Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Doc
Posts: 8735
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Doc » Sun Dec 10, 2017 11:39 am

MtnBiker wrote:
Sat Dec 09, 2017 12:40 pm
I would like to ask the experts on here what they think would be the best strategy for when to buy a TIPS ladder under present market conditions.
If you have enough just buy the whole thing now, put your computer in the closet, go fishing or golfing or whatever mountain biking and just enjoy your retirement.

If you are concerned with interest rates going up, still buy the whole thing now but buy triple rungs of tens and for the next ten years as each rung matures spend one and roll the other two. Modify as needed for the second ten year period.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

MtnBiker
Posts: 154
Joined: Sun Nov 16, 2014 4:43 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by MtnBiker » Tue Dec 12, 2017 12:33 pm

Grok & Doc: Thank you for your insights and advice. I'll probably start by buying some at auction in the coming months. Meanwhile I will continue my education and will begin monitoring interest rates.

Looking at the history of interest rates over the past five years I have an observation. Real (and nominal) rates increased sharply in the spring of 2013, spring of 2015, and in November 2016. The 2013 and 2016 events were associated with the taper tantrum and the last presidential election. Apparently more favorable buying opportunities can develop when unexpected events send shock waves through the financial markets.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Tue Dec 12, 2017 6:26 pm

MtnBiker wrote:
Tue Dec 12, 2017 12:33 pm
Grok & Doc: Thank you for your insights and advice. I'll probably start by buying some at auction in the coming months. Meanwhile I will continue my education and will begin monitoring interest rates.

Looking at the history of interest rates over the past five years I have an observation. Real (and nominal) rates increased sharply in the spring of 2013, spring of 2015, and in November 2016. The 2013 and 2016 events were associated with the taper tantrum and the last presidential election. Apparently more favorable buying opportunities can develop when unexpected events send shock waves through the financial markets.
Cuts both ways though. Real rates could go a lot lower.
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Thu Dec 14, 2017 2:52 pm

30 year yield now at 0.76%!
Keep calm and Boglehead on. KCBO.

Always passive
Posts: 315
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Always passive » Thu Dec 14, 2017 3:07 pm

Is 0.76% real yield supposed to be good?

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Thu Dec 14, 2017 3:40 pm

Always passive wrote:
Thu Dec 14, 2017 3:07 pm
Is 0.76% real yield supposed to be good?
Right now 30 year tips yields have been grinding lower since spiking over 1% earlier in the year.

Over the past 5 years the yields have been in a 0.5% to 1.5% range.

It's hard to know...
Keep calm and Boglehead on. KCBO.

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by saltycaper » Thu Dec 14, 2017 3:42 pm

As recently as the winter of 2015 and the fall of 2016, the rate on the 30-year TIPS got down to around 0.5%. Back in early 2012, it was about 0.25%. It certainly can happen again. Meanwhile, on the nominal side, the yield curve has been flattening.
Quod vitae sectabor iter?

User avatar
Doc
Posts: 8735
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Doc » Thu Dec 14, 2017 5:16 pm

grok87 wrote:
Thu Dec 14, 2017 3:40 pm
Always passive wrote:
Thu Dec 14, 2017 3:07 pm
Is 0.76% real yield supposed to be good?
Right now 30 year tips yields have been grinding lower since spiking over 1% earlier in the year.

Over the past 5 years the yields have been in a 0.5% to 1.5% range.

It's hard to know...
But we can speculate. :wink:

Image
https://www.treasury.gov/resource-cente ... ation.aspx
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Fri Mar 23, 2018 12:31 pm

Bump.
Keep calm and Boglehead on. KCBO.

