The 4% Rule Just Became a Whole Lot Easier - Allan Roth

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Kevin K
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The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Kevin K »

From the article:

"I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate.

At the suggestion of Bob Huebscher, the editor of this publication, I decided to try something different. I built a strategy backed by the U.S. government with Treasury Inflation Protected Securities (TIPS) that supports a reasonably level real 4.3% withdrawal rate for 30 years. It’s not perfect, but it was good enough for me to put my money behind it. I implemented such a portfolio with just under $100,000 of my own family’s nest egg."

https://www.advisorperspectives.com/art ... 6692148692
GaryA505
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

Kevin K wrote: Tue Oct 25, 2022 10:12 am From the article:

"I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate.

At the suggestion of Bob Huebscher, the editor of this publication, I decided to try something different. I built a strategy backed by the U.S. government with Treasury Inflation Protected Securities (TIPS) that supports a reasonably level real 4.3% withdrawal rate for 30 years. It’s not perfect, but it was good enough for me to put my money behind it. I implemented such a portfolio with just under $100,000 of my own family’s nest egg."

https://www.advisorperspectives.com/art ... 6692148692
Could you do this for 50 years? I'm not joking, could it be done?
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
JohnDoh
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by JohnDoh »

GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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firebirdparts
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by firebirdparts »

GaryA505 wrote: Tue Oct 25, 2022 11:30 am The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
It is. Otherwise he wouldn't be suggested TIPS. It's a lot simpler to calculate the real results of a TIPS ladder. I'll admit here it's a short article with insufficient detail and he might have fudged a little on the math. I did not check him.
Last edited by firebirdparts on Tue Oct 25, 2022 12:20 pm, edited 3 times in total.
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ikowik
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

GaryA505 wrote: Tue Oct 25, 2022 11:30 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
Not sure what you meant, but if you meant to say the TIPS ladder is not adjusted for inflation, that is incorrect. TIPS principal is adjusted to ongoing inflation, using CPI.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

ikowik wrote: Tue Oct 25, 2022 12:00 pm
GaryA505 wrote: Tue Oct 25, 2022 11:30 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
Not sure what you meant, but if you meant to say the TIPS ladder is not adjusted for inflation, that is incorrect. The basic premise of TIPS is adjustment of principal to ongoing inflation, using CPI.
The TIPS themselves of course are adjusted for inflation, but he shows the annual payouts which do not increase (always about $4300/yr).
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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firebirdparts
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by firebirdparts »

GaryA505 wrote: Tue Oct 25, 2022 12:05 pm
ikowik wrote: Tue Oct 25, 2022 12:00 pm
GaryA505 wrote: Tue Oct 25, 2022 11:30 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
Not sure what you meant, but if you meant to say the TIPS ladder is not adjusted for inflation, that is incorrect. The basic premise of TIPS is adjustment of principal to ongoing inflation, using CPI.
The TIPS themselves of course are adjusted for inflation, but he shows the annual payouts which do not increase (always about $4300/yr).
Well, when you spend tips in the future at future prices, you don't have to account for that. You can ignore it entirely and you're still right. The actual amount is not $4300.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

GaryA505 wrote: Tue Oct 25, 2022 12:05 pm
ikowik wrote: Tue Oct 25, 2022 12:00 pm
GaryA505 wrote: Tue Oct 25, 2022 11:30 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
The TIPS ladder isn't either, is it? I read the article and I don't see that it is.
Not sure what you meant, but if you meant to say the TIPS ladder is not adjusted for inflation, that is incorrect. The basic premise of TIPS is adjustment of principal to ongoing inflation, using CPI.
The TIPS themselves of course are adjusted for inflation, but he shows the annual payouts which do not increase (always about $4300/yr).
Look at the heading of the spreadsheet in what Allan Roth wrote. It says $4300 Desired Annual REAL amount (not nominal)
MattB
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by MattB »

Question: Do long-term tips pay regular interest on their value at purchase, or at their inflation adjusted value each six months?
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firebirdparts
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by firebirdparts »

I was wrong about that, and I had to google it. The coupon pays based on the "principal value"
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GaryA505
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

I ran a quick Excel spreadsheet. It looks like the total amount paid out with the TIPS ladder would be more than the annuity at 30 years, if average inflation for that period was more than about 2.2%. But then the TIPS ladder would be all spent and the annuity would keep on paying, assuming the annuitant was still alive of course.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by billyt »

The inflation index ratio is changed every day to match the non-seasonally adjusted CPI from 2 months ago. For example, the adjustment applied today is from the CPI change from July to August, which is announced in September. The coupon payment is based on the fixed percentage of the inflation adjusted principal.
GP813
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GP813 »

I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GAAP »

GaryA505 wrote: Tue Oct 25, 2022 10:50 am
Kevin K wrote: Tue Oct 25, 2022 10:12 am From the article:

"I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate.

At the suggestion of Bob Huebscher, the editor of this publication, I decided to try something different. I built a strategy backed by the U.S. government with Treasury Inflation Protected Securities (TIPS) that supports a reasonably level real 4.3% withdrawal rate for 30 years. It’s not perfect, but it was good enough for me to put my money behind it. I implemented such a portfolio with just under $100,000 of my own family’s nest egg."

https://www.advisorperspectives.com/art ... 6692148692
Could you do this for 50 years? I'm not joking, could it be done?

The maximum term for TIPS is 30 years, so you would need to spend additional funds for the next 20 years to keep purchasing TIPS. Stated another way, if you invested your entire portfolio portfolio this way, your money would be gone on year 31.
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GaryA505
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

GP813 wrote: Tue Oct 25, 2022 12:42 pm I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
I guess the point of the article is that it's possible, not that it's practical.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by LilyFleur »

"Easier"?

Easy for you to say. :mrgreen:

I understand that some of our forum members create and maintain a ladder as a form of financing retirement and don't mind handing off the complexity of it to their surviving spouse and/or heirs.

One of the tenets of the Bogleheads philosophy is: Invest with simplicity

If you have a masters in finance, your idea of simplicity may be different than that of other investors.

https://www.bogleheads.org/wiki/Boglehe ... back%20in.

