## What's up (or down) with TIPS?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

BirdFood wrote: Fri May 31, 2024 5:29 pm So, I'm looking at long term secondary market TIPS. Questions:

- My understanding is that the yield assumes that the coupon is reinvested at the same rate as the TIPS?
dbr has explained that technically YTM doesn't assume anything about what's done with the coupons--it's just the discount rate that equalizes price and future cash flows, and the math doesn't require assumptions about what's done with the cash flows.

The way I put it is that for the realized return to equal the initial YTM, all coupons must be reinvested at the original YTM.

So I think it's OK to think about it the way you state it, even though it isn't technically correct. My investing textbooks frame it this way, even though it's not technically correct.
- Therefore, if I'm buying these on the assumption that Treasury yields are going to go down, it will be problematic to reinvest the coupon at the same rate and the same level of safety, so that I can regard the yield as meaningful?
I guess you could say that. Again, the realized return is unlikely to equal the original yield, because the coupon reinvestment rates are unknown.
- Therefore, I would be better off--no, I would have a SIMPLER problem--if I seek minimum coupon associated with corresponding price discount?
The lower the coupon, the closer your realized return will be to the original yield. A zero coupon TIPS would make them close to equal, and a 0.125% coupon TIPS is the next best thing.
- So that I'll get my money later, but that's built into the yield calculation and in theory, I end up the same in the end? I realize that it depends on precisely what I buy and the price that minute; I mean, the tendency is that low coupon may get a discount, high coupon may get a premium, and the yield calculation's precise job is to tell me whether I end up even?
As dbr said, internal rate of return is akin to YTM, since both are discount rates in a cash flow analysis. Coupon affects the duration and the risk that realized return won't equal original YTM. So I look first at yield, and then at coupon.

Note that in a non-rolling ladder coupon doesn't matter, since we're spending the cash flows, or otherwise removing them from the ladder. Larger coupons in later years result in few TIPS being required in the earlier years, and vice versa.
Oh, and of course there's the adjusted principal and how I feel about that, the odds of deflation, and how it will affect me in the case of deflation. But the yield has nothing to say about that, I believe.
Remember that if there is deflation, things will cost less, so your purchasing power still is preserved with TIPS. With lower index ratios, there's a higher probability of a return bonus if we have extended deflation, due to the face value lower limit of the adjusted value at maturity.

Also note that it has been many, many years since we've had any period of extended deflation.

Considering the above points, many of use, including me, pay little to no attention to index ratios (aka inflation factors).
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Fri May 31, 2024 6:53 pm
dbr wrote: Fri May 31, 2024 5:35 pm
BirdFood wrote: Fri May 31, 2024 5:29 pm So, I'm looking at long term secondary market TIPS. Questions:

- My understanding is that the yield assumes that the coupon is reinvested at the same rate as the TIPS?
YTM assumes nothing about what the investor does with the coupon payments. However, if you want to compute return and include in your return at the end the earnings gained on the coupons wherever they are then invested, then you are going to have to track those investments and what they earn. Keep in mind that if this money is invested somewhere that pays away interest that is then in turn invested somewhere you have to track and add that in and on and on. If you don't reinvest the coupon payments then your holding has cash flow withdrawals and the concept of return must be abandoned in favor or internal rate of return or time weighted average return. YTM is really the same as or similar to an internal rate of return rather than a (total) return.
Thanks for that explanation. Helps clarify for me how to think about the coupons. It's my preference to buy TIPs with a low coupon so that most of the return is principal, getting close as possible to a zero coupon bond. With these higher coupons now; e.g., 2% it looks like most of the bonus to inflation is spun off as coupon payments. Unless you're managing those to maturity date, what you're getting at maturity in principal return is close to 0% real return. The coupon payments can get commingled along the way and probably spent. Am I right?
Are you thinking about a single holding period, say buying a 20-year TIPS and holding it to maturity, with no particular plans before the end of the holding period? Or are you thinking about a non-rolling ladder, where each year you spend the coupons and the principal from maturing TIPS?

In the ladder case, the coupons don't really matter since they're factored into the construction of the ladder. In the single holding period case, as I said in my previous post, the higher the coupon, the the higher the risk that realized return will deviate from the original yield.
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

hudson wrote: Fri May 31, 2024 7:23 pm
Kevin M wrote: Thu May 30, 2024 12:42 am
• Bond yield and price are inversely related. This is true of TIPS as it is for all other bonds. So yeah, if real yield increases, TIPS unadjusted price decreases, and vice versa.
• The magnitude of price change relative to yield change is larger for longer term bonds--again, true for all bonds. Technically, it's duration that matters more than term to maturity, but that's a fine point that we can put aside for now.
• If you hold to maturity, the interim changes in unadjusted price simply don't matter. You know the bond will mature at a price of 100, so you know exactly what you'll get in real terms at maturity.
• I qualified "price" with "unadjusted", because the price you actually pay or receive--the adjusted price--is adjusted based on the change in the reference CPI since the dated date of the TIPS (hmm, I think there might be more to explain than I can put in a reasonably short bulleted list, but here's a bit more.)
• The dated date for TIPS is the 15th of the month it's first issued, which is toward the end of the month.
• The reference CPI values used to adjust the TIPS prices lag the published CPI values by about three months. This is a very rough approximation to the reality, but good enough for now.
• So, if you hold to maturity, you know with almost no uncertainty what the internal rate of return (IRR) of the cash flows will be.
• The IRR may not equal the realized return if you're reinvesting the coupons (interest payments), because of the uncertainty in reinvestment rates.
• If you build a ladder of TIPS with the goal of generating a Desired Annual Real Amount (DARA) each year, you know with high certainty that the ladder will deliver the DARA each year. You don't care about coupon reinvestment rate, because the coupons are part of the DARA; i.e., you spend them along with the principal of any TIPS that mature that year.
Thanks!
Great and most useful review for the advance novice!
Bookmarked.
More detail on the bolded statement above from #Cruncher:
viewtopic.php?p=7839572#p7839572
Another good reference provided by #Cruncher is his eyebonds.info website. For an explanation of index ratios, see the Background in the left sidebar of TIPS - Help.
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

B88 wrote: Fri May 31, 2024 9:20 pm Glad to see the topic of seasonally adjusted yields. I found out about that effect the hard way. Buying some short term TIPS on the secondary market. Didn't get the total yield in the end I was expecting partly due to this seasonal effect. Worked out okay in the end just not as well as I thought it would.
To clarify, seasonality rationalizes TIPS nominal returns. If we assume zero-coupon TIPS, we'd still see the sawtooth pattern in the short term TIPS yield curve. So assuming a flat SA yield curve, a TIPS yield that is above the seasonally adjusted curve is expected to have a lower nominal return relative to an adjacent maturity that is on or below the seasonally adjusted curve, for example. So excluding coupon reinvestment risk, the realized real return of the former would indeed be higher than the latter, even though the expected nominal returns are the same.
If I make a calculation error, #Cruncher probably will let me know.
RationalWalk
Posts: 530
Joined: Sun May 07, 2023 12:31 pm

### Re: What's up (or down) with TIPS?

Kevin M wrote: Sat Jun 01, 2024 10:58 am
RationalWalk wrote: Fri May 31, 2024 6:53 pm
dbr wrote: Fri May 31, 2024 5:35 pm
BirdFood wrote: Fri May 31, 2024 5:29 pm So, I'm looking at long term secondary market TIPS. Questions:

