Y'all may be missing the point of TIPS

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GAAP
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Re: Y'all may be missing the point of TIPS

Post by GAAP »

rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
Funny, I'm making plans to visit my 93-year old uncle this summer. Longevity is a guess -- my uncle's brother died at 53.

A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
CloseEnough
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Re: Y'all may be missing the point of TIPS

Post by CloseEnough »

GAAP wrote: Tue May 14, 2024 11:49 am
rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
Funny, I'm making plans to visit my 93-year old uncle this summer. Longevity is a guess -- my uncle's brother died at 53.

A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree. Even if preference for funds is contrarian (lately) in this forum and your point is arguably not consistent with "stay the course" :happy And, another reason to not buy long TIPS. Reality happens and conditions change. Especially when talking about 30 years.
GAAP
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Re: Y'all may be missing the point of TIPS

Post by GAAP »

CloseEnough wrote: Tue May 14, 2024 11:57 am
GAAP wrote: Tue May 14, 2024 11:49 am
rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
Funny, I'm making plans to visit my 93-year old uncle this summer. Longevity is a guess -- my uncle's brother died at 53.

A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree. Even if preference for funds is contrarian (lately) in this forum and your point is arguably not consistent with "stay the course" :happy And, another reason to not buy long TIPS. Reality happens and conditions change. Especially when talking about 30 years.
Yup, I see "stay the course" as a guideline against behavioral mistakes. Setting a course that will sail around obstructions is sensible. Sailing on a fixed compass bearing to your final destination when the wind is pushing you into the rocks is just plain dumb. :beer
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
rockstar
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

GAAP wrote: Tue May 14, 2024 11:49 am
rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
Funny, I'm making plans to visit my 93-year old uncle this summer. Longevity is a guess -- my uncle's brother died at 53.

A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I’m not going to take on long duration risk in the hopes that I make it to 95. It’s compounding uncertainty. I have no clue how long I’m going to live. And I have no idea what will be happening with both inflation and interest rates that far into the future. I’d rather keep my duration no longer than 5-7 years max.
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Svensk Anga
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

GAAP wrote: Tue May 14, 2024 12:05 pm
CloseEnough wrote: Tue May 14, 2024 11:57 am
GAAP wrote: Tue May 14, 2024 11:49 am
rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
Funny, I'm making plans to visit my 93-year old uncle this summer. Longevity is a guess -- my uncle's brother died at 53.

A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree. Even if preference for funds is contrarian (lately) in this forum and your point is arguably not consistent with "stay the course" :happy And, another reason to not buy long TIPS. Reality happens and conditions change. Especially when talking about 30 years.
Yup, I see "stay the course" as a guideline against behavioral mistakes. Setting a course that will sail around obstructions is sensible. Sailing on a fixed compass bearing to your final destination when the wind is pushing you into the rocks is just plain dumb. :beer
Skilled sailors will alter course when a wind shift allows them to point a bit closer to their destination than previously. TIPS at 2+% real are such a wind shift. One takes advantage of such shifts because a "header" is likely to follow, pushing one away from the desired course.
abc132
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Re: Y'all may be missing the point of TIPS

Post by abc132 »

McQ wrote: Mon May 13, 2024 11:11 pm I’m all ears.
abc132 wrote: Sun May 12, 2024 4:10 pm 1. My long term inflation protection is covered by social security.
As such, there would be no reason to invest in longer duration TIPS other than speculation.

2. I have zero ability to purchase TIPS in my traditional retirement account.
As such, even short or intermediate TIPS are not available in traditional.

3. I likely don't need inflation protection.
At 80/20 AA and with 4-5 decades of retirement my risk is from stocks and this is unavoidable without 60x+ expenses, which I do not have.

4. My taxable and Roth space are better used for stocks.
I have I-Bonds, a variable annuity, and another 25% of investments in traditional accounts. None of these spaces offer TIPS. I am better off focusing on stocks in Roth and taxable while converting anything not fixed income to fixed income in these (variable annuity, traditional IRA) spaces. My stock portfolio would need to almost double before all this space could be completely filled with fixed income and TIPS could be considered in Roth space.

There is nothing special about long term TIPS that makes it the best solution for everyone. For my situation I-Bonds are a better first solution and nominals are the next best answer. My long term portfolio will be mostly Roth and taxable and this is superior to a large traditional account with a TIPS ladder. If/when TIPS make sense then long term TIPS will probably not be the correct answer.
There is no particular reason that long term TIPS make sense for every investor. The strategy of converting stock gains to TIPS as you accumulate or simply accumulating TIPS as you accumulate wealth will backtest better than taking timing risk. If you want to argue you took timing risk and got lucky, then the choice of getting all your TIPS now could be a good outcome. The timing plan takes risk without being properly rewarded for having taken past risk. It is not a recommended strategy any more than the 30/70 investor loading up on 100% stocks because PE is below average.

The timing strategy takes risks beyond what the individual should be taking. Investing decisions can be a function of outcome - say achieving 30% stock gains enabling one to load up much of those gains on TIPS - but this would be true regardless of the current TIPS rate.
protagonist
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Re: Y'all may be missing the point of TIPS

Post by protagonist »

Kevin M wrote: Tue May 14, 2024 8:08 am
protagonist wrote: Mon May 13, 2024 9:19 am Current inflation rate: 3.5%
Current yield to maturity of April 2025 TIPS: just under 3%.

12 month T-bill yield: 5.15%
FZDXX 7 day yield : 5.13%

Not knowing what inflation will be over the next year, if you can hold to maturity, April 2025 TIPS strike me as the best bet. Highest current yield PLUS inflation protection.
If you might need to sell prematurely, FZDXX is the best bet.
12 month T-bill doesn't make much sense to me.
What you quote as the current inflation rate is the year over year CPI change for March 2024. That isn't very relevant for comparing expected returns of nominal Treasuries and TIPS, for which BEI would be the better indicator. Also, we should seasonally adjust the TIPS yield, especially for shorter maturities like 1 year.
Yes, I understand that. But I disagree that it is not relevant.

My point is that, in order for April 2025 TIPS to underperform T-bills, given the information available today (which is all we have), inflation would have to fall quite a lot, averaged out between now and next February . And inflation in March was 0.4%....4.8% annualized, though, yes, it will likely fall towards the end of the year because of seasonality. (If my assumption is off, please correct me...you are far more versed in this than I am...though I don't think it would change the underlying point).