Now that I think about it, one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. He deals with enough complexity and puts in too many hours at his day job.
Last edited by LilyFleur on Tue Oct 25, 2022 12:58 pm, edited 1 time in total.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by goodenyou »

Does that mean that the 4% SWR is NOW valid because previously bond yields were so low?
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ikowik
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

LilyFleur wrote: Tue Oct 25, 2022 12:55 pm "Easier"?

Easy for you to say. :mrgreen:

I understand that some of our forum members create and maintain a ladder as a form of financing retirement and don't mind handing off the complexity of it to their surviving spouse and/or heirs.

One of the tenets of the Bogleheads philosophy is: Invest with simplicity

If you have a masters in finance, your idea of simplicity may be different than that of other investors.

https://www.bogleheads.org/wiki/Boglehe ... back%20in.

Now that I think about it, one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. He deals with enough complexity and puts in too many hours at his day job.
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by JohnDoh »

ikowik wrote: Tue Oct 25, 2022 1:16 pm
LilyFleur wrote: Tue Oct 25, 2022 12:55 pm "Easier"?

Easy for you to say. :mrgreen:

I understand that some of our forum members create and maintain a ladder as a form of financing retirement and don't mind handing off the complexity of it to their surviving spouse and/or heirs.

One of the tenets of the Bogleheads philosophy is: Invest with simplicity

If you have a masters in finance, your idea of simplicity may be different than that of other investors.

https://www.bogleheads.org/wiki/Boglehe ... back%20in.

Now that I think about it, one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. He deals with enough complexity and puts in too many hours at his day job.
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.
I also did not find this too hard. There is something of a learning curve with respect both to the theory and the mechanics but neither is steep. I will confess, however, that #Cruncher's spreadsheet, online information, and posts were extremely helpful. Perhaps I would have found the whole thing more daunting with those as well as BH in general. (We really are blessed.)
GaryA505
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

If bought with non-qualified (taxable) money, how/when would the gains from a TIPs ladder be taxed?
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by rich126 »

JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

rich126 wrote: Tue Oct 25, 2022 1:49 pm
JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
And, for someone heading into retirement, I'd say inflation protection isn't necessary on all income because people usually spend less as they get older.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by JohnDoh »

GaryA505 wrote: Tue Oct 25, 2022 2:13 pm
rich126 wrote: Tue Oct 25, 2022 1:49 pm
JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
And, for someone heading into retirement, I'd say inflation protection isn't necessary on all income because people usually spend less as they get older.
With all due respect, I think this is *seriously* mistaken and reflects recency bias. See Bill Bernstein on "deep risk".
GP813
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GP813 »

Hopefully Diamond NestEgg on youtube does a step by step video of how to do this, I find Jennifer explains things in a very simple and easy way to follow. I would be curious about how to construct something like this, not for me personally but I have older relatives worried about their retirement purchasing power. They're convinced Social Security is iffy, which I think is overblown and I always remind them about the stats of what the average retiree collects and that Social Security has a COLA in times of high inflation.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

JohnDoh wrote: Tue Oct 25, 2022 2:23 pm
GaryA505 wrote: Tue Oct 25, 2022 2:13 pm
rich126 wrote: Tue Oct 25, 2022 1:49 pm
JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
And, for someone heading into retirement, I'd say inflation protection isn't necessary on all income because people usually spend less as they get older.
With all due respect, I think this is *seriously* mistaken and reflects recency bias. See Bill Bernstein on "deep risk".
Which part of it? Can you elaborate?

I should add that about 75% of my retirement income will be inflation-adjusted, so I was referring to the other 25%. Other people's situations may vary greatly.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by LilyFleur »

ikowik wrote: Tue Oct 25, 2022 1:16 pm
LilyFleur wrote: Tue Oct 25, 2022 12:55 pm "Easier"?

Easy for you to say. :mrgreen:

I understand that some of our forum members create and maintain a ladder as a form of financing retirement and don't mind handing off the complexity of it to their surviving spouse and/or heirs.

One of the tenets of the Bogleheads philosophy is: Invest with simplicity

If you have a masters in finance, your idea of simplicity may be different than that of other investors.

https://www.bogleheads.org/wiki/Boglehe ... back%20in.

Now that I think about it, one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. He deals with enough complexity and puts in too many hours at his day job.
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.
So do you put the identification numbers for the 25 TIPS and the numbers of all the I-bonds into your trust, and designate beneficiaries on the Treasury website for each piece individually, or just once for your entire Treasury account? And then update your trust every year when you spend one of the TIPS and buy another?

I had 75 small-denomination paper EE bonds, and most of them had matured. I decided it was easier to cash them in than include them all in estate planning.

The reason I ask about the trust is because I am preparing paperwork for an attorney to do my trust, and the attorney wants account numbers and current balances for every asset that will be in the trust.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

LilyFleur wrote: Tue Oct 25, 2022 3:20 pm
ikowik wrote: Tue Oct 25, 2022 1:16 pm
LilyFleur wrote: Tue Oct 25, 2022 12:55 pm "Easier"?

Easy for you to say. :mrgreen:

I understand that some of our forum members create and maintain a ladder as a form of financing retirement and don't mind handing off the complexity of it to their surviving spouse and/or heirs.

One of the tenets of the Bogleheads philosophy is: Invest with simplicity

If you have a masters in finance, your idea of simplicity may be different than that of other investors.

https://www.bogleheads.org/wiki/Boglehe ... back%20in.

Now that I think about it, one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. He deals with enough complexity and puts in too many hours at his day job.
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.
So do you put the identification numbers for the 25 TIPS and the numbers of all the I-bonds into your trust, and designate beneficiaries on the Treasury website for each piece individually, or just once for your entire Treasury account? And then update your trust every year when you spend one of the TIPS and buy another?

I had 75 small-denomination paper EE bonds, and most of them had matured. I decided it was easier to cash them in than include them all in estate planning.