- My understanding is that the yield assumes that the coupon is reinvested at the same rate as the TIPS?
YTM assumes nothing about what the investor does with the coupon payments. However, if you want to compute return and include in your return at the end the earnings gained on the coupons wherever they are then invested, then you are going to have to track those investments and what they earn. Keep in mind that if this money is invested somewhere that pays away interest that is then in turn invested somewhere you have to track and add that in and on and on. If you don't reinvest the coupon payments then your holding has cash flow withdrawals and the concept of return must be abandoned in favor or internal rate of return or time weighted average return. YTM is really the same as or similar to an internal rate of return rather than a (total) return.
Thanks for that explanation. Helps clarify for me how to think about the coupons. It's my preference to buy TIPs with a low coupon so that most of the return is principal, getting close as possible to a zero coupon bond. With these higher coupons now; e.g., 2% it looks like most of the bonus to inflation is spun off as coupon payments. Unless you're managing those to maturity date, what you're getting at maturity in principal return is close to 0% real return. The coupon payments can get commingled along the way and probably spent. Am I right?
Are you thinking about a single holding period, say buying a 20-year TIPS and holding it to maturity, with no particular plans before the end of the holding period? Or are you thinking about a non-rolling ladder, where each year you spend the coupons and the principal from maturing TIPS?

In the ladder case, the coupons don't really matter since they're factored into the construction of the ladder. In the single holding period case, as I said in my previous post, the higher the coupon, the the higher the risk that realized return will deviate from the original yield.
In my case, I'm thinking about a short (3-5 yr) ladder with the first rung commencing in my late 80s. Not an income ladder but the objective is to provide an inflation-protected stash to be used in the event of a spike in cashflow needs due to healthcare; e.g., LTC. If I'm able and don't need the funds, I'll roll the ladder as long as I can.

So, the coupon payments along the way until the start of the ladder are likely to just get spent which is not what I really desire. When the TIPs start to mature, what I'll see for total return is just the value of the principal plus any coupon payments from TIPs in the ladder occurring that year. All the previous coupon payments would have been spent. So, you seem to be confirming my concern that the realized total return I'll be getting will deviate from what I want, and larger coupons will cause it to deviate more. If I'm, say, targeting \$50K/year in a 5-year ladder to commence in several years, in order to realize that amount in real dollars I am thinking I should focus on the amount of TIPs to buy for each rung based on targeting \$50K in principal at maturity, while disregarding coupons. Maybe I'm wrong about this and would appreciate being corrected.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
BirdFood
Posts: 493
Joined: Sat Mar 23, 2024 12:15 pm

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sat Jun 01, 2024 12:51 pm If I'm, say, targeting \$50K/year in a 5-year ladder to commence in several years, in order to realize that amount in real dollars I am thinking I should focus on the amount of TIPs to buy for each rung based on targeting \$50K in principal at maturity, while disregarding coupons. Maybe I'm wrong about this and would appreciate being corrected.
You might be wrong, but that’s what we’ve been planning. (Edited to add: That is, \$50K in today's dollars, so \$50K adjusted for inflation at maturity, leaving out coupon.) I would prefer to regard the coupons as being outside the guaranteed-income goal.
Last edited by BirdFood on Sat Jun 01, 2024 3:50 pm, edited 2 times in total.
gips
Posts: 1844
Joined: Mon May 13, 2013 5:42 pm

### Re: What's up (or down) with TIPS?

I purchased \$100k of schp to help build a bridge to social security, thinking I'd withdraw around 10% a year. the position quickly lost \$7k and hasn't recovered. It's hard to think of this investment as an inflation hedge since I've lost 7% of my principal though I guess if I wait to about double the 6.6 year effective duration, I may recover the loss.

it seems to me I should bite the bullet, take the loss, and move to a bond ladder where I won't lose principal if each rung is held to maturity. Am I looking at this the right way? pros and cons?
FactualFran
Posts: 2901
Joined: Sat Feb 21, 2015 1:29 pm

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sat Jun 01, 2024 12:51 pm If I'm, say, targeting \$50K/year in a 5-year ladder to commence in several years, in order to realize that amount in real dollars I am thinking I should focus on the amount of TIPs to buy for each rung based on targeting \$50K in principal at maturity, while disregarding coupons.
You should likely target \$50k of inflation-adjusted principal at the time of purchase. The principal at maturity, in then current dollars at maturity, will be the inflation-adjusted principal bought, in now current dollars at purchase, adjusted for inflation between purchase and maturity.
watchnerd
Posts: 14434
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

### Re: What's up (or down) with TIPS?

dbr wrote: Sat Jun 01, 2024 7:48 am
watchnerd wrote: Sat Jun 01, 2024 7:39 am

I don't bother with a ladder tool, either.

I just buy them as if they're zero coupon. A lot of the TIPS I own have coupons so low they're almost zero coupon, anyway.
I imagine the more complicated finagle for a long ladder is finding all the needed maturities of TIPS.

But, I have never contemplated actually using a TIPS ladder and have not looked in detail how it is done in practice.
*shrug*

Bond desks let you search maturity year.

It's not hard at all.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
RationalWalk
Posts: 530
Joined: Sun May 07, 2023 12:31 pm

### Re: What's up (or down) with TIPS?

Thanks to DBR and #Cruncher for helping me to understand what's going on with the coupon payments in the context of inflation-adjusted cashflow from a TIPs ladder. I was clueless in Bogleland.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
RyeBourbon
Posts: 1435
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

### Re: What's up (or down) with TIPS?

gips wrote: Sat Jun 01, 2024 1:41 pm I purchased \$100k of schp to help build a bridge to social security, thinking I'd withdraw around 10% a year. the position quickly lost \$7k and hasn't recovered. It's hard to think of this investment as an inflation hedge since I've lost 7% of my principal though I guess if I wait to about double the 6.6 year effective duration, I may recover the loss.

it seems to me I should bite the bullet, take the loss, and move to a bond ladder where I won't lose principal if each rung is held to maturity. Am I looking at this the right way? pros and cons?
You can take consolation that the price of the ladder has probably declined about the same amount - assuming the duration of the ladder was similar to the fund.

I held two funds with an average duration equal to the ladder I wanted to buy until I had the funds (401k rollover to IRA) to buy the ladder. Over the course of about a year or so, the value of the funds tracked the price of the ladder pretty well. I thought of maintaining the funds, but bit the bullet and bought the bonds for a 7 year SS bridge. I feel more comfortable that I will get the real return I expect.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

RyeBourbon wrote: Sat Jun 01, 2024 4:21 pm
gips wrote: Sat Jun 01, 2024 1:41 pm I purchased \$100k of schp to help build a bridge to social security, thinking I'd withdraw around 10% a year. the position quickly lost \$7k and hasn't recovered. It's hard to think of this investment as an inflation hedge since I've lost 7% of my principal though I guess if I wait to about double the 6.6 year effective duration, I may recover the loss.

it seems to me I should bite the bullet, take the loss, and move to a bond ladder where I won't lose principal if each rung is held to maturity. Am I looking at this the right way? pros and cons?
You can take consolation that the price of the ladder has probably declined about the same amount - assuming the duration of the ladder was similar to the fund.