VinhoVerde
Posts: 90
Joined: Fri Nov 21, 2014 8:39 am

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by VinhoVerde » Fri Mar 23, 2018 11:09 pm

Grok87:
I want to thank you for initiating this thread in 2011. I came across it around 2012 when at age 58, I was furiously researching what to do in the distribution phase of retirement. I implemented a simplified version of a TIPS ladder in 2013-2014 by purchasing TIPS that begin maturing at age 70 every 5 years until 90 ( I hope.) Each tranche consists of 100K, will be dumped into Vanguard Short Term Inflation Adjusted Securities fund at maturity, and receive an inflation adjusted 20K distribution each year to add to my and DW Social Security. I thought this modified version was easier to accomplish than purchasing TIPS for each year of retirement. I nailed down the short end ( age 70) and the long end (age 90) while the rest will roll to fill the middle years.
I will receive dividend and interest payments from stocks, nominal bonds, and CD's to supplement this, but should all of these fail ( unlikely) the TIPS ladder plus Social Security will be enough for me to live on. Thanks for this superb idea!
VinhoVerde

smectym
Posts: 252
Joined: Thu May 26, 2011 5:07 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by smectym » Sat Mar 24, 2018 12:13 am

Absurd. I have plenty of I-bonds and still have worries. One of those worries is that I-bond returns have been ghastly since 666 vs. SPX. Over that period—by now a rather extended period—which investment has done a better job of inflation protection?
Perhaps the next decade will see better results for the magical I-bond. Perhaps. Let’s hope so. Some of those who drank the I-bond/TIPS Kool-Aid don’t have many (any?) decades left to find out.

Smectym

Always passive
Posts: 315
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Always passive » Sat Mar 24, 2018 2:51 am

smectym wrote:
Sat Mar 24, 2018 12:13 am
Absurd. I have plenty of I-bonds and still have worries. One of those worries is that I-bond returns have been ghastly since 666 vs. SPX. Over that period—by now a rather extended period—which investment has done a better job of inflation protection?
Perhaps the next decade will see better results for the magical I-bond. Perhaps. Let’s hope so. Some of those who drank the I-bond/TIPS Kool-Aid don’t have many (any?) decades left to find out.

Smectym
The problem of course is that TIPS are linked to an inflation factor that applies to no one in particular. We all have different life styles, spends differently and live in different places.
But having said that, it is the best solution we have, not great, but i am yet to find a better one to fund retirement. 5 years ago, at 65, I did not commit to a 30 years ladder, just 10. The TIPS real yields bothered me too much to go that long. So I invested the rest in a intermediate term Vanguard corporate bond fund that hopefully provides a better real return (VCIT). Next year, when the fund reaches duration. I will then sell part of it and buy another 5 years worth of ladder. And so on....
Obviously I am taking a bit more risk, but I think not much more.

Longtermgrowth
Posts: 563
Joined: Thu Nov 26, 2015 1:59 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Longtermgrowth » Sat Mar 24, 2018 3:37 am

Would advice change if everything is in taxable? I always thought that a SPIA (single premium immediate annuity) to cover base expenses, along with the rest in stocks (besides emergency fund) to cover whatever inflation erodes from the SPIA, would be decent if SPIA didn't make up a huge portion of portfolio.

Of course if the SPIA doesn't consist of a large portion of portfolio, why not have that part in an intermediate government bond fund like VGIT, instead of the SPIA, taking advantage of the state tax exemption of treasuries?

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re:

Post by grok87 » Sat Mar 24, 2018 6:05 am

#Cruncher wrote:
Wed Apr 06, 2011 9:02 am
grok87 wrote:Is there an easy way to update the index ratios?
Glad you like it, Grok. There are actually 2 sets of index ratios. The first, in column H (multiplied by $1,000) are for whatever date one chooses to take as the "base" date of real values. It is calculated using the Ref CPI for that date which needs to be entered in cell B3. For example, if one wants to use 5/1/2011 instead of 4/1/2011 as the base, enter 221.309. (This is the CPI for Feb, 3 months earlier (CPI-U since 1961). If for some reason one wants to use a base date other than the first of a month, look up the interpolated Ref CPI on that date. For example, a base date of 4/15/2011 would use a Ref CPI of 220.72980 (Ref CPI for 2011).

The second set of index ratios are in column L and are used just to calculate the cost (in column Q) of the bonds purchased for the ladder. These index ratios come from the WSJ TIPS Quote page which I pasted in the green area of the WSJ sheet. When one copies the HTML from a more recent WSJ page and pastes it into this green area, the index ratios in colum L are automaticaly updated.