The reason I ask about the trust is because I am preparing paperwork for an attorney to do my trust, and the attorney wants account numbers and current balances for every asset that will be in the trust.
I hold all TIPS only in pre-tax retirement accounts (IRAs) at two brokerages. Only I bonds at Treasury Direct, and they are designated TOD. I and spouse have named each other as beneficiaries for our brokerage accounts, so on my death spouse will have access. The IRA account lists all TIPS with CUSIPs, date bought, date of maturity etc;. There is no need to track it elsewhere, but I am cautious and have my own Personal Finance spreadsheet (Excel) which lists all our accounts, where they are held etc. One of the worksheets lists all I-Bonds and TIPS with the same information. This is in addition to #Cruncher's spreadsheet I used to construct the ladder. Redundant information, and not strictly necessary so long IRAs have designated beneficiaries and I-bonds are co-owned or TOD. I do not have a Trust (just wills and Power-of-attorneys) so can't help there.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Billy C »

I only want to spend an hour or so a year managing my portfolio so this doesn’t interest me, as I’m a big believer in the importance of keeping things simple.

But I’m glad this option exists for those who don’t mind the extra effort.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

In an IRA at Fidelity it looks easy to buy TIPS (secondary market). I do see the gap from 2032 to 2040.

What happens when the bond matures? Does the cash just get returned to your account?
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by McQ »

goodenyou wrote: Tue Oct 25, 2022 12:57 pm Does that mean that the 4% SWR is NOW valid because previously bond yields were so low?
You can do a bit better than 4.0% now, as Allan did, because TIPS yields are approaching 2.0%. Last year, when TIPS were negative, the same ladder would have paid a little less than 3.0%. Late Spring this year, when TIPS were yielding about 1.0%, you could have got an SWR of about 3.9%.

See my thread here for the math: viewtopic.php?t=388277

The point of Allan's article, as I read it: when TIPS yields are high enough, you can get a government guaranteed real SWR of 4.0% or more. Whenever you read of a lower SWR, using a balanced portfolio and based on an extended historical inquiry, there is no rational reason to prefer that portfolio to a TIPS ladder ... unless you are willing to risk running out of money in the worst case in order to leave a legacy for your heirs in the best case.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by rich126 »

GaryA505 wrote: Tue Oct 25, 2022 2:13 pm
rich126 wrote: Tue Oct 25, 2022 1:49 pm
JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
And, for someone heading into retirement, I'd say inflation protection isn't necessary on all income because people usually spend less as they get older.
True and if you retired around 60, as inflation does eat away at your annuity, you can start social security at age 70 and that will offset the diminishing value of the annuity.

Don't get me wrong, I'm not all in favor of getting an annuity but I kind of think setting up a simpler path for my wife to follow if I die first (likely), then her having an annuity, my pension (reduced on my death) and social security would allow her to not worry about routine expenses and only use savings for emergencies or something like a new car or medical expenses.

Anyhow, at least in the current environment the payout of an annuity is higher which could be good unless inflation ends up being a longer term problem (always possible).
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GaryA505 »

rich126 wrote: Tue Oct 25, 2022 5:55 pm
GaryA505 wrote: Tue Oct 25, 2022 2:13 pm
rich126 wrote: Tue Oct 25, 2022 1:49 pm
JohnDoh wrote: Tue Oct 25, 2022 11:25 am
GaryA505 wrote: Tue Oct 25, 2022 11:24 am Right now, a 50-year-old male can purchase a $100,000 annuity (life with cash-refund) that will pay about $6000/yr for life.
It's not US Govt insured, but it pays for life and not just 30 years.

I just thought I'd throw that out there.
Not inflation adjusted, however.
This does makes things more interesting. If the goal was to generate $4,000 a year then an annuity with a payout of 6%, you would need ~$66,000. You can take the ~$34,000 leftover invest it in TIPs or whatever for a few years and depending on rates possibly buy another annuity to help out with inflation. IF rates didn't change then the $34K would provide another $2K a year. Of course you don't know what rates will do, and if you wait to buy the second annuity you would get more mortality credits but if rates drop then the payout rate would drop.

Or just drop it all in the annuity in the beginning and get $6,000 a year and save the "extra" to cover inflation later.

I just see TIPs as a thing someone with a lot of money might want to preserve their money.

Another interesting thing right now is the strength of the dollar. So someone who wants to maintain $100 of purchasing power with TIPs may track inflation but still (and IMO most likely would) lose because the dollar is currently at a very high value compared to most all other currencies. 10, 20 yrs from now it is quite possible the dollar will be weaker and imports would cost more and that $100 you kept, is really only worth $80.
And, for someone heading into retirement, I'd say inflation protection isn't necessary on all income because people usually spend less as they get older.
True and if you retired around 60, as inflation does eat away at your annuity, you can start social security at age 70 and that will offset the diminishing value of the annuity.

Don't get me wrong, I'm not all in favor of getting an annuity but I kind of think setting up a simpler path for my wife to follow if I die first (likely), then her having an annuity, my pension (reduced on my death) and social security would allow her to not worry about routine expenses and only use savings for emergencies or something like a new car or medical expenses.

Anyhow, at least in the current environment the payout of an annuity is higher which could be good unless inflation ends up being a longer term problem (always possible).
That's my thinking as well. Already started SS, at 70.
Get most of it right and don't make any big mistakes. Other things being equal (or close enough), simpler is better.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by tipswatcher »

Kevin K wrote: Tue Oct 25, 2022 10:12 am From the article:

"I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate.