If one thinks that is highly likely, then I suppose a 12 month T-bill would be a reasonable choice.

(The PCE is projected to fall to 2.1% by the end of the year, averaging 2.3% for the year, if you have faith in projections- but that still wouldn't beat the T-bill, and the real TIPS yield is guaranteed.)

I have no clue what will happen, so in my mind betting on the 12 month T-bill overperforming enough to make a significant positive difference does not seem like a good bet. I leave my gambling to my stock investments.

Especially because the TIPS offers inflation protection, which IMHO is worth a lot , particularly for retirees. So regardless of which performs better, TIPS serve their purpose, whereas (as many found out in 2022) T-bills can easily and rapidly fail and result in a significant real loss (with no absolute ceiling on how bad it could get, especially because bonds and stocks may well also be falling).

Especially as a retiree, for me, going half and half (nominals /TIPS) does not offer enough of an upside to be worth it vs. 100% TIPS, but still a fair potential downside, and I know that I will make money in real terms with TIPS regardless. That is particularly true because imho this is a year of heightened geopolitical uncertainty, both at home and globally. If nominals outperform 3% TIPS over the next 12 months, I doubt the difference will be significant.
rockstar
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

protagonist wrote: Tue May 14, 2024 5:01 pm
Kevin M wrote: Tue May 14, 2024 8:08 am
protagonist wrote: Mon May 13, 2024 9:19 am Current inflation rate: 3.5%
Current yield to maturity of April 2025 TIPS: just under 3%.

12 month T-bill yield: 5.15%
FZDXX 7 day yield : 5.13%

Not knowing what inflation will be over the next year, if you can hold to maturity, April 2025 TIPS strike me as the best bet. Highest current yield PLUS inflation protection.
If you might need to sell prematurely, FZDXX is the best bet.
12 month T-bill doesn't make much sense to me.
What you quote as the current inflation rate is the year over year CPI change for March 2024. That isn't very relevant for comparing expected returns of nominal Treasuries and TIPS, for which BEI would be the better indicator. Also, we should seasonally adjust the TIPS yield, especially for shorter maturities like 1 year.
Yes, I understand that. But I disagree that it is not relevant.

My point is that, in order for April 2025 TIPS to underperform T-bills, given the information available today (which is all we have), the year over year CPI over the course of 11 months from April 2024 through February 2025 would have to average out to a decrease of over 1.35% over the entire period. And the one month inflation rate in March 2024 was 0.4%...4.8% if annualized , though admittedly it is likely to be higher in this season than late in the year. (If my assumption is off, please correct me...you are far more versed in this than I am...though I don't think it would change the underlying point).

If one thinks that is highly likely, then I suppose a 12 month T-bill would be a reasonable choice.

(The PCE is projected to fall to 2.1% by the end of the year, averaging 2.3% for the year, if you have faith in projections- but that still wouldn't beat the T-bill, and the real TIPS yield is guaranteed.)

I have no clue what will happen, so in my mind betting on the 12 month T-bill overperforming enough to make a significant positive difference does not seem like a good bet. I leave my gambling to my stock investments.

Especially because the TIPS offers inflation protection, which IMHO is worth a lot , particularly for retirees. So regardless of which performs better, TIPS serve their purpose, whereas (as many found out in 2022) T-bills can easily and rapidly fail and result in a significant real loss (with no absolute ceiling on how bad it could get, especially because bonds and stocks may well also be falling).

Especially as a retiree, for me, going half and half (nominals /TIPS) does not offer enough of an upside to be worth it vs. 100% TIPS. That is particularly true because imho this is a year of heightened geopolitical uncertainty, both at home and globally. If nominals outperform TIPS over the next 12 months, I doubt the difference will be significant.
If nominals outperform TIPS, then the Fed has hit its target, and they’ll be dropping the Fed funds rate. Powell came out today and said higher for longer. I’m betting on April 15th TIPS. But next April I might go back to T Bills. We’ll see.
protagonist
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Re: Y'all may be missing the point of TIPS

Post by protagonist »

[
rockstar wrote: Mon May 13, 2024 1:19 pm I know one person to make it into their 90s. Most died before 85. Unless your health is pretty perfect, I wouldn’t count on it.
I live in an over 55 community all winter (NOT assisted living). I'll be 72 next month. Two of my neighbors are 97 and 104 (both female). Rumor has it there is a 111 y.o. in the complex. and, believe it or not, a male. If my memory serves me well, that ties the record for men alive today. When I am there I feel like a teenager.

EDIT....I looked it up, and the oldest validated American male today is only 110. So either my guy is flying under the radar or he is lying about his age. That said, I have no plan to extend my TIPS ladder out to 2063. I'll take my chances with reinvestment risk.
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watchnerd
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Re: Y'all may be missing the point of TIPS

Post by watchnerd »

protagonist wrote: Tue May 14, 2024 5:01 pm So regardless of which performs better, TIPS serve their purpose, whereas (as many found out in 2022) T-bills can easily and rapidly fail and result in a significant real loss (with no absolute ceiling on how bad it could get, especially because bonds and stocks may well also be falling).
When it comes to T-bills, "no absolute ceiling" pretty hyperbolic, because the duration is so short.

3 month T-bills (one of the benchmarks for a risk-free rate) have a napkin math duration of 0.25.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
AlwaysLearningMore
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Re: Y'all may be missing the point of TIPS

Post by AlwaysLearningMore »

ScubaHogg wrote: Sat May 11, 2024 8:51 am
AlwaysLearningMore wrote: Fri May 10, 2024 3:16 pm
Dottie57 wrote: Fri May 10, 2024 2:21 pm
How about multiple smaller SPIA bought every 5 years. Starting at 75 yrs, …. Say 4 or 5 spia.
+1
Also provide longevity insurance.
I’ll say it to the end

A nominal SPIA doesn’t provide ex-ante longevity insurance.
Such a SPIA will lose some purchasing power over time, of course, but it will pay as long as the annuitant is breathing. Same as a corporate pension without a CPI adjustment. They are lifetime contractual income streams, not all in one CPI-indexed retirement plans :wink:

Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy

Since most people have a CPI-indexed income stream in the form of SS, that, of course, helps mitigate overall portfolio inflation risk.