I held two funds with an average duration equal to the ladder I wanted to buy until I had the funds (401k rollover to IRA) to buy the ladder. Over the course of about a year or so, the value of the funds tracked the price of the ladder pretty well. I thought of maintaining the funds, but bit the bullet and bought the bonds for a 7 year SS bridge. I feel more comfortable that I will get the real return I expect.
Yeah, if you (gips) mean that you intended to start drawing from the fund this year or next, for example, then a fund with a 6.6 year duration was not the appropriate choice. Something like VTIP, with a duration of 2.5 years, would have been better (and would have lost less), but even that is too long for spending in the next couple of years.

This is one reason I prefer individual bonds to funds--I can target whatever maturity I want. With a ladder, we know with high certainty what our annual real cash flows will be, so we simply build the ladder with the real cash flows we want for each year (or perhaps more often; e.g., quarterly for shorter maturity TIPS).

You didn't say specifically what years you are trying to cover, but I suspect that your ladder wouldn't have been similar to SCHP holdings:

If your ladder did look something like this, like RB said, the value of the ladder would have declined about as much as the fund, but I suspect your ladder will be much shorter, so you've probably lost more in the fund than you would have with a properly constructed ladder.

What better time to fix this than now, unless you want to roll the dice that real yields will decline, and you'll recoup more of your loss before you swap to a ladder. I might start swapping now, and then gradually continue the process, since this would result in less regret than if I did it all now, then yields declined a lot (and the fund NAV increased), or if I waited and they went even higher (more losses to recoup).
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

In working on some analysis of a duration matching method to cover the gap years, I wanted to determine reasonable upper and lower limits for 10-year TIPS yields, using historical yields as a guide. I looked at two sources:
1. 10-year constant maturity Treasury (CMT) real yields
2. 10-year TIPS auction yields
Here are the charts of historical yields:

The auction data goes back further, to Feb 1997, while the CMT real yield data starts Jan 2003.

If we compare the two charts, the patterns match quite well starting in early 2003. One thing that caught my attention though, is that the high yields on the CMT chart during the 2008 financial crisis hit 3.14% on 10/31/2008 and 3.15% on 11/21/2008, while the high auction yields bracketing this range were 1.49% at the 7/10/2008 auction and 2.25% at the 1/6/2009 auction. So if you limited yourself to buying at auction, you missed the highest yields by quite a lot.

Back to the original objective, it seems to me that +3% and -1% are reasonable ranges to estimate for future 10-year TIPS yields. I just think it's too optimistic, from a buyer's perspective, to hope for 4% real yields (be still my heart!).
If I make a calculation error, #Cruncher probably will let me know.
billthecat
Posts: 1079
Joined: Tue Jan 24, 2017 1:50 pm
Location: USA

### Re: What's up (or down) with TIPS?

Do you all count social security toward your target inflation-protected holdings? Suppose your goal is for 50% of your fixed income to be inflation protected (i.e., TIPS and/or I bonds). Once you start social security, would you reduce your TIPS and/or I bonds holdings in proportion to the present value of your social security benefit, so that TIPS + PV of SS = 50% of fixed income?
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
watchnerd
Posts: 14434
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

### Re: What's up (or down) with TIPS?

billthecat wrote: Sat Jun 01, 2024 7:58 pm Do you all count social security toward your target inflation-protected holdings? Suppose your goal is for 50% of your fixed income to be inflation protected (i.e., TIPS and/or I bonds). Once you start social security, would you reduce your TIPS and/or I bonds holdings in proportion to the present value of your social security benefit, so that TIPS + PV of SS = 50% of fixed income?
Kind of....

So in the years before I start collecting SS, the TIPS ladder has to account for all the inflation adjusted income.

But I don't do what you describe.

My LMP portfolio (all TIPS) has nothing to do with the risk portfolio and its bond allocation.

Because my LMP ladder is non-rolling, it will all be consumed, and thus I view it as an income stream, not part of a steady state bond allocation.

As it gets consumed, it also means I'm on a rising equity glide path.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

billthecat wrote: Sat Jun 01, 2024 7:58 pm Do you all count social security toward your target inflation-protected holdings? Suppose your goal is for 50% of your fixed income to be inflation protected (i.e., TIPS and/or I bonds). Once you start social security, would you reduce your TIPS and/or I bonds holdings in proportion to the present value of your social security benefit, so that TIPS + PV of SS = 50% of fixed income?
If you're doing a classic liability matching portfolio, as popularized by Bill Bernstein, then the goal is to match the annual real amount generated by the ladder to the expected annual necessary, residual, real liabilities. Residual liabilities are expenses not covered by social security, pensions, or other income streams. So yeah, your TIPS income is on top of your SS income.

The "necessary" bit is that your safe real income streams (TIPS, SS, etc.) provide enough for you to live a decent life, but perhaps not as extravagant a life as you want. Your risk portfolio is intended to cover enhanced lifestyle spending (or giving money away, or whatever). The RP is what's left after you build the ladder, and as the name implies, is invested in assets with higher risk and higher expected returns, like stocks and nominal bonds.

I consider anything that's not in my LMP ladder as part of my risk portfolio. For example, I have way more TIPS maturing 2025-2027 than I need, and since the average duration of these is way less than half of my expected lifetime, these TIPS have reinvestment risk. Similarly, I hold a bunch of shorter-term nominal Ts in taxable, and although these feel very safe, they also have reinvestment risk, so technically are part of my RP.

If you have a nominal pension or annuity, I guess you factor that in somehow too, but since those don't provide real amounts, perhaps reduce them by some inflation estimate.
If I make a calculation error, #Cruncher probably will let me know.
dbr
Posts: 46659
Joined: Sun Mar 04, 2007 8:50 am

### Re: What's up (or down) with TIPS?

Kevin M wrote: Sun Jun 02, 2024 8:22 am
billthecat wrote: Sat Jun 01, 2024 7:58 pm Do you all count social security toward your target inflation-protected holdings? Suppose your goal is for 50% of your fixed income to be inflation protected (i.e., TIPS and/or I bonds). Once you start social security, would you reduce your TIPS and/or I bonds holdings in proportion to the present value of your social security benefit, so that TIPS + PV of SS = 50% of fixed income?
If you're doing a classic liability matching portfolio, as popularized by Bill Bernstein, then the goal is to match the annual real amount generated by the ladder to the expected annual necessary, residual, real liabilities. Residual liabilities are expenses not covered by social security, pensions, or other income streams. So yeah, your TIPS income is on top of your SS income.

The "necessary" bit is that your safe real income streams (TIPS, SS, etc.) provide enough for you to live a decent life, but perhaps not as extravagant a life as you want. Your risk portfolio is intended to cover enhanced lifestyle spending (or giving money away, or whatever). The RP is what's left after you build the ladder, and as the name implies, is invested in assets with higher risk and higher expected returns, like stocks and nominal bonds.

I consider anything that's not in my LMP ladder as part of my risk portfolio. For example, I have way more TIPS maturing 2025-2027 than I need, and since the average duration of these is way less than half of my expected lifetime, these TIPS have reinvestment risk. Similarly, I hold a bunch of shorter-term nominal Ts in taxable, and although these feel very safe, they also have reinvestment risk, so technically are part of my RP.

If you have a nominal pension or annuity, I guess you factor that in somehow too, but since those don't provide real amounts, perhaps reduce them by some inflation estimate.
I feel that the division of income streams into secure and risky, basically meaning SS, pensions, annuities, and ladders on the one hand and withdrawals from a portfolio of stocks and bonds on the other hand to be meaningful and common sensical.