At the suggestion of Bob Huebscher, the editor of this publication, I decided to try something different. I built a strategy backed by the U.S. government with Treasury Inflation Protected Securities (TIPS) that supports a reasonably level real 4.3% withdrawal rate for 30 years. It’s not perfect, but it was good enough for me to put my money behind it. I implemented such a portfolio with just under $100,000 of my own family’s nest egg."

https://www.advisorperspectives.com/art ... 6692148692
FYI, this strategy was based on a model built by Boglehead #Cruncher and uses his spreadsheet as a guide. Allan Roth gives him credit in the article.
Last edited by tipswatcher on Wed Oct 26, 2022 9:57 am, edited 1 time in total.
TIPS: Perfect investment for imperfect times?
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Allan Roth »

GP813 wrote: Tue Oct 25, 2022 12:42 pm I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
I hear you and agree this wasn't simple. But #cruncher has done the heavy lifting and gives it away here: http://eyebonds.info/downloads/pages/TIPSLadder.htmlBuying the bonds wasn't easy - I bought some at Fidelity and some at Vanguard and found Vanguard had the better service and execution which surprised me. I did it online but the worst case scenario is that the bond desk could do it for you. I believe they charge $20 a bond so the 24 bonds would cost about $480.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by #Cruncher »

ikowik wrote: Tue Oct 25, 2022 12:13 pm
GaryA505 wrote: Tue Oct 25, 2022 12:05 pm
ikowik wrote: Tue Oct 25, 2022 12:00 pm... if you meant to say the TIPS ladder is not adjusted for inflation, that is incorrect. The basic premise of TIPS is adjustment of principal to ongoing inflation, using CPI.
The TIPS themselves of course are adjusted for inflation, but he shows the annual payouts which do not increase (always about $4300/yr).
Look at the heading of the spreadsheet in what Allan Roth wrote. It says $4300 Desired Annual REAL amount (not nominal)
This may be clearer if we break down the "Annual Cash Flow" column of the chart from Allan Roth's article into "Principal", "Last Year Interest", and "Other TIPS Interest". All of the principal and interest proceeds are valued using the TIPS index ratios 10/1/2022 -- shown here. But the actual dollars received will be proportional to the increase in the Reference CPI from 10/1/2022 to whatever date principal or interest is received. [*]

Take 2024 for example. The 3 TIPS he bought will mature 4/15/2024. At the 10/1/2022 index ratio he would collect $3,524.19 (3000 * 1.17473) in principal plus $8.81 (3524.19 * 0.5% / 2) for the final semi-annual coupon interest. But the actual dollars will be based on this TIPS' index ratio 4/15/2024. If the Reference CPI 4/15/2024 is 5% higher than what it is 10/1/2022, the index ratio will also be 5% higher and he would collect $3,700.40 (3524.19 * 1.05) and $9.25 (3700.40 * 0.5% / 2). Likewise the $890.70 shown for "Other TIPS Interest" in 2024 will produce actual dollars based on the Reference CPI values on each interest payment date.

Code: Select all

                           Index              Last Year Other TIPS     Annual
 Matures    Coupon  Nbr    Ratio    Principal  Interest   Interest   Cash Flow    Year

Code: Select all

4/15/2023   0.625%    3   1.19278    3,578.34     11.18     908.32    4,497.84    2023
4/15/2024   0.500%    3   1.17473    3,524.19      8.81     890.70    4,423.70    2024 <===
4/15/2025   0.125%    3   1.14702    3,441.06      2.15     886.40    4,329.61    2025
4/15/2026   0.125%    3   1.12975    3,389.25      2.12     882.16    4,273.53    2026
4/15/2027   0.125%    3   1.04934    3,148.02      1.97     878.22    4,028.21    2027
7/15/2028   0.750%    3   1.18030    3,540.90     26.56     851.67    4,419.12    2028
7/15/2029   0.250%    3   1.15826    3,474.78      8.69     842.98    4,326.45    2029
7/15/2030   0.125%    3   1.15556    3,466.68      4.33     838.65    4,309.66    2030
7/15/2031   0.125%    3   1.10542    3,316.26      4.15     834.50    4,154.91    2031
7/15/2032   0.625%   17   1.01971   17,335.07    108.34   3,630.79   21,074.20    2032-2036
2/15/2040   2.125%   11   1.37076   15,078.36    640.83   1,622.97   17,342.16    2037-2040
2/15/2041   2.125%    3   1.35291    4,058.73     43.12     319.49    4,421.35    2041
2/15/2042   0.750%    3   1.31118    3,933.54     14.75     289.99    4,238.28    2042
2/15/2043   0.625%    3   1.28866    3,865.98     12.08     265.83    4,143.89    2043
2/15/2044   1.375%    3   1.27125    3,813.75     26.22     213.39    4,053.36    2044
2/15/2045   0.750%    4   1.25817    5,032.68     18.87     175.65    5,227.20    2045
2/15/2046   1.000%    3   1.25040    3,751.20     18.76     138.13    3,908.09    2046
2/15/2047   0.875%    3   1.22736    3,682.08     16.11     105.92    3,804.10    2047
2/15/2048   1.000%    4   1.20146    4,805.84     24.03      57.86    4,887.73    2048
2/15/2049   1.000%    3   1.17740    3,532.20     17.66      22.54    3,572.40    2049
2/15/2050   0.250%    4   1.15240    4,609.60      5.76      11.01    4,626.37    2050
2/15/2051   0.125%    4   1.13798    4,551.92      2.84       5.32    4,560.09    2051
2/15/2052   0.125%    4   1.06431    4,257.24      2.66               4,259.90    2052
                     --            ----------  --------  ---------  ----------
      Sum            96            113,187.67  1,022.00  14,672.47  128,882.14
GAAP wrote: Tue Oct 25, 2022 12:49 pm
GaryA505 wrote: Tue Oct 25, 2022 10:50 amCould you do this for 50 years? I'm not joking, could it be done?
The maximum term for TIPS is 30 years, so you would need to spend additional funds for the next 20 years to keep purchasing TIPS.
Or you could purchase 21 year's worth of the latest currently available maturity, the 2/15/2052 TIPS. Then each year for the next 20 years, you'd sell one year's worth and buy the new 30-year TIPS. There would be little interest rate risk the first few years. E.g., the first year you'd be selling a 29-year bond and buying a 30-year bond. But as time goes by the interest rate risk increases. E.g., in 2042 you'd be selling a 10-year bond and buying a 30-year bond.