'Have no fear of perfection - you'll never reach it.' - Salvador Dalí
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
ScubaHogg
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Re: Y'all may be missing the point of TIPS

Post by ScubaHogg »

AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
AlwaysLearningMore
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Re: Y'all may be missing the point of TIPS

Post by AlwaysLearningMore »

ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
A SPIA purchased by a 65-year-old in 1970 would now find that annuitant to be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
ScubaHogg
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Re: Y'all may be missing the point of TIPS

Post by ScubaHogg »

AlwaysLearningMore wrote: Wed May 15, 2024 12:53 pm
ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
A SPIA purchased by a 65-year-old in 1970 would not find that and it would be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
I can’t tell if you are purposefully ignoring the point or not. So I’ll help.

A SPIA bought in 1970 lost 60% of its purchasing power in 12 years. So for a 65 year old in 1970 trying to “solve” longevity insurance and possibly looking at 20+ more years in 1982, do you think they said, “good thing I’ve got this SPIA! I don’t have to worry about running out of money”?

And of course Mr Larimore’s SPIA has worked out, as until very recently we experienced a couple decades of very low and falling inflation. Awesome. I’m happy for him. But what does that prove going forward? Absolutely nothing unless you think you can predict inflation.

A 1985 retiree withdrawing 4% could have levered up 50% at the start of retirement and by 1999 have 20x their starting balance. Does that mean all retirees should take on massive leverage?

https://www.portfoliovisualizer.com/bac ... ESg6smlpRC
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
AlwaysLearningMore
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Re: Y'all may be missing the point of TIPS

Post by AlwaysLearningMore »

ScubaHogg wrote: Wed May 15, 2024 1:03 pm
AlwaysLearningMore wrote: Wed May 15, 2024 12:53 pm
ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
A SPIA purchased by a 65-year-old in 1970 would not find that and it would be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
I can’t tell if you are purposefully ignoring the point or not. So I’ll help.

A SPIA bought in 1970 lost 60% of its purchasing power in 12 years. So for a 65 year old in 1970 trying to “solve” longevity insurance and possibly looking at 20+ more years in 1982, do you think they said, “good thing I’ve got this SPIA! I don’t have to worry about running out of money”?

And of course Mr Larimore’s SPIA has worked out, as until very recently we experienced a couple decades of very low and falling inflation. Awesome. I’m happy for him. But what does that prove going forward? Absolutely nothing unless you think you can predict inflation.

A 1985 retiree withdrawing 4% could have levered up 50% at the start of retirement and by 1999 have 20x their starting balance. Does that mean all retirees should take on massive leverage?

https://www.portfoliovisualizer.com/bac ... ESg6smlpRC
Not missing your point at all, but I don't think that people should be quivering in fear of inflation. SPIA's are tools as I stated above (unless you skipped over that part), not the whole tool chest. There are other assets in a portfolio, after all; but other commercially available products don't guarantee a lifetime income.

Perhaps I could help with a culinary analogy: when flavoring a soup for a special dinner for your family, don't rely on one herb alone.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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watchnerd
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Re: Y'all may be missing the point of TIPS

Post by watchnerd »

AlwaysLearningMore wrote: Wed May 15, 2024 1:34 pm
ScubaHogg wrote: Wed May 15, 2024 1:03 pm
AlwaysLearningMore wrote: Wed May 15, 2024 12:53 pm
ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
A SPIA purchased by a 65-year-old in 1970 would not find that and it would be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
I can’t tell if you are purposefully ignoring the point or not. So I’ll help.

A SPIA bought in 1970 lost 60% of its purchasing power in 12 years. So for a 65 year old in 1970 trying to “solve” longevity insurance and possibly looking at 20+ more years in 1982, do you think they said, “good thing I’ve got this SPIA! I don’t have to worry about running out of money”?

And of course Mr Larimore’s SPIA has worked out, as until very recently we experienced a couple decades of very low and falling inflation. Awesome. I’m happy for him. But what does that prove going forward? Absolutely nothing unless you think you can predict inflation.

A 1985 retiree withdrawing 4% could have levered up 50% at the start of retirement and by 1999 have 20x their starting balance. Does that mean all retirees should take on massive leverage?

https://www.portfoliovisualizer.com/bac ... ESg6smlpRC
Not missing your point at all, but I don't think that people should be quivering in fear of inflation. SPIA's are tools as I stated above (unless you skipped over that part), not the whole tool chest. There are other assets in a portfolio, after all; but other commercially available products don't guarantee a lifetime income.

Perhaps I could help with a culinary analogy: when flavoring a soup for a special dinner for your family, don't rely on one herb alone.
But why buy a SPIA at all if I can just roll my own annuity with TIPS?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
AlwaysLearningMore
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Re: Y'all may be missing the point of TIPS

Post by AlwaysLearningMore »

watchnerd wrote: Wed May 15, 2024 1:46 pm
AlwaysLearningMore wrote: Wed May 15, 2024 1:34 pm
ScubaHogg wrote: Wed May 15, 2024 1:03 pm
AlwaysLearningMore wrote: Wed May 15, 2024 12:53 pm
ScubaHogg wrote: Wed May 15, 2024 11:32 am

Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
A SPIA purchased by a 65-year-old in 1970 would not find that and it would be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
I can’t tell if you are purposefully ignoring the point or not. So I’ll help.

A SPIA bought in 1970 lost 60% of its purchasing power in 12 years. So for a 65 year old in 1970 trying to “solve” longevity insurance and possibly looking at 20+ more years in 1982, do you think they said, “good thing I’ve got this SPIA! I don’t have to worry about running out of money”?

And of course Mr Larimore’s SPIA has worked out, as until very recently we experienced a couple decades of very low and falling inflation. Awesome. I’m happy for him. But what does that prove going forward? Absolutely nothing unless you think you can predict inflation.

A 1985 retiree withdrawing 4% could have levered up 50% at the start of retirement and by 1999 have 20x their starting balance. Does that mean all retirees should take on massive leverage?

https://www.portfoliovisualizer.com/bac ... ESg6smlpRC
Not missing your point at all, but I don't think that people should be quivering in fear of inflation. SPIA's are tools as I stated above (unless you skipped over that part), not the whole tool chest. There are other assets in a portfolio, after all; but other commercially available products don't guarantee a lifetime income.