On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
Svensk Anga
Posts: 1722
Joined: Sun Dec 23, 2012 4:16 pm

### Re: What's up (or down) with TIPS?

dbr wrote: Sun Jun 02, 2024 8:30 am
On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
Any expenditure in excess of what the LMP/SS/pension/annuity can fund must therefore come out of the risk portfolio. It might mean that your discretionary spending capacity out of the RP in the future will be less than you had hoped. But the LMP part will be intact and funding essential expenses into the future as planned.

If the LMP is generously funded, taking on debt (HELOC draw?) might level out the large expenses enough to fit the reliable funds. Whether that is worthwhile depends on the allocation of the risk portfolio (could be 100% stocks) and its expected return vs debt cost at the time.
dbr
Posts: 46659
Joined: Sun Mar 04, 2007 8:50 am

### Re: What's up (or down) with TIPS?

Svensk Anga wrote: Sun Jun 02, 2024 8:58 am
dbr wrote: Sun Jun 02, 2024 8:30 am
On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
Any expenditure in excess of what the LMP/SS/pension/annuity can fund must therefore come out of the risk portfolio. It might mean that your discretionary spending capacity out of the RP in the future will be less than you had hoped. But the LMP part will be intact and funding essential expenses into the future as planned.

Well, that is what I said about the sources of the income, but I don't find a relationship between LMP and any particular identification of spending. The issue here is that assigning spending to essential and discretionary is not nearly such a clear organization of spending as assigning income to particular classes of secure and risky. In short the weak point in the concept is to identify how one thing is matched to the other. Operationally there is no such particular identification as income is delivered from sources of income or extracted from a portfolio and then, whatever the income source, is spent/gifted/otherwise disposed of on one item or another. Other people may imagine relationships I don't see.

If the LMP is generously funded, taking on debt (HELOC draw?) might level out the large expenses enough to fit the reliable funds. Whether that is worthwhile depends on the allocation of the risk portfolio (could be 100% stocks) and its expected return vs debt cost at the time.
protagonist
Posts: 9466
Joined: Sun Dec 26, 2010 11:47 am

### Re: What's up (or down) with TIPS?

dbr wrote: Sun Jun 02, 2024 8:30 am
On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.

I'm the first to admit that the future is unpredictable.

That said, we have to make assumptions, right or wrong, even if they are little more than guesses, in order to decide on future action.
I guess what my essential annual financial needs will be (admittedly likely inaccurate 20 or 30 or 40 years into the future), and then pad that with enough excess that I guess should be sufficient to cope with most unpredictable future expenses. I know that is not perfectly risk-free. Nothing is. But that is what I call my risk-free allocation (invested in TIPS), because it is as risk-free as my limited knowledge will allow. The rest I consider at risk.

We all have to make choices based on imperfect assumptions. People who choose a specific SWR do that. People who choose an AA do that. People who choose for how many years they need funds when they decide when to retire do that. Not to mention, when you choose a job, or to get married, or really just about anything dealing with the future, and the longer the time frame, the more guessing comes into the equation.

We still need to do it the best we can in order to take anything more than random action.
watchnerd
Posts: 14434
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

### Re: What's up (or down) with TIPS?

dbr wrote: Sun Jun 02, 2024 8:30 am
Kevin M wrote: Sun Jun 02, 2024 8:22 am
billthecat wrote: Sat Jun 01, 2024 7:58 pm Do you all count social security toward your target inflation-protected holdings? Suppose your goal is for 50% of your fixed income to be inflation protected (i.e., TIPS and/or I bonds). Once you start social security, would you reduce your TIPS and/or I bonds holdings in proportion to the present value of your social security benefit, so that TIPS + PV of SS = 50% of fixed income?
If you're doing a classic liability matching portfolio, as popularized by Bill Bernstein, then the goal is to match the annual real amount generated by the ladder to the expected annual necessary, residual, real liabilities. Residual liabilities are expenses not covered by social security, pensions, or other income streams. So yeah, your TIPS income is on top of your SS income.

The "necessary" bit is that your safe real income streams (TIPS, SS, etc.) provide enough for you to live a decent life, but perhaps not as extravagant a life as you want. Your risk portfolio is intended to cover enhanced lifestyle spending (or giving money away, or whatever). The RP is what's left after you build the ladder, and as the name implies, is invested in assets with higher risk and higher expected returns, like stocks and nominal bonds.

I consider anything that's not in my LMP ladder as part of my risk portfolio. For example, I have way more TIPS maturing 2025-2027 than I need, and since the average duration of these is way less than half of my expected lifetime, these TIPS have reinvestment risk. Similarly, I hold a bunch of shorter-term nominal Ts in taxable, and although these feel very safe, they also have reinvestment risk, so technically are part of my RP.

If you have a nominal pension or annuity, I guess you factor that in somehow too, but since those don't provide real amounts, perhaps reduce them by some inflation estimate.
I feel that the division of income streams into secure and risky, basically meaning SS, pensions, annuities, and ladders on the one hand and withdrawals from a portfolio of stocks and bonds on the other hand to be meaningful and common sensical.

On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
You don't need to overthink it.

Food, utilities, health insurance premiums, taxes, etc, are essential.

Pricey overseas vacations aren't.

There is some gray zone in between (irregular capital expenses like a new car).
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

dbr wrote: Sun Jun 02, 2024 8:30 am I feel that the division of income streams into secure and risky, basically meaning SS, pensions, annuities, and ladders on the one hand and withdrawals from a portfolio of stocks and bonds on the other hand to be meaningful and common sensical.

On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
Here's another way to think about it.

Classic CAPM uses "the riskless asset" in conjunction with a portfolio of risky assets to determine an overall asset allocation. The typical Bogleheads portfolio ignores the riskless asset, and focuses on adjusting risk by adjusting the stocks/bonds allocation; I never saw the sense in this.

Although Tbills typically are used as the riskless asset in most analyses we see, as I learned from bobcat2 some years ago, this is not correct, since the riskless asset depends on holding period (aka investment horizon aka decision horizon) and unit of account: Portfolio theory and the riskless (safest) asset - Bogleheads.org.

In retirement we have a series of holding periods, from say one year and each subsequent year to the number of years we expect to live. A TIPS ladder provides the riskless asset for each of these holding periods. Although I don't recall articulating this exactly this way before, I think that this is the way I view it.

This can be seen in the way my TIPS ladder actually functions in terms of matching my residual expenses in retirement (I've been retired for about 17 years now, but only got around to building a TIPS ladder over the last eight months or so). All of my TIPS are in my IRA (and my IRA is nothing but TIPS).

I established my initial DARA (Desired Annual Real Amount) based on my current estimated residual living expenses. After I completed the ladder, TIPS yields increased, and I wanted to buy more at these higher yields, so I increased my DARA by 20%. Since then, I've added enough to the ladder so that I'm pretty much there now. I consider this ladder to be my riskless asset.

About 57% of my TIPS are in 2025-2027 maturities, so only 3 out of 23 years in the ladder, which obviously is way more than I need. I consider the excess over what I need for the ladder as part of my risk portfolio (RP), since they are not remotely matched to the durations of my liabilities in these years. To put it another way, the weighted average duration of my TIPS is about 6.4 years, while it should be closer to 11 years for a 23 year expected lifetime.