Edit 3/24/2018 to fix domains for CPI and Ref CPI tables.
thanks #Cruncher for updating the cpi links
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Sat Mar 24, 2018 7:21 am

VinhoVerde wrote:
Fri Mar 23, 2018 11:09 pm
Grok87:
I want to thank you for initiating this thread in 2011. I came across it around 2012 when at age 58, I was furiously researching what to do in the distribution phase of retirement. I implemented a simplified version of a TIPS ladder in 2013-2014 by purchasing TIPS that begin maturing at age 70 every 5 years until 90 ( I hope.) Each tranche consists of 100K, will be dumped into Vanguard Short Term Inflation Adjusted Securities fund at maturity, and receive an inflation adjusted 20K distribution each year to add to my and DW Social Security. I thought this modified version was easier to accomplish than purchasing TIPS for each year of retirement. I nailed down the short end ( age 70) and the long end (age 90) while the rest will roll to fill the middle years.
I will receive dividend and interest payments from stocks, nominal bonds, and CD's to supplement this, but should all of these fail ( unlikely) the TIPS ladder plus Social Security will be enough for me to live on. Thanks for this superb idea!
VinhoVerde
VinhoVerde,
glad it was helpful.
if you bought 30 year tips in late 2013 early 2014 you probably got rates of around 1.3%-1.4%. For example the 30 year tips auctioned in feb 2014 at a coupon of 1.375% and are trading at 109 today.
http://www.wsj.com/mdc/public/page/2_3020-tips.html
cheers,
grok
Last edited by grok87 on Sat Mar 24, 2018 8:06 am, edited 1 time in total.
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Sat Mar 24, 2018 7:55 am

smectym wrote:
Sat Mar 24, 2018 12:13 am
Absurd. I have plenty of I-bonds and still have worries. One of those worries is that I-bond returns have been ghastly since 666 vs. SPX. Over that period—by now a rather extended period—which investment has done a better job of inflation protection?
Perhaps the next decade will see better results for the magical I-bond. Perhaps. Let’s hope so. Some of those who drank the I-bond/TIPS Kool-Aid don’t have many (any?) decades left to find out.

Smectym
A few thoughts...

1) In April of 2011 when this was posted, 30 year tips were trading at real yields of close to 2%. So if one had bought then one would have gotten a strong price return on top of the real yield and inflation.
for example the 30 year tips issued in feb of 2011 (due feb 2014) were issued at a real yield of 2.125% and are trading at 125 today.
http://www.wsj.com/mdc/public/page/2_3020-tips.html
So that works out to a 3.2% annual price return on top of inflation of say 2% and the real yield of 2%. So something like at 7% annual return. Not as good as the S&P 500 obviously but not terrible. Looking at the 15+ years tips etf LTPZ ETF, if you annualize the returns from 2011 to today (march 23rd 2018) one gets an annualized return (CAGR) of 4.7%. Again not S&P 500 type returns but still a comfortable return above inflation.
http://performance.morningstar.com/fund ... ture=en_US

2) The original post focused on Bodie's paper and talked about combining the TIPS ladder with LEAPS, S&P 500 Equity options. That strategy would obviously have paid off very handsomely particularly with the recent run up in equities. It's hard to post returns on it since there is not a fund one can look up on morningstar etc. and there is not good historical price information on S&P 500 leaps.

3) But all of that is backward looking. The question obviously is what to do now. My current plan is to follow a 3-legged-stool approach to replicate 50% of salary in retirement:

a) 1st leg = 1/6 of salary = Social Security
b) 2nd leg = 1/6 of salary = Employer Pension /Tips/I-bond ladder
c) 3rd leg = 1/6 of salary =Risk Portfolio using 3.5% safe withdrawal rate (SWR) ---> Portfolio size = 4.75 x Salary. So for example if one's salary is $100k one would need a $475k Risk portfolio. For asset allocation for this i am roughly following Swensen.

cheers,
grok
Last edited by grok87 on Sat Mar 24, 2018 8:09 am, edited 3 times in total.
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Sat Mar 24, 2018 7:59 am

Always passive wrote:
Sat Mar 24, 2018 2:51 am
smectym wrote:
Sat Mar 24, 2018 12:13 am
Absurd. I have plenty of I-bonds and still have worries. One of those worries is that I-bond returns have been ghastly since 666 vs. SPX. Over that period—by now a rather extended period—which investment has done a better job of inflation protection?
Perhaps the next decade will see better results for the magical I-bond. Perhaps. Let’s hope so. Some of those who drank the I-bond/TIPS Kool-Aid don’t have many (any?) decades left to find out.