Perhaps I could help with a culinary analogy: when flavoring a soup for a special dinner for your family, don't rely on one herb alone.
But why buy a SPIA at all if I can just roll my own annuity with TIPS?
It's an option if you can purchase enough to assuredly cover the longevity of you and your spouse. Perhaps some investors aren't in that financial position?
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Re: Y'all may be missing the point of TIPS

Post by RationalWalk »

TomatoTomahto wrote: Sun May 12, 2024 10:56 am
LilyFleur wrote: Sat May 11, 2024 12:54 pm
bombcar wrote: Fri May 10, 2024 3:30 pm Anyone who is considering TIPS without first maximizing all possible IBonds should meditate for awhile.
Plenty of Bogleheads have enough assets that iBonds would be a drop in the bucket.
+1

We sold all of our iBonds this year. It’s not so much that the limits are low, but that our intention for most of our assets is that they be inherited by our heirs and charity. It’s easy enough to buy and redeem on TD, but I’m not so sure that it would be as easy for someone inheriting. So, given that the limits are low and the hassles of redeeming for our heirs is unknown, I decided that the juice wasn’t worth the squeeze.
I have the same concern with I-Bonds, and a related concern is squeezing the juice if (when) I am short a few marbles and I or my agent has to navigate TD. The gold standard I'm striving for in retirement is to have everything on autopilot, like Social Security. An income TIPs ladder comes closer - it can be set up so that the maturing payouts are directed to my cash reserve. But --- you'll need to build that TIPs ladder before you start losing those marbles.
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Re: Y'all may be missing the point of TIPS

Post by Svensk Anga »

AlwaysLearningMore wrote: Wed May 15, 2024 12:53 pm
A SPIA purchased by a 65-year-old in 1970 would now find that annuitant to be 119 years old.

As has been stated in the past, purchasing a series smaller SPIAs in the following years helps to mitigate the inflation risk. Of course Social Security is on board so the CPI from that also plays a role. Annuities are tools in a toolbox, but they aren't the whole toolbox.

Again, you can ask Mr. Larimore and dbr if they find their non-CPI indexed annuity/pension income streams to currently be essentially worthless and unhelpful. 😉
I find it doubtful that a 1970 retiree, seeing his SPIA payouts trashed year after year by steep inflation, is going to throw more money down that rat hole by signing up for another. I don't think it was clear that inflation was dead by 1982 either.
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Re: Y'all may be missing the point of TIPS

Post by hudson »

watchnerd wrote: Wed May 15, 2024 1:46 pm But why buy a SPIA at all if I can just roll my own annuity with TIPS?
That's exactly what I'm doing. I'd call it a duration matched TIPS non-rolling ladder.
A TIPS ladder works for you and me and many of us here.

I can see a SPIA working for someone in a narrow situation. Maybe they have come up short; maybe their holdings are under the amount "insured" by their state's guarantee association. (Not as insured as FDIC/NCUA)
I figured a SPIA on Blueprint and the payout was about 10% per year. In 10 years, you have your $250K back.
(age 77, $250K, lifetime, 2,039.66 month, 24,480/year, Nationwide)
https://www.blueprintincome.com/

Bottom line: A SPIA won't work for me, but the deal is attractive.
I'd rather keep control of my funds and just draw down.

Could a SPIA beat a TIPS ladder?
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Re: Y'all may be missing the point of TIPS

Post by CRC_Volunteer »

If the SPIA was funded thru your IRA, this reduces your RMD and could keep you from going over the IRMAA cliff.
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Re: Y'all may be missing the point of TIPS

Post by Kevin M »

protagonist wrote: Tue May 14, 2024 5:09 pm
Kevin M wrote: Tue May 14, 2024 8:08 am
protagonist wrote: Mon May 13, 2024 9:19 am Current inflation rate: 3.5%
Current yield to maturity of April 2025 TIPS: just under 3%.

12 month T-bill yield: 5.15%
FZDXX 7 day yield : 5.13%

Not knowing what inflation will be over the next year, if you can hold to maturity, April 2025 TIPS strike me as the best bet. Highest current yield PLUS inflation protection.
If you might need to sell prematurely, FZDXX is the best bet.
12 month T-bill doesn't make much sense to me.
What you quote as the current inflation rate is the year over year CPI change for March 2024. That isn't very relevant for comparing expected returns of nominal Treasuries and TIPS, for which BEI would be the better indicator. Also, we should seasonally adjust the TIPS yield, especially for shorter maturities like 1 year.
Yes, I understand that. But I disagree that it is not relevant.
Your following argument indicates that you do not understand it. If you did, you'd understand that inflation over the previous year is not a good predictor of inflation over the next year, or two or five. BEI may not be perfect, but from previous investigations, I recall that it's a better predictor than previous YoY inflation.

We don't have to look far into that past to see this. YoY inflation in June 2022 was 9.06%. By June 2023 it had fallen to 2.97%, and for April it's 3.36%.

Image
protagonist wrote: Tue May 14, 2024 5:09 pmMy point is that, in order for April 2025 TIPS to underperform T-bills, given the information available today (which is all we have), inflation would have to fall quite a lot, averaged out between now and next February . And inflation in March was 0.4%....4.8% annualized, though, yes, it will likely fall towards the end of the year because of seasonality. (If my assumption is off, please correct me...you are far more versed in this than I am...though I don't think it would change the underlying point).

If one thinks that is highly likely, then I suppose a 12 month T-bill would be a reasonable choice.
But the BEI, which is based on the "bets" of institutional investors who are betting much more than you or I, indicates that this is indeed what they expect!

I posted a CPI update today, (5) April 2024 CPI and TIPS inflation adjustments for June - Bogleheads.org, and in that pointed out not only the April (not March) month over month CPIAUCNS change of 0.39%, but the annualized rate of 4.77%, as you point out. But I also pointed out how volatile month to month CPI changes are, and although seasonal adjustments smooth it out some, they're still volatile.

Image
I have no clue what will happen, so in my mind betting on the 12 month T-bill overperforming enough to make a significant positive difference does not seem like a good bet. I leave my gambling to my stock investments.
If you are choosing TIPS over nominals because you think they will do better, then you are making a bet.
Especially because the TIPS offers inflation protection, which IMHO is worth a lot , particularly for retirees. So regardless of which performs better, TIPS serve their purpose, whereas (as many found out in 2022) T-bills can easily and rapidly fail and result in a significant real loss (with no absolute ceiling on how bad it could get, especially because bonds and stocks may well also be falling).
I have no argument at all with this. This has nothing to do with choosing TIPS over nominals because we think that they'll do better. This has to do with holding TIPS because we want a known amount of real dollars at some point in the future.
Especially as a retiree, for me, going half and half (nominals /TIPS) does not offer enough of an upside to be worth it vs. 100% TIPS, but still a fair potential downside, and I know that I will make money in real terms with TIPS regardless. That is particularly true because imho this is a year of heightened geopolitical uncertainty, both at home and globally. If nominals outperform 3% TIPS over the next 12 months, I doubt the difference will be significant.
I mostly agree with this too.