I also hold more than enough short-term Treasuries in taxable to cover many years of residual expenses, even considering that they could be much higher than my current DARA (unless we have hyperinflation). My longest maturity is 6/30/2026, but about half are in maturities of six months or less, and 84% in maturities of one year or less. So although these feel very safe, I consider them part of my RP due to the mismatch between their duration and that of my expected liabilities. I derive some consolation from Bill Bernstein's recommendation that "The prudent retiree holds a goodly pile of both" with respect to TIPS and Tbills: Riskless at Age 104 - Articles - Advisor Perspectives.

So in reality, the annual real amounts (ARAs) from my TIPS ladder will fund my RMDs, starting next year, but I won't actually need them to fund residual expenses. QED.

I realize that I'm extremely fortunate, and that my situation won't apply to others, but there still may be some value of this alternative way of viewing one's TIPS ladder, in that it avoids all of the nitpicking of matching the ARAs to future (uncertain) liabilities. In other words, your riskless portfolio might be too small or too big, but it still can function as "the riskless asset" for the purposes of portfolio construction.
If I make a calculation error, #Cruncher probably will let me know.
RationalWalk
Posts: 530
Joined: Sun May 07, 2023 12:31 pm

### Re: What's up (or down) with TIPS?

Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
Svensk Anga
Posts: 1722
Joined: Sun Dec 23, 2012 4:16 pm

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
Yes, it should be possible, though it might be broker-dependent. I had to convert a TIPS from tIRA to Roth when I had no more stocks available to convert to meet my target. I'm thinking it was at Schwab.
Svensk Anga
Posts: 1722
Joined: Sun Dec 23, 2012 4:16 pm

### Re: What's up (or down) with TIPS?

dbr wrote: Sun Jun 02, 2024 9:15 am
Svensk Anga wrote: Sun Jun 02, 2024 8:58 am
dbr wrote: Sun Jun 02, 2024 8:30 am
On the other side I don't relate to being able to stratify liabilities by essential and "risk" expenditures nor has it proven to be practical to identify the timing of spending. In practice some of our largest expenditures have been both unpredicted and not optional. Even planned, essential expenses haven't turned out to be exactly what one might have thought.
Any expenditure in excess of what the LMP/SS/pension/annuity can fund must therefore come out of the risk portfolio. It might mean that your discretionary spending capacity out of the RP in the future will be less than you had hoped. But the LMP part will be intact and funding essential expenses into the future as planned.

Well, that is what I said about the sources of the income, but I don't find a relationship between LMP and any particular identification of spending. The issue here is that assigning spending to essential and discretionary is not nearly such a clear organization of spending as assigning income to particular classes of secure and risky. In short the weak point in the concept is to identify how one thing is matched to the other. Operationally there is no such particular identification as income is delivered from sources of income or extracted from a portfolio and then, whatever the income source, is spent/gifted/otherwise disposed of on one item or another. Other people may imagine relationships I don't see.

If the LMP is generously funded, taking on debt (HELOC draw?) might level out the large expenses enough to fit the reliable funds. Whether that is worthwhile depends on the allocation of the risk portfolio (could be 100% stocks) and its expected return vs debt cost at the time.
I'm not targeting any specific categories of spending as essential. I am targeting a level of income that I feel I could be satisfied with.

As I see it, the stock market has been very kind to me over my investing career. I started retirement savings right at the market low in the fall of 1982. The talking heads have been whining about high valuations the whole time. Now, the bond market has provided a nice opportunity to lock in a pretty good real return on one's fixed income allocation. Seeing as the real returns are solid across the yield curve, it makes sense to me to ladder in TIPS a large portion of my fixed income. It seems greedy to try to hold out for more and would be a risk that I don't need. I don't care for the reinvestment risk from shorter term fixed income versus my expected lifetime liabilities. Come what may in the markets, I have a pretty good 22 years locked in. The question for me is is it worthwhile to go past 22 years and into low probability life expectancy?
RyeBourbon
Posts: 1435
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
This would be considered a Roth conversion and likely be taxable. Fidelity will allow you to convert TIPS from tIRA to Roth IRA.

If your brokerage requires you to sell and transfer cash, just rebuy in the Roth.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Svensk Anga wrote: Sun Jun 02, 2024 2:53 pm The question for me is is it worthwhile to go past 22 years and into low probability life expectancy?
You could do that instead of buying an annuity. I've been thinking about that a bit. My ladder goes out 23 years (2025-2047), so to age 95. I think the odds of me living longer than that are slim, but if I wanted to add some long-term longevity insurance, I think I'd just buy rungs out to 2052 or even 2054. And there could be worse things to leave my heirs than some long term TIPS that could form the foundations of their riskless asset portfolios.

I get the impression that most Bogleheads would prefer stocks to TIPS for investment horizons of longer than 20 years, but for the more risk averse among us, me included, TIPS out to 30 years do the job.

I don't know much about annuities--just enough to know I have no interest in them--but I wouldn't want to buy one that didn't start paying out for 22 years if it were subject to erosion by inflation between now and then.
If I make a calculation error, #Cruncher probably will let me know.
sycamore
Posts: 6625
Joined: Tue May 08, 2018 12:06 pm

### Re: What's up (or down) with TIPS?

RyeBourbon wrote: Sun Jun 02, 2024 3:16 pm
RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
This would be considered a Roth conversion and likely be taxable. Fidelity will allow you to convert TIPS from tIRA to Roth IRA.

If your brokerage requires you to sell and transfer cash, just rebuy in the Roth.
Yeah, this is the sort of thing that depends on how your brokerage works. For example, here's an old post about in-kind TIPS transfer at Fidelity.
vtMaps wrote: Tue Feb 11, 2020 3:27 am I do conversions of cash online at Fidelity. If I want to convert in kind (e.g. a TIPS bond or shares of a fund), I need to call them. The whole process takes about 5 minutes on the phone. After you've done it a couple of times, you can answer their questions before they ask them... just blurt out: "I understand that my tax liability will be determined by the value of the fund at market close".

--vtMaps
Svensk Anga wrote: Mon Nov 27, 2023 5:45 pm I don't know about Vanguard, but Schwab converted a TIPS for me in-kind.

You might run through their on-line conversion process. There should eventually be a screen where you tell them what assets you want to convert. Enter the number of TIPS and see if it is accepted.
Ret2018 wrote: Tue Nov 28, 2023 10:17 am Spoke with Vanguard today. For rollover of tax-deferred individual 401k (to rollover IRA), the assets are liquidated. For Roth conversion (from rollover IRA to Roth), assets are transferred in-kind. I specifically confirmed that TIPS in a rollover IRA would not have to be "sold" to do the conversion.
protagonist
Posts: 9466
Joined: Sun Dec 26, 2010 11:47 am

### Re: What's up (or down) with TIPS?

Svensk Anga wrote: Sun Jun 02, 2024 2:53 pm I have a pretty good 22 years locked in. The question for me is is it worthwhile to go past 22 years and into low probability life expectancy?

Good question.
I ask myself the same thing.
Recently I extended it to at least 88, overfunding 2034 and 2040 to provide for the gap years when they become available, with a few TIPS out to age 90.

Since I will probably have excess funds maturing every year, I could use those excess funds to extend it further , or use a rolling ladder, or ????

