends to match retiree spending patterns. The average retiree has decreasing real spending through their mid-80s, but it tends to start going back up in the late 80s due to healthcare and long-term care costs), so having a deferred income payout that grows faster than expected inflation will be very comforting if you DO happen to live into your late 90s or beyond. Now you're really getting mostly "pure" longevity insurance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rolling TIPS Ladder/LMP...EXPENSIVE

Post by dbr »

vineviz wrote: Mon Jul 27, 2020 10:31 am
dbr wrote: Mon Jul 27, 2020 10:08 am I remember discussion of the deferred income annuity where the question asked was whether those annuities are structured so that the deferred income would be inflation indexed. What is the present situation for someone considering this approach?
When you buy a deferred income annuity, the initial payout is set in nominal dollars at the time of purchase. That probably means that you should to make some projection for expected inflation between the date of purchase and the first payout date. In other words, if I'd cover my expenses with $1,000/month today then if I'm buying a deferred annuity which starts in 15 years I should probably buy one that pays $1,250 a month.

That's fine if actual inflation over the next 15 years perfectly matches expected inflation, but if inflation is unexpectedly high during the intervening years you could end up disappointed. So my advice is usually to buy the deferred annuity no more than 10 - 15 years in advance if you can, and preferably stagger the purchases. Going back to the example from the previous paragraph, maybe buy $625 worth of income today and plan to buy the other $625 in 7-10 years. That way you cover some ground on realized inflation. In the meantime, keep the cash that you're allocating for the future purchase in duration-matched inflation-protected bonds (either an individual 30-year TIPS or in inflation-indexed bond funds, like a combination of LTPZ and LQDI).

Then there's the question of how the payout itself gets adjusted for inflation. There is no commercial CPI-linked deferred annuity (which is why delaying your filing age for Social Security is so important), so your options are no adjustment or some fixed amount of increase (e.g. 1%, 2%, etc.). Assuming the deferred annuity starts paying out at age 85, my advice is to get the biggest COLA that the insurance company offers. This is typically 4% or 5%. This typically doesn't lower the payout very much (because, actuarially, the insurance company knows you're not likely to live long enough for that payout to balloon out of control), and it also tends to match retiree spending patterns. The average retiree has decreasing real spending through their mid-80s, but it tends to start going back up in the late 80s due to healthcare and long-term care costs), so having a deferred income payout that grows faster than expected inflation will be very comforting if you DO happen to live into your late 90s or beyond. Now you're really getting mostly "pure" longevity insurance.
Thanks. That should be very helpful to those considering this possibility, as I remember these details getting a lot of discussion previously.
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