For me, lots of my TIPS are in a liability matching ladder (roughly, since liabilities are uncertain). However, about 57% of my TIPS are mature before the end of 2027, while my LMP extends through 2047. So if I'm being honest, many of the TIPS maturing before 2028 are part of my risk portfolio, due to the reinvestment risk.

I've chosen to hold only nominal Treasuries in taxable, which results in my overall fixed income consisting of about 60% TIPS, which is all I have in my IRA, and 40% nominals, which is almost all of my fixed income in taxable. I have nominals maturing every month from June 2024 through Dec 2025, with a bit in May and June of 2026 because on the day before a batch of Ts matured I could get 5.0% out that far. Again, if being honest, I have to admit that much of my nominal T holdings are part of my risk portfolio due to the reinvestment risk, and I'm OK with that.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Y'all may be missing the point of TIPS

Post by silvergga »

Kevin M wrote: Wed May 15, 2024 4:04 pm I have no argument at all with this. This has nothing to do with choosing TIPS over nominals because we think that they'll do better. This has to do with holding TIPS because we want a known amount of real dollars at some point in the future.
I completely agree on this point. There have been a lot of "are TIPs better" / "nominals will beat TIPs" thread lately. I participated in some of them but have given up. Mostly because folks making the arguments have different objectives than how I view TIPs.

Personally, I don't care if nominal "may or may not" beat TIPs over 10-20-30 years, and if so, by how many % (0.5% or 1.0% or 1.5%). What I need TIPs to do is to give me the "known amount of real dollars at some point in the future". My TIPs ladder / liability matched portfolio is only 40% of my whole portfolio, and I do not care about squeaking a % here or there out of that portion of my portfolio. I take risk and "hopefully" gains from the risk portfolio, in equities.
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Re: Y'all may be missing the point of TIPS

Post by watchnerd »

silvergga wrote: Wed May 15, 2024 4:38 pm My TIPs ladder / liability matched portfolio is only 40% of my whole portfolio, and I do not care about squeaking a % here or there out of that portion of my portfolio. I take risk and "hopefully" gains from the risk portfolio, in equities.
This is pretty aligned with the way Bernstein and Sharpe via LMP TIPS portfolios + risk portfolios.

I find it sensible blend of just enough deterministic outcome to create a safety net, but still with probabilistic upside.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Y'all may be missing the point of TIPS

Post by protagonist »

Thanks, Kevin.
Kevin M wrote: Wed May 15, 2024 4:04 pm

Your following argument indicates that you do not understand it. If you did, you'd understand that inflation over the previous year is not a good predictor of inflation over the next year, or two or five. BEI may not be perfect, but from previous investigations, I recall that it's a better predictor than previous YoY inflation.

We don't have to look far into that past to see this. YoY inflation in June 2022 was 9.06%. By June 2023 it had fallen to 2.97%, and for April it's 3.36%.
I believe I do understand it. It is certainly not as relevant as month-to-month change, and even that leaves a lot unknown, but the two of those together are all the solid information we really have. When YoY inflation was 8-9% , month-to-month inflation was high, and nominals were around 1% in 2022, gambling on nominals outperforming TIPS over the following year would have been pretty risky. I agree, as you point out, even that leaves a huge amount unknown. But if, for a ~1 year investment, we are starting with YoY inflation + TIPS YTM>>nominal yield, AND most recent month inflation+TIPS YTM>> nominal yield, AND projection of inflation for rest of 2024 + TIPS YTM > nominal yield, AND given the inherent value of guaranteed inflation adjustment of TIPS, why would one want to take a chance that maybe nominals will outperform TIPS? That is the situation today- not nearly as extreme as in summer 2022.
If you are choosing TIPS over nominals because you think they will do better, then you are making a bet.
I don't see it that way. In fact, quite the opposite. I don't really care if nominals beat TIPS. I am sure that TIPS will return inflation + about 3% before taxes. It's a sure bet. I win. I'm not comparing my performance with the unknown performance of another investment.

Breakeven points (nominals vs TIPS) are meaningful to you, but not to me. For my purposes, one is a gamble and the other is a sure thing. Apples and oranges. Since I am gambling in the stock market, I choose the sure thing.
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Re: Y'all may be missing the point of TIPS

Post by Circle the Wagons »

Kevin M wrote: Wed May 15, 2024 4:04 pm For me, lots of my TIPS are in a liability matching ladder (roughly, since liabilities are uncertain). However, about 57% of my TIPS are mature before the end of 2027, while my LMP extends through 2047. So if I'm being honest, many of the TIPS maturing before 2028 are part of my risk portfolio, due to the reinvestment risk.
Curious what your baseline plan is for the TIPS coming due over the next few years. Reinvest? into short? long?
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Re: Y'all may be missing the point of TIPS

Post by billaster »

protagonist wrote: Wed May 15, 2024 7:48 pm I am sure that TIPS will return inflation + about 3% before taxes. It's a sure bet. I win.
Plus 3%? Sure bet? I'll take your bet.
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Re: Y'all may be missing the point of TIPS

Post by protagonist »

billaster wrote: Wed May 15, 2024 8:20 pm
protagonist wrote: Wed May 15, 2024 7:48 pm I am sure that TIPS will return inflation + about 3% before taxes. It's a sure bet. I win.
Plus 3%? Sure bet? I'll take your bet.
April 2025 TIPS is around 3.1% at close today.
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Re: Y'all may be missing the point of TIPS

Post by rockstar »

billaster wrote: Wed May 15, 2024 8:20 pm
protagonist wrote: Wed May 15, 2024 7:48 pm I am sure that TIPS will return inflation + about 3% before taxes. It's a sure bet. I win.
Plus 3%? Sure bet? I'll take your bet.
A 12 month treasury according to Bloomberg is 5.07%. The April 15th TIPS YTM is 3.09%. Now, you are missing a month of inflation and yield, so if I call the TIPS YTM only 3%, then that would still imply a breakeven inflation rate of about 2%. Inflation is running above 3% today mainly due to how OER is calculated in the shelter component of CPI. Bloomberg has a good write up on this and suggests it lags. What's the likelihood that CPI goes from 3.4% to 2% over the next 11 months?