I do have stock investments to fall back upon if my spending needs change and maturing TIPS cannot match them, or if I live beyond the extent of my ladder.

Though it would be nice to leave a lot to heirs, it is also comforting to know that all of my funds will be available while alive, without losing much due to forced withdrawals during bad times.

Right now I am just playing by ear. I don't know what I will do in the future, though if TIPS yields remain positive I will probably reinvest in TIPS in some fashion.
protagonist
Posts: 9466
Joined: Sun Dec 26, 2010 11:47 am

### Re: What's up (or down) with TIPS?

Kevin M wrote: Sun Jun 02, 2024 3:23 pm

I get the impression that most Bogleheads would prefer stocks to TIPS for investment horizons of longer than 20 years, but for the more risk averse among us, me included, TIPS out to 30 years do the job.

I don't know much about annuities--just enough to know I have no interest in them--but I wouldn't want to buy one that didn't start paying out for 22 years if it were subject to erosion by inflation between now and then.
I agree with all of the above.
I think that people who believe that stocks somehow get magically more risk-free as investment horizon increases are deluding themselves based on recency bias, since we have perhaps been the luckiest generation since the dawn of agriculture. Noise (and thus uncertainty) rapidly overtakes signal as a function of time going forward.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
Follow-up question: can RMDs be "in kind" transfers from tIRA to a taxable account (ideally at the same brokerage firm to reduce potential complications)?
"The quest is the quest."
kaesler
Posts: 255
Joined: Mon Mar 12, 2007 4:53 pm
Location: Boston, MA

### Re: What's up (or down) with TIPS?

RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
I did this kind of Roth conversion last year at Fidelity. It can be done online.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Sun Jun 02, 2024 6:50 pm
RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
Follow-up question: can RMDs be "in kind" transfers from tIRA to a taxable account (ideally at the same brokerage firm to reduce potential complications)?
I haven't done this, but I've seen posts indicating that you can take IRA distributions in kind. As long as the broker supports asset transfers from one account to the other, even if the account types are different, you should be able to do it.

I just did a web search on it, and the first hit was this: Taking In-Kind Distributions from Your IRA | Charles Schwab
If I make a calculation error, #Cruncher probably will let me know.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

Kevin M wrote: Sun Jun 02, 2024 8:32 pm
Richard1580 wrote: Sun Jun 02, 2024 6:50 pm
RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
Follow-up question: can RMDs be "in kind" transfers from tIRA to a taxable account (ideally at the same brokerage firm to reduce potential complications)?
I haven't done this, but I've seen posts indicating that you can take IRA distributions in kind. As long as the broker supports asset transfers from one account to the other, even if the account types are different, you should be able to do it.

I just did a web search on it, and the first hit was this: Taking In-Kind Distributions from Your IRA | Charles Schwab

I have set things up so that I will have tranches of TIPS maturing in the years and in the amounts that I *think* I will need to take RMDs, but you never can be sure that the numbers will match up.
"The quest is the quest."
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Sun Jun 02, 2024 8:48 pm
Kevin M wrote: Sun Jun 02, 2024 8:32 pm
Richard1580 wrote: Sun Jun 02, 2024 6:50 pm
RationalWalk wrote: Sun Jun 02, 2024 2:01 pm Just a quick management question. Am I able to transfer TIPs "in kind" from my IRA to my Roth IRA? I would not want them to be liquidated and transferred as cash.
Follow-up question: can RMDs be "in kind" transfers from tIRA to a taxable account (ideally at the same brokerage firm to reduce potential complications)?
I haven't done this, but I've seen posts indicating that you can take IRA distributions in kind. As long as the broker supports asset transfers from one account to the other, even if the account types are different, you should be able to do it.

I just did a web search on it, and the first hit was this: Taking In-Kind Distributions from Your IRA | Charles Schwab

I have set things up so that I will have tranches of TIPS maturing in the years and in the amounts that I *think* I will need to take RMDs, but you never can be sure that the numbers will match up.
Did you see my thread on this topic? Building a TIPS ladder for IRA RMDs - Bogleheads.org
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### TIPS update for June 3, 2024

Yet another day of a fairly large move up in LTPZ price, but not near as much change for short- and intermediate-term TIPS:

The 2045-47 are at 2.27%. This is down 20 bps from the recent high of 2.47% on Apr 24, but up 56 bps from the 6-month low of 1.91% on Dec 27. Here's the chart of 2047 yields for the last year through Friday:

The Apr 2028 0.125%, at 2.24 % is down 4 bps from my purchase on Friday at 2.28%, which is a price change of +0.19% since my Friday purchase and +0.38% since my purchase on 05/28/2024.

Here's the 1 year yield history of the Apr 2028 3.625%, which should be within a basis point or so of the 0.125% issue:

I remember not wanting to buy any of the 202Xs for much of the year through March, when yields were below 2%.

I want to keep pushing my average duration out, but I'd prefer not to add to the longer maturities when their yields are declining. I'll think about adding some more 2028s today.
Last edited by Kevin M on Mon Jun 03, 2024 5:11 pm, edited 1 time in total.
If I make a calculation error, #Cruncher probably will let me know.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

Kevin M wrote: Mon Jun 03, 2024 9:19 am Did you see my thread on this topic? Building a TIPS ladder for IRA RMDs - Bogleheads.org
Thanks for the link. I went back and read (reread?) it. In our case we probably will not be using the RMDs to cover costs - they are just a required evil. We have been converting our tIRAs to Roths for several years, so the only thing left is the wife's tIRA which is a combination of an intermediate TIPS ETF, some short term TIPS and about 50% in a physical gold ETF. Given how volatile gold can be there isn't much chance of getting a ladder of TIPS "just right" to cover RMDs, but I figure a rolling ladder of 5-year TIPS will be close enough, and if we come up short I can always liquidate some of the ETFs.

Also, thanks for all of your posts regarding I-bonds and TIPS (and the tax complications they can create). I have learned a lot from them. We now have a nice rolling ladder of TIPS in our taxable account going out 5+ years, with the majority having real yields of over 2%. We sleep better at night now.
"The quest is the quest."
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Mon Jun 03, 2024 12:44 pm
Kevin M wrote: Mon Jun 03, 2024 9:19 am Did you see my thread on this topic? Building a TIPS ladder for IRA RMDs - Bogleheads.org
Thanks for the link. I went back and read (reread?) it. In our case we probably will not be using the RMDs to cover costs - they are just a required evil.
Right, that thread was not about covering costs, but covering RMDs. The learning was that RMDs increase significantly from age 73 to age 95, at which point it's almost double in nominal terms, and about 21% greater in real terms, given the assumptions I used. So you can't use a fixed DARA if you want to cover expected RMDs, and you need to use the #Cruncher spreadsheet in a different way than intended.
We have been converting our tIRAs to Roths for several years, so the only thing left is the wife's tIRA which is a combination of an intermediate TIPS ETF, some short term TIPS and about 50% in a physical gold ETF. Given how volatile gold can be there isn't much chance of getting a ladder of TIPS "just right" to cover RMDs, but I figure a rolling ladder of 5-year TIPS will be close enough, and if we come up short I can always liquidate some of the ETFs.
I'm confused. How do you cover RMDs with a rolling ladder of TIPS? My thread assumed that the IRA was all TIPS, with each rung of the non-rolling ladder providing the estimated value of the RMD for that year.
Also, thanks for all of your posts regarding I-bonds and TIPS (and the tax complications they can create). I have learned a lot from them. We now have a nice rolling ladder of TIPS in our taxable account going out 5+ years, with the majority having real yields of over 2%. We sleep better at night now.
Yay! Always glad to hear from someone who's benefited from other Bogleheads' posts.
If I make a calculation error, #Cruncher probably will let me know.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