Another problem with this approach is that the coupons on TIPS maturing in 2053 could easily be more than the minimal 1/8% coupon of the Feb 2052 maturity. Say, the coupon on the Feb 2053 is 1%. Even if the yield were the same for the Feb 2052 being sold and the Feb 2053 being purchased, the Feb 2053 would be more "expensive". To get the same constant dollars of principal in 2053 would take more than 1/21st of the 592 Feb 2052 bonds held. On the other hand, there would now be slightly more interest payments being collected 2023 - 2052.

Here's how the initial purchase looks using my TIPS Ladder Builder Excel workbook with prices from the end of September. The cost of $30,000 per year in constant dollars to cover 50 years is $1,060,000. The only change I made to the default inputs was to change the Multiplier for the Feb 2052 from "1" to "21".

Code: Select all

10/01/2022 base dt                          Mult  Nbr      Cost  Principal
10/03/2022 quote dt                    Sum    50 1218  1,059,610 1,370,239
                                  Interest                         129,390
                                  Combined                       1,499,629
  Matures    Coupon      Yield     CUSIP

Code: Select all

 4/15/2023   0.625%    3.324%    9128284H0     1   19     22,410    22,663
 4/15/2024   0.500%    2.292%    9128286N5     1   20     22,903    23,495
 4/15/2025   0.125%    2.155%    912828ZJ2     1   20     21,813    22,940
 4/15/2026   0.125%    2.003%    91282CCA7     1   20     21,167    22,595
 4/15/2027   0.125%    1.871%    91282CEJ6     1   23     22,323    24,135
 7/15/2028   0.750%    1.776%    912828Y38     1   19     21,200    22,426
 7/15/2029   0.250%    1.740%    9128287D6     1   21     22,026    24,323
 7/15/2030   0.125%    1.715%    912828ZZ6     1   20     20,452    23,111
 7/15/2031   0.125%    1.650%    91282CCM1     1   21     20,333    23,214
 7/15/2032   0.625%    1.605%    91282CEZ0     5  119    110,777   121,345
 2/15/2040   2.125%    1.807%    912810QF8     4   74    106,507   101,436
 2/15/2041   2.125%    1.886%    912810QP6     1   20     28,132    27,058
 2/15/2042   0.750%    1.936%    912810QV3     1   20     21,250    26,224
 2/15/2043   0.625%    1.977%    912810RA8     1   21     20,978    27,062
 2/15/2044   1.375%    1.973%    912810RF7     1   22     25,116    27,968
 2/15/2045   0.750%    1.991%    912810RL4     1   22     21,531    27,680
 2/15/2046   1.000%    1.984%    912810RR1     1   23     23,521    28,759
 2/15/2047   0.875%    1.955%    912810RW0     1   23     22,369    28,229
 2/15/2048   1.000%    1.919%    912810SB5     1   24     23,574    28,835
 2/15/2049   1.000%    1.865%    912810SG4     1   24     23,226    28,258
 2/15/2050   0.250%    1.830%    912810SM1     1   26     19,822    29,962
 2/15/2051   0.125%    1.782%    912810SV1     1   25     17,990    28,450
 2/15/2052   0.125%    1.709%    912810TE8    21  592    400,189   630,072
ikowik wrote: Tue Oct 25, 2022 1:16 pm
LilyFleur wrote: Tue Oct 25, 2022 12:55 pm... one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. ...
... Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
It's important to distinguish between the difficulty in establishing the ladder and that of maintaining it. Establishing it is hard. But with one exception, maintaining it is not. That exception is handling the years 2033-2039 when no TIPS mature.

The ladder that Allan Roth purchased handles this case by buying additional amounts of the 2032 and 2040 maturities. If nothing is done, the ladder will produce a huge amount of dollars in 2032 and 2040 with only a trickle of interest payments in between. To make life easier for an heir, the rungs for 2033 - 2039 should be filled in with 10-year TIPS during 2023-2029 funded by selling part of the large 2032 or 2040 maturities. This certainly isn't easy. But once it's done the ladder requires no maintenance.

* See the first two paragraphs of the left sidebar on this help page for an explanation of monthly CPI, Reference CPI, and index ratios.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Allan Roth »

I noted in the article that I'm likely to do more and I did. The logic was to approximate a 30 year inflation adjusted cash flow so that, along with social security (though of course I'm delaying), I have a floor on annual inflation adjusted cash flow for the next 30 years while my wife and I are still alive. The economic reason was the attractive real yields (far more important than nominal yields) but there is a peace of mind that comes from knowing that, between the TIPS ladder and social security, we have enough inflation adjusted cash flow to easily get by, no matter what happens to markets.

Of course, social security could always be cut. And I did not change my allocations from my target of 45% stocks and 55% fixed income.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by vineviz »

GP813 wrote: Tue Oct 25, 2022 12:42 pm I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
For one thing, it's not actually as hard as the author makes it out to be.

And the "average" retiree would (I'd even say should) not be building the whole ladder at once: best practice would be to build it steadily over a period of years as the investor is transitioning from accumulation to retirement. Plus, once it's built there's not much more work to do.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by vineviz »

#Cruncher wrote: Wed Oct 26, 2022 9:17 am
ikowik wrote: Tue Oct 25, 2022 1:16 pm
LilyFleur wrote: Tue Oct 25, 2022 12:55 pm... one of my heirs does have a masters in data analytics, and I know for a fact he would not want to manage a ladder. ...
... Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
It's important to distinguish between the difficulty in establishing the ladder and that of maintaining it. Establishing it is hard. But with one exception, maintaining it is not. That exception is handling the years 2033-2039 when no TIPS mature.

The ladder that Allan Roth purchased handles this case by buying additional amounts of the 2032 and 2040 maturities. If nothing is done, the ladder will produce a huge amount of dollars in 2032 and 2040 with only a trickle of interest payments in between. To make life easier for an heir, the rungs for 2033 - 2039 should be filled in with 10-year TIPS during 2023-2029 funded by selling part of the large 2032 or 2040 maturities. This certainly isn't easy. But once it's done the ladder requires no maintenance.
Agreed.