I made this bet last month when the breakeven inflation was a little bit higher, and I was getting almost 12 months of inflation and yield.

I'm hoping someone can correct me if what I wrote above is incorrect or if I'm missing something obvious.

https://www.wsj.com/market-data/bonds/tips

https://www.bloomberg.com/markets/rates ... t-bonds/us
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Re: Y'all may be missing the point of TIPS

Post by UpperNwGuy »

GAAP wrote: Tue May 14, 2024 11:49 am A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree!
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Re: Y'all may be missing the point of TIPS

Post by Richard1580 »

UpperNwGuy wrote: Wed May 15, 2024 9:02 pm
GAAP wrote: Tue May 14, 2024 11:49 am A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree!
I would agree with everything up until the bond ladders bit. A rolling bond ladder with the ability to either pull money or roll it over as necessary, strikes me as much better than a bond fund where you may find yourself needing to sell in a down market. Fo course, it also depends on how long you have had money in the fund.
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Re: Y'all may be missing the point of TIPS

Post by ScubaHogg »

AlwaysLearningMore wrote: Wed May 15, 2024 1:53 pm It's an option if you can purchase enough to assuredly cover the longevity of you and your spouse. Perhaps some investors aren't in that financial position?
That is my point though. A non-inflation adjusted SPIA doesn’t provide longevity protection because you have no idea how much goods and services it’ll buy at any point in the future

The fact people suggest just stacking them every few years means people agree with me behaviorally if not explicitly
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Re: Y'all may be missing the point of TIPS

Post by hudson »

Richard1580 wrote: Wed May 15, 2024 9:40 pm
UpperNwGuy wrote: Wed May 15, 2024 9:02 pm
GAAP wrote: Tue May 14, 2024 11:49 am A fixed plan is basically only good at the time it's made, and gets worse as reality happens over time. Good plans are adjusted as conditions change. Flexibility is key. That's one reason why I'm not a fan of bond ladders. Matching duration to a moving target is just plain easier with funds.
I agree!
I would agree with everything up until the bond ladders bit. A rolling bond ladder with the ability to either pull money or roll it over as necessary, strikes me as much better than a bond fund where you may find yourself needing to sell in a down market. Fo course, it also depends on how long you have had money in the fund.
Funds and ETFs are easy.
Chickens like me get heartburn from ups and downs from funds and ETFs.
Once one learns the ropes, buying individual T's and CDs isn't hard.
When prices of T's and CDs go up and down, I don't care much as I'm holding until maturity.

Bottom line: Anything that works is good technique!
Individual T's and CDs work for me. What expenses?
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Re: Y'all may be missing the point of TIPS

Post by Gaston »

Naive question: With regard to new TIPS bonds (not those purchased on the secondary market), are TIPS bonds unlimited in supply? If a large number of investors suddenly want to buy more new bonds, does the US government (the treasury) simply issue more?
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Re: Y'all may be missing the point of TIPS

Post by hudson »

Gaston wrote: Thu May 16, 2024 9:09 am Naive question: With regard to new TIPS bonds (not those purchased on the secondary market), are TIPS bonds unlimited in supply? If a large number of investors suddenly want to buy more new bonds, does the US government (the treasury) simply issue more?
no limit
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Re: Y'all may be missing the point of TIPS

Post by KlangFool »

AlwaysLearningMore wrote: Wed May 15, 2024 1:53 pm
It's an option if you can purchase enough to assuredly cover the longevity of you and your spouse. Perhaps some investors aren't in that financial position?
AlwaysLearningMore,

Or, their social security benefit ( A COLA based annuity) cover most of their retirement expense. Hence, they do not need this.

FYI. This is a first world problem. It only applies to folks that have retirement expenses far exceed whatever the social security can provide.

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Re: Y'all may be missing the point of TIPS

Post by CloseEnough »

KlangFool wrote: Thu May 16, 2024 9:23 am
AlwaysLearningMore wrote: Wed May 15, 2024 1:53 pm
It's an option if you can purchase enough to assuredly cover the longevity of you and your spouse. Perhaps some investors aren't in that financial position?
AlwaysLearningMore,

Or, their social security benefit ( A COLA based annuity) cover most of their retirement expense. Hence, they do not need this.

FYI. This is a first world problem. It only applies to folks that have retirement expenses far exceed whatever the social security can provide.

KlangFool
Consider that SS covers around 40% of pre-retirement income, that average SS benefits in this country are around $20k per year and that only about 40% of retirees live solely off their SS benefit. Add to that the ever increasing costs of health/medical for many retirees. So, it's not really not just a first world problem, more of a second world problem in the first world.
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Re: Y'all may be missing the point of TIPS

Post by bikechuck »

ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
There are ways to mitigate the inflation risks of SPIAS. Some of these might include

Augment them with a TIPS ladder

Use them to help delay SS until 70

Purchase them in traunches every 5 to ten years in progressively smaller amounts as mortality credits grow to generate income lost to inflation

Given the guaranteed monthly annuity income in conjunction with SS allow yourself to take some additional risk by increasing your equity exposure

Too many people look at this in isolation rather than as a component of an overall strategy.
Last edited by bikechuck on Thu May 16, 2024 11:09 am, edited 3 times in total.
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Re: Y'all may be missing the point of TIPS

Post by ScubaHogg »

bikechuck wrote: Thu May 16, 2024 11:03 am
ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
There are ways to mitigate the inflation risks of SPIAS. Some of these might include

Augment them with a TIPS ladder

Use them to help delay SS until 70

Purchase them in traunches every 5 to ten years in smaller amounts to generate income lost to inflation

Given the guaranteed monthly income in conjunction with SS allows yourself to take some risk by increasing your equity exposure

Too many people look at this in isolation rather than as a component of an overall strategy.
That’s all good and fine. I never said they were worthless. I said they weren’t “longevity insurance” cause they aren’t.