Kevin M wrote: Mon Jun 03, 2024 5:10 pm
Richard1580 wrote: Mon Jun 03, 2024 12:44 pm
Kevin M wrote: Mon Jun 03, 2024 9:19 am
I'm confused. How do you cover RMDs with a rolling ladder of TIPS? My thread assumed that the IRA was all TIPS, with each rung of the non-rolling ladder providing the estimated value of the RMD for that year.
Also, thanks for all of your posts regarding I-bonds and TIPS (and the tax complications they can create). I have learned a lot from them. We now have a nice rolling ladder of TIPS in our taxable account going out 5+ years, with the majority having real yields of over 2%. We sleep better at night now.
Yay! Always glad to hear from someone who's benefited from other Bogleheads' posts.
I am not comfortable going long with TIPS. That's just me. With a rolling ladder you can take out what you need, when you need it and roll the rest. It is not much different than what I am doing in our taxable account. We keep enough money in MMs to cover expected expenses for the next 12 months, but we also have a rolling 5-year ladder of TIPS with a tranche coming due every quarter to cover unexpected expenses. If we need the money, it is there, if not it gets rolled. It reduces the chances of having to pull money out of a TIPS fund/ETF in a down market.

While it is not a perfect solution, it is good enough for my purposes. In the tIRA, it lets me prepare for *anticipated* RMD liabilities. Of course, since we can do in-kind RMDs (I had not realized that before), it may be a moot point and something I need to rethink.

I believe in giving credit where credit is due, and you, Cruncher and a host of others have done amazing work explaining the ins and outs of I-bonds and TIPS.

Thanks.
"The quest is the quest."
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Mon Jun 03, 2024 5:29 pm
Kevin M wrote: Mon Jun 03, 2024 5:10 pm
Richard1580 wrote: Mon Jun 03, 2024 12:44 pm
Kevin M wrote: Mon Jun 03, 2024 9:19 am
I'm confused. How do you cover RMDs with a rolling ladder of TIPS? My thread assumed that the IRA was all TIPS, with each rung of the non-rolling ladder providing the estimated value of the RMD for that year.
Also, thanks for all of your posts regarding I-bonds and TIPS (and the tax complications they can create). I have learned a lot from them. We now have a nice rolling ladder of TIPS in our taxable account going out 5+ years, with the majority having real yields of over 2%. We sleep better at night now.
Yay! Always glad to hear from someone who's benefited from other Bogleheads' posts.
I am not comfortable going long with TIPS. That's just me. With a rolling ladder you can take out what you need, when you need it and roll the rest. It is not much different than what I am doing in our taxable account. We keep enough money in MMs to cover expected expenses for the next 12 months, but we also have a rolling 5-year ladder of TIPS with a tranche coming due every quarter to cover unexpected expenses. If we need the money, it is there, if not it gets rolled. It reduces the chances of having to pull money out of a TIPS fund/ETF in a down market.

While it is not a perfect solution, it is good enough for my purposes. In the tIRA, it lets me prepare for *anticipated* RMD liabilities. Of course, since we can do in-kind RMDs (I had not realized that before), it may be a moot point and something I need to rethink.
OK, so it's not really a rolling ladder, but a hybrid of rolling and non-rolling.

This is what I do with short-term nominal Treasuries, mostly with maturities of one year or less, in taxable. We usually have enough in MM funds to cover expenses for the month, but when I want to add to the MM funds, I don't roll all the maturing Ts, but use some of the proceeds to top off the MM funds.

Bring the convo back to TIPS, I have some nominal Ts in taxable maturing as far out as 6/30/2026, but I don't think I'd want to put much into nominals for maturities beyond about a year or so. OTOH, my fixed income, almost all Ts, is 60% TIPS and 40% nominals, and I think the TIPS I have are more than enough to ensure that my annual real income (ARA). I have enough nominal Ts in taxable that I won't really need my RMDs, funded by the IRA ARA, to cover residual expenses for quite a few years, so I guess building the TIPS ladder was just a crutch to get me to buy longer maturity TIPS.

Again, my nominal Ts are essentially part of my risk portfolio (RP), as are the ARA in excess of DARA in 2025-2027 TIPS.
If I make a calculation error, #Cruncher probably will let me know.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

Kevin M wrote: Mon Jun 03, 2024 6:50 pm OK, so it's not really a rolling ladder, but a hybrid of rolling and non-rolling.

This is what I do with short-term nominal Treasuries, mostly with maturities of one year or less, in taxable. We usually have enough in MM funds to cover expenses for the month, but when I want to add to the MM funds, I don't roll all the maturing Ts, but use some of the proceeds to top off the MM funds.

Bring the convo back to TIPS, I have some nominal Ts in taxable maturing as far out as 6/30/2026, but I don't think I'd want to put much into nominals for maturities beyond about a year or so. OTOH, my fixed income, almost all Ts, is 60% TIPS and 40% nominals, and I think the TIPS I have are more than enough to ensure that my annual real income (ARA). I have enough nominal Ts in taxable that I won't really need my RMDs, funded by the IRA ARA, to cover residual expenses for quite a few years, so I guess building the TIPS ladder was just a crutch to get me to buy longer maturity TIPS.

Again, my nominal Ts are essentially part of my risk portfolio (RP), as are the ARA in excess of DARA in 2025-2027 TIPS.
Once TIPS started giving real returns of 2%+ I switched from 1 year Treasuries and extended out to 5+ years in TIPS.

If real yields keep going up, I will probably start extending out beyond 5 years.

If real yields drop, I will mull over my options. I just don't see how rates can drop over the long term. Then again, I have been so wrong on where interest rates will go that I just stick to relatively short term positions in fixed income. But 2%+ real is pretty sweet.
"The quest is the quest."
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Mon Jun 03, 2024 7:15 pm Once TIPS started giving real returns of 2%+ I switched from 1 year Treasuries and extended out to 5+ years in TIPS.

If real yields keep going up, I will probably start extending out beyond 5 years.

If real yields drop, I will mull over my options. I just don't see how rates can drop over the long term. Then again, I have been so wrong on where interest rates will go that I just stick to relatively short term positions in fixed income. But 2%+ real is pretty sweet.
Did you follow this thread at all: Now that long TIPS yields have breached 2.25% again I will… - Bogleheads.org? The title keeps changing, but one of the main points in the OP is that:
McQ wrote: Sun Sep 18, 2022 11:08 pm A little historical background: Dimson, Marsh & Staunton, earlier in their book Triumph of the Optimists, and more recently in the Credit Suisse Global Yearbooks, found the long term real return on long government bonds since 1900 to be 2.0%. That was the value for US bonds; and that was the value for World ex-USA bonds. Over the 120 years.
That's one of the things that finally got me motivated to start building a ladder out to 2047, and that got me motivated to keep buying longer-term TIPS at yields of close to 2%. Until then, all my TIPS matured in 2027 or earlier, with a heavy emphasis on "earlier".