Some users might find it easier and possibly "good enough" to build the initial ladder with the money that would have gone to the 2033- 2039 rungs invested in a TIPS fund like SCHP or VAIPX instead. Then, each year when a new 10-year TIPS is offered the investor could sell enough of the TIPS to fill in one of the missing rungs. This way they'd never need to sell an individual TIPS.
"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: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Allan Roth »

ikowik wrote: Tue Oct 25, 2022 1:16 pm
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.

I'm sorry to disappoint you but, IMO, financial planning is not about trading. My investing philosophy is aligned with the late John C. Bogle which is to use broad index funds rather than buying individual securities. Buying bonds in the secondary market is far more difficult than stocks as their are no exchanges. For each purchase, I had to find a seller willing to sell small quantities of TIPS at a reasonable price. Then, when I accepted, many of the trades did not go through and were eventually cancelled. I had to resubmit and for some, call the bond desk to get them to push it through, sometimes with long hold times to reach the bond desks.

Relative to buying VTI or VTSAX, i found this difficult and time consuming. Ikowik, how did you get around those issues I faced as i'd love to learn from you as I certainly learned from #Cruncher.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by vineviz »

#Cruncher wrote: Wed Oct 26, 2022 9:17 am
GAAP wrote: Tue Oct 25, 2022 12:49 pm
GaryA505 wrote: Tue Oct 25, 2022 10:50 amCould you do this for 50 years? I'm not joking, could it be done?
The maximum term for TIPS is 30 years, so you would need to spend additional funds for the next 20 years to keep purchasing TIPS.
Or you could purchase 21 year's worth of the latest currently available maturity, the 2/15/2052 TIPS. Then each year for the next 20 years, you'd sell one year's worth and buy the new 30-year TIPS. There would be little interest rate risk the first few years. E.g., the first year you'd be selling a 29-year bond and buying a 30-year bond. But as time goes by the interest rate risk increases. E.g., in 2042 you'd be selling a 10-year bond and buying a 30-year bond.
Similar to my previous post, I'd probably rely on bond funds or ETFs to help solve this problem.

Investing the last 20 rungs worth of principal into a long-term bond fund or ETF doesn't solve all the risks but it would mean that over the course of the next two decades you'd always be selling a fund with a duration similar to the new TIPS you're buying. The obvious choice is probably PIMCO 15+ Year US TIPS ETF (LTPZ) but an investor might be willing to take a little inflation risk and use a nominal fund like Vanguard Extended Duration Treasury ETF (EDV) instead.

Historically the 30-year breakeven inflation rate has tended to be relatively stable in a range of 1.9% to 2.4%.
"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: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

Allan Roth wrote: Wed Oct 26, 2022 9:45 am
ikowik wrote: Tue Oct 25, 2022 1:16 pm
I do not have a Master's in finance. Just about all I know I learned here. I have almost completed my inflation-adjusted income ladder to supplement Social Security, for 25 years in retirement. I am surprised that Allan Roth, a finance professional, says it was difficult- but he also mentions he had never bought an individual TIPS before, even more surprising for someone who makes a living by advising clients on how to purchase and maintain a portfolio.
There are a few long threads here with detailed instructions on how to purchase TIPS at auction and on secondary market. There is an initial learning curve, but trust me, people who post intelligent comments here can do it.
Once constructed, there is little maintenance. The money is available when you need it. The one extra thing to do is re-investment of principal + interest if it exceeds my needs for that year, but this is not different from getting dividends and capital gains.
I also have a stash of I-Bonds purchased over several years. I plug them into the ladder to fill in the "gap" years.

I'm sorry to disappoint you but, IMO, financial planning is not about trading. My investing philosophy is aligned with the late John C. Bogle which is to use broad index funds rather than buying individual securities. Buying bonds in the secondary market is far more difficult than stocks as their are no exchanges. For each purchase, I had to find a seller willing to sell small quantities of TIPS at a reasonable price. Then, when I accepted, many of the trades did not go through and were eventually cancelled. I had to resubmit and for some, call the bond desk to get them to push it through, sometimes with long hold times to reach the bond desks.

Relative to buying VTI or VTSAX, i found this difficult and time consuming. Ikowik, how did you get around those issues I faced as i'd love to learn from you as I certainly learned from #Cruncher.
Allan, I have sporadically read your articles and enjoyed every bit of your level-headed wisdom in these writings. So, let me be clear that I did not intend any criticism or disappointment. I thought that in your work you would have run into clients who ask about buying individual TIPS and would have experience buying them in secondary market. I now understand this expectation was not warranted.
As for how I bought TIPS- I bought them at auction when auctions were available at a maturity date which fit the ladder. Obviously no problems with buying small amounts of bonds, I could buy just one ($1000). In the secondary market (I used Fidelity), I also find that prices are higher for smaller numbers of bonds. I open the depth of book, look for quotes for minimum quantities that I need- just like you did. I did not have any trade fail to fill. However, my minimums were at least 10 or more, and maybe that made a difference. Or you might have had the bad luck of trying to buy when TIPS prices were volatile. I noticed once, while I was trying to buy, that the price changed suddenly, so I had to slow down and make sure I was buying what I wanted.
The first time was difficult as I was confused between Ask and Bid, so I backed out, collected myself and tried again. After a few tries it got progressively easier and I began to have a better grasp on why I was paying what I was paying.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by JackoC »

GaryA505 wrote: Tue Oct 25, 2022 1:33 pm If bought with non-qualified (taxable) money, how/when would the gains from a TIPs ladder be taxed?
Both the inflation principal adjustment and the coupons on TIPS are taxed. Technically speaking the former will show up on your brokerage statement in the 'Original Issue Discount' box, the latter in treasury interest box. If the inflation adjustment wasn't also taxed, TIPS would be a free lunch tax wise compared to ordinary treasuries (where the 'inflation adjustment' can be thought of as fixed at purchase for the amount by which the nominal treasury yield exceeds the TIPS [real] yield).