The mental gymnastics and Rube Goldberg combinations people throw out to offset the massive inflation risk of a nominal SPIA only proves my point

*I would add that all your ideas really only work if you know future inflation. But my entire point is that not only is future inflation unknowable, it’s unbounded as well. For all practical purposes It can be virtually infinitely high

viewtopic.php?t=382830
Last edited by ScubaHogg on Thu May 16, 2024 11:12 am, edited 1 time in total.
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Re: Y'all may be missing the point of TIPS

Post by dbr »

bikechuck wrote: Thu May 16, 2024 11:03 am
ScubaHogg wrote: Wed May 15, 2024 11:32 am
AlwaysLearningMore wrote: Wed May 15, 2024 11:28 am Esteemed contributors T. Larimore (now age 100) and dbr have posted about their non-CPI indexed annuities/pension. Care to ask them if they have found the payment streams useful over the years, in spite of their lack of CPI indexation? :happy
Lots of investments do well if the risk never materializes. But we can’t know that before the fact, can we?

Ask yourself how a nominal SPIA purchased in 1970 performed? Or more dramatically, a nominal SPIA before the dramatic 20th century inflation jumps in any of dozens of countries?
There are ways to mitigate the inflation risks of SPIAS. Some of these might include

Augment them with a TIPS ladder

Use them to help delay SS until 70

Purchase them in traunches every 5 to ten years in smaller amounts to generate income lost to inflation

Given the guaranteed monthly income in conjunction with SS allows yourself to take some risk by increasing your equity exposure

Too many people look at this in isolation rather than as a component of an overall strategy.
This is all so.

I am not one for metaphors, but in this case one could consider what a person who is short does about reaching something that is kept too high. One answer is that you use a step stool (= other sources of income that make up for the loss of real purchasing power) or one stores things at a lower level (= you are not going to consume as much as you would if the same original source increased with inflation rather than being fixed).

I am sure the fact that these things are so is shocking -- round up the usual suspects.
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Re: Y'all may be missing the point of TIPS

Post by KlangFool »

CloseEnough wrote: Thu May 16, 2024 10:50 am
Consider that SS covers around 40% of pre-retirement income, that average SS benefits in this country are around $20k per year and that only about 40% of retirees live solely off their SS benefit. Add to that the ever increasing costs of health/medical for many retirees. Consider that SS covers around 40% of pre-retirement income.
CloseEnough,

1) The average gross saving rate in this country is less than 5%. Folks that live paycheck to paycheck does not have to worry about buying TIPS. They do not have the money.

"Consider that SS covers around 40% of pre-retirement income"

2) So, the only people that need to worry about buying TIPS are those with high saving rate. Hence, they live on a smaller percentage of their gross income and higher percentage of their gross income goes towards taxes.

3) My Social Security Benefits is about 3K per month. My spouse collects 50% of that. So, that makes it 4.5K per month or 54K per year.

4) My annual expense is about 60K per year.

" So, it's not really not just a first world problem, more of a second world problem in the first world."

5) So, it is a first world problem. Folks with substantial savings and high retirement expense need to think about TIPS.

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Re: Y'all may be missing the point of TIPS

Post by ncbill »

hudson wrote: Wed May 15, 2024 3:24 pm
watchnerd wrote: Wed May 15, 2024 1:46 pm But why buy a SPIA at all if I can just roll my own annuity with TIPS?
That's exactly what I'm doing. I'd call it a duration matched TIPS non-rolling ladder.
A TIPS ladder works for you and me and many of us here.

I can see a SPIA working for someone in a narrow situation. Maybe they have come up short; maybe their holdings are under the amount "insured" by their state's guarantee association. (Not as insured as FDIC/NCUA)
I figured a SPIA on Blueprint and the payout was about 10% per year. In 10 years, you have your $250K back.
(age 77, $250K, lifetime, 2,039.66 month, 24,480/year, Nationwide)
https://www.blueprintincome.com/

Bottom line: A SPIA won't work for me, but the deal is attractive.
I'd rather keep control of my funds and just draw down.

Could a SPIA beat a TIPS ladder?
TIPS don't offer the mortality credits of a SPIA.

Which is probably why one of my retirement planners (MaxiFi, IIRC) recommends annuitizing everything I have left in tax-deferred.

But not until around age 80.
dcabler
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Re: Y'all may be missing the point of TIPS

Post by dcabler »

ncbill wrote: Thu May 16, 2024 11:36 am
hudson wrote: Wed May 15, 2024 3:24 pm
watchnerd wrote: Wed May 15, 2024 1:46 pm But why buy a SPIA at all if I can just roll my own annuity with TIPS?
That's exactly what I'm doing. I'd call it a duration matched TIPS non-rolling ladder.
A TIPS ladder works for you and me and many of us here.

I can see a SPIA working for someone in a narrow situation. Maybe they have come up short; maybe their holdings are under the amount "insured" by their state's guarantee association. (Not as insured as FDIC/NCUA)
I figured a SPIA on Blueprint and the payout was about 10% per year. In 10 years, you have your $250K back.
(age 77, $250K, lifetime, 2,039.66 month, 24,480/year, Nationwide)
https://www.blueprintincome.com/

Bottom line: A SPIA won't work for me, but the deal is attractive.
I'd rather keep control of my funds and just draw down.

Could a SPIA beat a TIPS ladder?
TIPS don't offer the mortality credits of a SPIA.

Which is probably why one of my retirement planners (MaxiFi, IIRC) recommends annuitizing everything I have left in tax-deferred.

But not until around age 80.
Similar for us. If we make it that far and it looks like our health is good, then, sure, that'll be something we consider depending on what our finances and spending are looking like. Always good to be flexible, have a plan B (or maybe even a plan C or D). Nowhere is it written that our choices must be all-or-nothing...

Cheers.
RationalWalk
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Re: Y'all may be missing the point of TIPS

Post by RationalWalk »

McQ said:
2. Owners of SPIAs may wish to protect themselves with a TIPS insurance policy: an abbreviated ladder that commences, say, 10 years after the SPIA was taken out, and continues at least to joint life expectancy. Inflation is the ravager of the SPIA.

I personally intend to annuitize some of my TIAA accumulation in my mid-70s.