Smectym
The problem of course is that TIPS are linked to an inflation factor that applies to no one in particular. We all have different life styles, spends differently and live in different places.
But having said that, it is the best solution we have, not great, but i am yet to find a better one to fund retirement. 5 years ago, at 65, I did not commit to a 30 years ladder, just 10. The TIPS real yields bothered me too much to go that long. So I invested the rest in a intermediate term Vanguard corporate bond fund that hopefully provides a better real return (VCIT). Next year, when the fund reaches duration. I will then sell part of it and buy another 5 years worth of ladder. And so on....
Obviously I am taking a bit more risk, but I think not much more.
Looks like you played things well 5 years ago by not buying 30 year tips. 30 year real yields then were very low at less than 0.5%
https://fred.stlouisfed.org/series/DFII30
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Sat Mar 24, 2018 8:03 am

Longtermgrowth wrote:
Sat Mar 24, 2018 3:37 am
Would advice change if everything is in taxable? I always thought that a SPIA (single premium immediate annuity) to cover base expenses, along with the rest in stocks (besides emergency fund) to cover whatever inflation erodes from the SPIA, would be decent if SPIA didn't make up a huge portion of portfolio.

Of course if the SPIA doesn't consist of a large portion of portfolio, why not have that part in an intermediate government bond fund like VGIT, instead of the SPIA, taking advantage of the state tax exemption of treasuries?
So I'm not retired yet and am more interested in a deferred inflation-indexed annuity. But i can't find any. Seems like a market failure. I want to buy something and the market is not willing to sell it to me.
https://coub.com/view/efw8g
:annoyed
Keep calm and Boglehead on. KCBO.

Always passive
Posts: 315
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Always passive » Sat Mar 24, 2018 9:24 am

grok87 wrote:
Sat Mar 24, 2018 7:59 am
Always passive wrote:
Sat Mar 24, 2018 2:51 am
smectym wrote:
Sat Mar 24, 2018 12:13 am
Absurd. I have plenty of I-bonds and still have worries. One of those worries is that I-bond returns have been ghastly since 666 vs. SPX. Over that period—by now a rather extended period—which investment has done a better job of inflation protection?
Perhaps the next decade will see better results for the magical I-bond. Perhaps. Let’s hope so. Some of those who drank the I-bond/TIPS Kool-Aid don’t have many (any?) decades left to find out.

Smectym
The problem of course is that TIPS are linked to an inflation factor that applies to no one in particular. We all have different life styles, spends differently and live in different places.
But having said that, it is the best solution we have, not great, but i am yet to find a better one to fund retirement. 5 years ago, at 65, I did not commit to a 30 years ladder, just 10. The TIPS real yields bothered me too much to go that long. So I invested the rest in a intermediate term Vanguard corporate bond fund that hopefully provides a better real return (VCIT). Next year, when the fund reaches duration. I will then sell part of it and buy another 5 years worth of ladder. And so on....
Obviously I am taking a bit more risk, but I think not much more.
Looks like you played things well 5 years ago by not buying 30 year tips. 30 year real yields then were very low at less than 0.5%
https://fred.stlouisfed.org/series/DFII30
Luck!

Always passive
Posts: 315
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by Always passive » Sat Mar 24, 2018 9:24 am

Duplicated
Last edited by Always passive on Sat Mar 24, 2018 9:32 am, edited 1 time in total.

gmaynardkrebs
Posts: 937
Joined: Sun Feb 10, 2008 11:48 am

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by gmaynardkrebs » Sat Mar 24, 2018 9:27 am

grok87 wrote:
Sat Mar 24, 2018 8:03 am
Longtermgrowth wrote:
Sat Mar 24, 2018 3:37 am
Would advice change if everything is in taxable? I always thought that a SPIA (single premium immediate annuity) to cover base expenses, along with the rest in stocks (besides emergency fund) to cover whatever inflation erodes from the SPIA, would be decent if SPIA didn't make up a huge portion of portfolio.