So taxes can make a big difference. The article presumably assumes it's 401k/IRA money. In that case it's not as if taxes don't exist, a tax rate of r means your actual affective trad IRA balance to use for consumption (goods and services you actually need to buy, the reason you save) is Statement Balance * (1-r), not actually Statement Balance. However Statement Balance * (1-r) then grows at the pre tax rate. So as long as people are remembering that the IRA balance isn't really as big as it looks, it's correct to calculate the return or 'SWR' based on the pre tax TIPS yield.

For taxable money the real balance available for consumption is actually what the brokerage statement says it is, but it will only grow at the after tax yield. For example if federal tax rate is 25%, 30 yr bond yields 4.26% and 30 yr TIPS yields 1.74%, and assuming the mid point expectation of inflation is 4.26%-1.74%=2.52% (the 'TIPS breakeven'), the TIPS will also generate 4.26% in return, thus tax will be 1.07%, the after tax nominal return 4.26%-1.07%=3.19% and the after tax return 3.19%-2.52%=.67%. So, using TIPS in taxable the expected 'SWR' isn't nearly as high as the article states, it would be 3.7% for 30 yrs at that expected inflation rate. Again key assumption the SWR % is what the investor needs to *spend* on *consumption*, not 'I withdraw 4% but some significant % of that goes to income tax'...IOW you can't actually spend it on stuff you need, but setting aside money to spend on consumer goods/services you need is the whole purpose of the exercise. Also note that if inflation exceeds the expected value, the real return of taxable TIPS goes down. If inflation averaged 4%, the after tax return on TIPS would fall to 0.3% and 30 yr 'SWR' to 3.5%.

TIPS aren't particularly close to gteeing 4% SWR for taxable investors, especially considering lack of any longevity protection (beyond the assumed 30 yrs) besides the secondary risk of high inflation on TIPS after tax return. They are looking much better relatively than they were only months ago though.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by Allan Roth »

JackoC wrote: Wed Oct 26, 2022 10:39 am
GaryA505 wrote: Tue Oct 25, 2022 1:33 pm If bought with non-qualified (taxable) money, how/when would the gains from a TIPs ladder be taxed?
Both the inflation principal adjustment and the coupons on TIPS are taxed. Technically speaking the former will show up on your brokerage statement in the 'Original Issue Discount' box, the latter in treasury interest box. If the inflation adjustment wasn't also taxed, TIPS would be a free lunch tax wise compared to ordinary treasuries (where the 'inflation adjustment' can be thought of as fixed at purchase for the amount by which the nominal treasury yield exceeds the TIPS [real] yield).

So taxes can make a big difference. The article presumably assumes it's 401k/IRA money. In that case it's not as if taxes don't exist, a tax rate of r means your actual affective trad IRA balance to use for consumption (goods and services you actually need to buy, the reason you save) is Statement Balance * (1-r), not actually Statement Balance. However Statement Balance * (1-r) then grows at the pre tax rate. So as long as people are remembering that the IRA balance isn't really as big as it looks, it's correct to calculate the return or 'SWR' based on the pre tax TIPS yield.

For taxable money the real balance available for consumption is actually what the brokerage statement says it is, but it will only grow at the after tax yield. For example if federal tax rate is 25%, 30 yr bond yields 4.26% and 30 yr TIPS yields 1.74%, and assuming the mid point expectation of inflation is 4.26%-1.74%=2.52% (the 'TIPS breakeven'), the TIPS will also generate 4.26% in return, thus tax will be 1.07%, the after tax nominal return 4.26%-1.07%=3.19% and the after tax return 3.19%-2.52%=.67%. So, using TIPS in taxable the expected 'SWR' isn't nearly as high as the article states, it would be 3.7% for 30 yrs at that expected inflation rate. Again key assumption the SWR % is what the investor needs to *spend* on *consumption*, not 'I withdraw 4% but some significant % of that goes to income tax'...IOW you can't actually spend it on stuff you need, but setting aside money to spend on consumer goods/services you need is the whole purpose of the exercise. Also note that if inflation exceeds the expected value, the real return of taxable TIPS goes down. If inflation averaged 4%, the after tax return on TIPS would fall to 0.3% and 30 yr 'SWR' to 3.5%.

TIPS aren't particularly close to gteeing 4% SWR for taxable investors, especially considering lack of any longevity protection (beyond the assumed 30 yrs) besides the secondary risk of high inflation on TIPS after tax return. They are looking much better relatively than they were only months ago though.
The so called "4% rule" is a withdrawal rate that includes paying taxes. One's actual after-tax spend rate to live on with TIPS is better with low inflation or deflation since taxes are based on nominal income. If all pretax money, then you are right that the full amount withdrawn from an IRA is taxed at the marginal rate. If in a taxable account, it's far more complex and has little to do with the cash flow. If in a Roth, typically no tax implications.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by ikowik »

As a follow-up on my post above, I want to acknowledge people who have helped me learn about TIPS
-#Cruncher's website eyebonds.info. The TIPS ladder spreadsheet is here.
-Kevin M who posts here. There are a couple of long threads which have detailed instructions on how to buy TIPS in secondary market
-Harry Sit's blog the Finance buff
-David Enna's blog tipswatch.com
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by JackoC »

Allan Roth wrote: Wed Oct 26, 2022 10:55 am
JackoC wrote: Wed Oct 26, 2022 10:39 am
GaryA505 wrote: Tue Oct 25, 2022 1:33 pm If bought with non-qualified (taxable) money, how/when would the gains from a TIPs ladder be taxed?
Both the inflation principal adjustment and the coupons on TIPS are taxed. Technically speaking the former will show up on your brokerage statement in the 'Original Issue Discount' box, the latter in treasury interest box. If the inflation adjustment wasn't also taxed, TIPS would be a free lunch tax wise compared to ordinary treasuries (where the 'inflation adjustment' can be thought of as fixed at purchase for the amount by which the nominal treasury yield exceeds the TIPS [real] yield).