And I will certainly lay in a stock of long TIPS as reinsurance on that “insurance” purchase.
By referring to TIPs as an "insurance policy" for an SPIA, the idea seems to be that the TIPs will offer some degree of hedging to offset the negative impact of high inflation on a nominal annuty: if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up remains constant. Of course, the amount of TIPs to buy is a crapshoot because the real value that might be required would depend on the future inflation rate - which is an unknown. And the higher the inflation rate, the less offsetting value provided by the TIPs "policy," which is contrary to the point of having that "insurance" in the first place.

Another way to view this matter is in terms of how much inflation-protected income might be needed in retirement and then assemble the necessary assets to provide a floor of real income. This would include assets such as Social Security, inflation-adjusted pensions, TIPs, I-Bonds. From this perspective, the amount of TIPs to ladder provides one piece of the needed real income stream - it's not "insurance" for an SPIA. If the primary goal is to secure a floor of real income first, then the equation is reversed -- Any residual funds after doing that could then be invested in an SPIA as one option.

If we're considering a TIAA 403(b), then funds that might needed for one's real income TIPs ladder from that source can be rolled into an IRA where TIPs can be purchased. The remaining funds in TIAA can be used to purchase a TIAA annuity. To me, this seems like putting the horse in front of the cart where it belongs.
Last edited by RationalWalk on Thu May 16, 2024 4:54 pm, edited 1 time in total.
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CloseEnough
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Re: Y'all may be missing the point of TIPS

Post by CloseEnough »

KlangFool wrote: Thu May 16, 2024 11:13 am
CloseEnough wrote: Thu May 16, 2024 10:50 am
Consider that SS covers around 40% of pre-retirement income, that average SS benefits in this country are around $20k per year and that only about 40% of retirees live solely off their SS benefit. Add to that the ever increasing costs of health/medical for many retirees. Consider that SS covers around 40% of pre-retirement income.
CloseEnough,

1) The average gross saving rate in this country is less than 5%. Folks that live paycheck to paycheck does not have to worry about buying TIPS. They do not have the money.

"Consider that SS covers around 40% of pre-retirement income"

2) So, the only people that need to worry about buying TIPS are those with high saving rate. Hence, they live on a smaller percentage of their gross income and higher percentage of their gross income goes towards taxes.

3) My Social Security Benefits is about 3K per month. My spouse collects 50% of that. So, that makes it 4.5K per month or 54K per year.

4) My annual expense is about 60K per year.

" So, it's not really not just a first world problem, more of a second world problem in the first world."

5) So, it is a first world problem. Folks with substantial savings and high retirement expense need to think about TIPS.

KlangFool
Yours is irrelevant to my point. In fact your number 3 makes my point.

We may be more or less making the same point, with different words. Many investors don't have the money to buy TIPS. It's not because SS covers their expenses (which is what you said), it is because they don't have the financial resources, i.e. they are scraping by because SS does not cover their expenses. Not because expenses are high, they are just in relative poverty, compared to many that post here and worry about/think about TIPS. The post you were responding to was, I think, making that point. At least that is the way I read it, you may have read it differently.
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watchnerd
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Re: Y'all may be missing the point of TIPS

Post by watchnerd »

RationalWalk wrote: Thu May 16, 2024 1:37 pm if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up.
Not necessarily.

My TIPS ladder could consist entirely of TIPS with 0% real yield.

So while the real value of the SPIA contract goes down, the TIPS ladder would just be held constant, in real terms.
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Richard1580
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Re: Y'all may be missing the point of TIPS

Post by Richard1580 »

watchnerd wrote: Thu May 16, 2024 3:59 pm
RationalWalk wrote: Thu May 16, 2024 1:37 pm if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up.
Not necessarily.

My TIPS ladder could consist entirely of TIPS with 0% real yield.

So while the real value of the SPIA contract goes down, the TIPS ladder would just be held constant, in real terms.
Depending on when you purchased the TIPS, that could be true. However, if you purchased them in the last year or so (and hold them to maturity) you should be looking at 1.5-2.4% real yield.
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watchnerd
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Re: Y'all may be missing the point of TIPS

Post by watchnerd »

Richard1580 wrote: Thu May 16, 2024 4:14 pm
watchnerd wrote: Thu May 16, 2024 3:59 pm
RationalWalk wrote: Thu May 16, 2024 1:37 pm if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up.
Not necessarily.

My TIPS ladder could consist entirely of TIPS with 0% real yield.

So while the real value of the SPIA contract goes down, the TIPS ladder would just be held constant, in real terms.
Depending on when you purchased the TIPS, that could be true. However, if you purchased them in the last year or so (and hold them to maturity) you should be looking at 1.5-2.4% real yield.
Sure, but that's an independent variable that has nothing to do with SPIAs going down.

If you have positive real yield, you get that regardless of what SPIAs do.

It doesn't get "more positive real yield" if SPIAs go down.
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Richard1580
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Re: Y'all may be missing the point of TIPS

Post by Richard1580 »

watchnerd wrote: Thu May 16, 2024 4:19 pm
Richard1580 wrote: Thu May 16, 2024 4:14 pm
watchnerd wrote: Thu May 16, 2024 3:59 pm
RationalWalk wrote: Thu May 16, 2024 1:37 pm if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up.
Not necessarily.

My TIPS ladder could consist entirely of TIPS with 0% real yield.

So while the real value of the SPIA contract goes down, the TIPS ladder would just be held constant, in real terms.
Depending on when you purchased the TIPS, that could be true. However, if you purchased them in the last year or so (and hold them to maturity) you should be looking at 1.5-2.4% real yield.
Sure, but that's an independent variable that has nothing to do with SPIAs going down.

If you have positive real yield, you get that regardless of what SPIAs do.

It doesn't get "more positive real yield" if SPIAs go down.
The bottom line is that TIPS should keep up with inflation while SPIAs will lose purchasing power to inflation. Which one works best for you will depend on your individual situation.
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Re: Y'all may be missing the point of TIPS

Post by RationalWalk »

watchnerd wrote: Thu May 16, 2024 3:59 pm
RationalWalk wrote: Thu May 16, 2024 1:37 pm if the real value of an SPIA contract goes down, the real value of a TIPs ladder goes up.
Not necessarily.

My TIPS ladder could consist entirely of TIPS with 0% real yield.

So while the real value of the SPIA contract goes down, the TIPS ladder would just be held constant, in real terms.
Yes, of course that makes sense. It is the relative difference in the real values of the SPIA and the TIPs that becomes greater with inflation because the real value of the SPIA decreases while the real value of the TIPs remains constant (does not increase as I said earlier).
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