Of course if the SPIA doesn't consist of a large portion of portfolio, why not have that part in an intermediate government bond fund like VGIT, instead of the SPIA, taking advantage of the state tax exemption of treasuries?
So I'm not retired yet and am more interested in a deferred inflation-indexed annuity. But i can't find any. Seems like a market failure. I want to buy something and the market is not willing to sell it to me.
https://coub.com/view/efw8g
:annoyed
I've looked also -- it doesn't exist as far as I can tell. However, I don't think it is a market failure. Instead, I think the market is telling us a few things: (1) the risk of high long-run inflation is so great that the annuity market either can't price it; or, if they can price it, when they see the cost, they are unwilling to take on the risk; (2) how valuable a Social Security annuity is, in both its inflation and longevity insurance dimensions; (3) Long TIPS, even at today's low real rates, are seriously under-priced, as they offer a type of long run inflation protection that the private market has so far been unwilling or unable to offer at an affordable price.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Sat Mar 24, 2018 12:11 pm

gmaynardkrebs wrote:
Sat Mar 24, 2018 9:27 am
grok87 wrote:
Sat Mar 24, 2018 8:03 am
Longtermgrowth wrote:
Sat Mar 24, 2018 3:37 am
Would advice change if everything is in taxable? I always thought that a SPIA (single premium immediate annuity) to cover base expenses, along with the rest in stocks (besides emergency fund) to cover whatever inflation erodes from the SPIA, would be decent if SPIA didn't make up a huge portion of portfolio.

Of course if the SPIA doesn't consist of a large portion of portfolio, why not have that part in an intermediate government bond fund like VGIT, instead of the SPIA, taking advantage of the state tax exemption of treasuries?
So I'm not retired yet and am more interested in a deferred inflation-indexed annuity. But i can't find any. Seems like a market failure. I want to buy something and the market is not willing to sell it to me.
https://coub.com/view/efw8g
:annoyed
I've looked also -- it doesn't exist as far as I can tell. However, I don't think it is a market failure. Instead, I think the market is telling us a few things: (1) the risk of high long-run inflation is so great that the annuity market either can't price it; or, if they can price it, when they see the cost, they are unwilling to take on the risk; (2) how valuable a Social Security annuity is, in both its inflation and longevity insurance dimensions; (3) Long TIPS, even at today's low real rates, are seriously under-priced, as they offer a type of long run inflation protection that the private market has so far been unwilling or unable to offer at an affordable price.
Interesting points. I'll give that some thought. Here's my take which i think has some connection to your point 1:

1) i think the basic insurance company business model is to sell you annuities based on treasury rates, but when they buy assets for their investment accounts they buy "spread assets", corporate bonds, real estate debt, etc. There is nothing inherently wrong with this, but it is something to be aware of as a buyer of annuities etc. If there are massive defaults in corporate bonds and other spread bonds that could affect insurance companies solvency.

2) In actual fact insurance companies usually struggle to find spread assets that are long enough in duration to match the duration of the annuities they sell. there just are not a lot of really long term corporate bonds around. so there is more demand than supply which tends to compress the spreads and mean the returns are not great. See this post for example
viewtopic.php?f=10&t=116549

3) there are of course no inflation indexed corporate bonds or other spread bonds. so it makes asset liability matching an inflation indexed annuity very hard and a deferred one with even longer duration even harder. they could of course buy tips but again that doesn't fit their business model of buying spread assets like corporate bonds. they could buy regular long term spread assets but that would mean they would end up taking unhedged inflation risk which maybe they don't want, which i think relates to your point 1.

so again this feels like a market failure to me. it's also probably the case that demand is low cause inflation is not on most people's radar right now.
cheers,
grok
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8501
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's Tip #8:Retire Worry-Free with TIPs as a foundation

Post by grok87 » Wed Mar 28, 2018 12:48 pm

Some of those that responded here may find this new thread interesTing:

viewtopic.php?f=10&t=245377&newpost=3851455

“The 3-legged stool approach to retirement planning”

as it situates the tips-ladder idea in the broader context of a portfolio that includes social security and conventional stock/bond Portfolio.

Cheers,
Grok
Keep calm and Boglehead on. KCBO.

Post Reply