So taxes can make a big difference. The article presumably assumes it's 401k/IRA money. In that case it's not as if taxes don't exist, a tax rate of r means your actual affective trad IRA balance to use for consumption (goods and services you actually need to buy, the reason you save) is Statement Balance * (1-r), not actually Statement Balance. However Statement Balance * (1-r) then grows at the pre tax rate. So as long as people are remembering that the IRA balance isn't really as big as it looks, it's correct to calculate the return or 'SWR' based on the pre tax TIPS yield.

For taxable money the real balance available for consumption is actually what the brokerage statement says it is, but it will only grow at the after tax yield. For example if federal tax rate is 25%, 30 yr bond yields 4.26% and 30 yr TIPS yields 1.74%, and assuming the mid point expectation of inflation is 4.26%-1.74%=2.52% (the 'TIPS breakeven'), the TIPS will also generate 4.26% in return, thus tax will be 1.07%, the after tax nominal return 4.26%-1.07%=3.19% and the after tax return 3.19%-2.52%=.67%. So, using TIPS in taxable the expected 'SWR' isn't nearly as high as the article states, it would be 3.7% for 30 yrs at that expected inflation rate. Again key assumption the SWR % is what the investor needs to *spend* on *consumption*, not 'I withdraw 4% but some significant % of that goes to income tax'...IOW you can't actually spend it on stuff you need, but setting aside money to spend on consumer goods/services you need is the whole purpose of the exercise. Also note that if inflation exceeds the expected value, the real return of taxable TIPS goes down. If inflation averaged 4%, the after tax return on TIPS would fall to 0.3% and 30 yr 'SWR' to 3.5%.

TIPS aren't particularly close to gteeing 4% SWR for taxable investors, especially considering lack of any longevity protection (beyond the assumed 30 yrs) besides the secondary risk of high inflation on TIPS after tax return. They are looking much better relatively than they were only months ago though.
The so called "4% rule" is a withdrawal rate that includes paying taxes. One's actual after-tax spend rate to live on with TIPS is better with low inflation or deflation since taxes are based on nominal income. If all pretax money, then you are right that the full amount withdrawn from an IRA is taxed at the marginal rate. If in a taxable account, it's far more complex and has little to do with the cash flow. If in a Roth, typically no tax implications.
I think in fact the '4% rule' simply ignored taxes and the easiest though clunky way to account for that, under everyone's realization that taxes will somehow enter in, is assume the 4% has to also cover income taxes. But that doesn't make a lot of conceptual sense. As you say the tax component is a potentially complicated function of the kind of account the money is in and the nominal return (though only the real after tax return is of any true interest to the investor). So under the 'simple' assumption that part of the 4% goes to pay income taxes, two different people's 4% of the same nominal Statement Balance would mean a significantly different level of actual allowable consumption.

Whatever the kludgy convention, the way to look at it that makes sense is consider how much you want/need to consume in inflation adjusted $'s (exchanging money for goods and services, not exchanging money for remaining out of prison as we do with income taxes :happy ) then what portfolio will support that for the assumed time period. The key input is the *after tax real return* of the portfolio. That consumption number can't be 4% (initial with CPI adjustment thereafter) of a portfolio of taxable TIPS for 30 yrs. And if it's quoted '4% but some has to go to taxes' the 'some' varies by individual and according to inflation, hard for me to see how that makes sense as a way of describing it. I'm not saying the latter isn't common, just that it doesn't make sense. :happy

On trad IRA the point is that the *return* is actually the pre tax return, it's just that the $1mil trad IRA isn't really worth $1mil to begin with. It's further complicated by Roth and the progressivity of the tax system generally (tax advantageous Roth conversions are available to people below a certain level but moot above that, etc) but it just goes on a tangent. I'd heard of Roth IRA's before your response, believe it or not. :happy
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GP813 »

vineviz wrote: Wed Oct 26, 2022 9:33 am
GP813 wrote: Tue Oct 25, 2022 12:42 pm I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
For one thing, it's not actually as hard as the author makes it out to be.

And the "average" retiree would (I'd even say should) not be building the whole ladder at once: best practice would be to build it steadily over a period of years as the investor is transitioning from accumulation to retirement. Plus, once it's built there's not much more work to do.

Can you expand on this point, why would somebody not build it at once? Let's say a person 5 to 10 years from retirement what are you suggesting would be the best course of action for them.
Last edited by GP813 on Wed Oct 26, 2022 12:07 pm, edited 1 time in total.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by GP813 »

Allan Roth wrote: Wed Oct 26, 2022 9:11 am
GP813 wrote: Tue Oct 25, 2022 12:42 pm I don't really get how an average retiree is supposed to do this if a registered investment advisor is having trouble buying TIPS and building this bond ladder. This doesn't seem like advice for the average retiree unless somebody sets up a much simpler way to set this up.
I hear you and agree this wasn't simple. But #cruncher has done the heavy lifting and gives it away here: http://eyebonds.info/downloads/pages/TIPSLadder.htmlBuying the bonds wasn't easy - I bought some at Fidelity and some at Vanguard and found Vanguard had the better service and execution which surprised me. I did it online but the worst case scenario is that the bond desk could do it for you. I believe they charge $20 a bond so the 24 bonds would cost about $480.
Thanks for responding to my feedback, the article was very interesting, even if I still have more questions than clarity.
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Re: The 4% Rule Just Became a Whole Lot Easier - Allan Roth

Post by vineviz »

JackoC wrote: Wed Oct 26, 2022 11:29 am I think in fact the '4% rule' simply ignored taxes and the easiest though clunky way to account for that, under everyone's realization that taxes will somehow enter in, is assume the 4% has to also cover income taxes. But that doesn't make a lot of conceptual sense.
Nonetheless, that's the convention that we have.

Researchers need a standard methodology so that findings can be replicated, falsified, updated, or extended. The conventions of the SWR studies provide that standardization. The research is agnostic about what the withdrawal is spent on.

I think it should be obvious that taxes will play a role when standard research findings are brought down to the level of an individual household's financial planning. If two households at age 72 both have $4 million in financial assets, but one has them all in a Roth IRA and the other has them all in a Traditional IRA they likely will have very different lifestyles but they will indeed have the same SWR if the asset allocation is the same.
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