I hold a lot of 2034s and 2040s to cover the gap years. My low yield for the 2040 was 1.86% and my high yield was 2.36%, with my weighted average yield at 2.08%. I bought the 2034 as low as 1.83%, and my high was 2.24%, which was for my last two purchase, and my last purchase on 04/24/24 nudged my weighted average yield from 1.99% to 2.01%.
If I make a calculation error, #Cruncher probably will let me know.
Richard1580
Posts: 404
Joined: Fri Aug 25, 2017 7:53 pm
Location: Flyover country

### Re: What's up (or down) with TIPS?

Kevin M wrote: Mon Jun 03, 2024 9:15 pm Did you follow this thread at all: Now that long TIPS yields have breached 2.25% again I will… - Bogleheads.org? The title keeps changing, but one of the main points in the OP is that:
McQ wrote: Sun Sep 18, 2022 11:08 pm A little historical background: Dimson, Marsh & Staunton, earlier in their book Triumph of the Optimists, and more recently in the Credit Suisse Global Yearbooks, found the long term real return on long government bonds since 1900 to be 2.0%. That was the value for US bonds; and that was the value for World ex-USA bonds. Over the 120 years.
That's one of the things that finally got me motivated to start building a ladder out to 2047, and that got me motivated to keep buying longer-term TIPS at yields of close to 2%. Until then, all my TIPS matured in 2027 or earlier, with a heavy emphasis on "earlier".

I hold a lot of 2034s and 2040s to cover the gap years. My low yield for the 2040 was 1.86% and my high yield was 2.36%, with my weighted average yield at 2.08%. I bought the 2034 as low as 1.83%, and my high was 2.24%, which was for my last two purchase, and my last purchase on 04/24/24 nudged my weighted average yield from 1.99% to 2.01%.
Yes, I have been following that thread since it began. Interesting, but I am adverse to going long, due to rising interest rate risk (which I prefer to keep on the equity side). And yes, I realize that the current real returns of 2% are average for the last century+.

The tIRA has an equal portion of individual TIPS bonds and an intermediate term TIPS fund (FIPDX) which I purchased in mid 2021. My timing buying into that fund was... poor.

Since I am not looking at using the tIRA for liability matching, when RMDs hit in a few years I will just do transfers in kind, from either the TIPS ladder or the fund. It will be interesting to see how the rolling 5-year ladder performs against the intermediate TIPS fund over the next few years.
"The quest is the quest."
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Richard1580 wrote: Tue Jun 04, 2024 8:11 am
Kevin M wrote: Mon Jun 03, 2024 9:15 pm Did you follow this thread at all: Now that long TIPS yields have breached 2.25% again I will… - Bogleheads.org? The title keeps changing, but one of the main points in the OP is that:
McQ wrote: Sun Sep 18, 2022 11:08 pm A little historical background: Dimson, Marsh & Staunton, earlier in their book Triumph of the Optimists, and more recently in the Credit Suisse Global Yearbooks, found the long term real return on long government bonds since 1900 to be 2.0%. That was the value for US bonds; and that was the value for World ex-USA bonds. Over the 120 years.
That's one of the things that finally got me motivated to start building a ladder out to 2047, and that got me motivated to keep buying longer-term TIPS at yields of close to 2%. Until then, all my TIPS matured in 2027 or earlier, with a heavy emphasis on "earlier".

I hold a lot of 2034s and 2040s to cover the gap years. My low yield for the 2040 was 1.86% and my high yield was 2.36%, with my weighted average yield at 2.08%. I bought the 2034 as low as 1.83%, and my high was 2.24%, which was for my last two purchase, and my last purchase on 04/24/24 nudged my weighted average yield from 1.99% to 2.01%.
Yes, I have been following that thread since it began. Interesting, but I am adverse to going long, due to rising interest rate risk (which I prefer to keep on the equity side). And yes, I realize that the current real returns of 2% are average for the last century+.
I had exactly the same view as you on term risk from late Oct 2010 until I started buying long-term TIPS last December.

The thing to keep in mind is that term risk, aka interest rate risk, has two components:
1. price risk
2. reinvestment risk
You can minimize one risk at the expense of maximizing the other.
• By staying short you minimize #1 but maximize #2.
• By going all long you minimize #2 but maximize #1.
• By matching duration to your investment horizon, and matching the unit of account for liabilities and investments (e.g., TIPS for real consumption, nominal Ts for nominal liabilities), you balance the risks such that #1 and #2 pretty much offset each other; i.e., it is as close to riskless as possible.
I understood all of this during the years when I was staying short, but I was not interested in reducing reinvestment risk when yields were historically low. Once TIPS yields returned to historically high levels for TIPS, and historically average level for government bonds over a much longer time period, and once I got over my cognitive bias that prevented going long, I started buying longer-term TIPS.

Having said that, the average duration of my ladder still is only 6.4 years, while to match the duration of my 23-year investment horizon is should be closer to 11 years. This is why I consider a large portion of my 2025-2027 TIPS as part of my risk portfolio.

So I'm still biased toward short term, apparently still more averse to reinvestment risk than to price risk, but at least now I have a good chunk of fixed income where the duration equals that of my investment horizon, and I'm continuing to gradually swap shorter-term for longer-term TIPS.

Note that you don't have to be matching specific liabilities for any of the above to hold. Everyone has some sort of investment horizon and some sort of liabilities that they intend to fund from their portfolio.
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Man, can't get a break! LTPZ is up again today, and the other TIPS funds are too to a lesser extent:

We see from the Low%Chg and Hi%Chg columns that LTPZ was up 0.90% at some point today, and the current price is at the low for today, up 0.57%.

I think I have enough 2028s now, so I'll need to start looking at increasing 2029s; hopefully yields will increase a bit later today.
If I make a calculation error, #Cruncher probably will let me know.
gips
Posts: 1844
Joined: Mon May 13, 2013 5:42 pm

### Re: What's up (or down) with TIPS?

Kevin M wrote: Sat Jun 01, 2024 5:13 pm
RyeBourbon wrote: Sat Jun 01, 2024 4:21 pm
gips wrote: Sat Jun 01, 2024 1:41 pm I purchased \$100k of schp to help build a bridge to social security, thinking I'd withdraw around 10% a year. the position quickly lost \$7k and hasn't recovered. It's hard to think of this investment as an inflation hedge since I've lost 7% of my principal though I guess if I wait to about double the 6.6 year effective duration, I may recover the loss.

it seems to me I should bite the bullet, take the loss, and move to a bond ladder where I won't lose principal if each rung is held to maturity. Am I looking at this the right way? pros and cons?
You can take consolation that the price of the ladder has probably declined about the same amount - assuming the duration of the ladder was similar to the fund.

I held two funds with an average duration equal to the ladder I wanted to buy until I had the funds (401k rollover to IRA) to buy the ladder. Over the course of about a year or so, the value of the funds tracked the price of the ladder pretty well. I thought of maintaining the funds, but bit the bullet and bought the bonds for a 7 year SS bridge. I feel more comfortable that I will get the real return I expect.
Yeah, if you (gips) mean that you intended to start drawing from the fund this year or next, for example, then a fund with a 6.6 year duration was not the appropriate choice. Something like VTIP, with a duration of 2.5 years, would have been better (and would have lost less), but even that is too long for spending in the next couple of years.

This is one reason I prefer individual bonds to funds--I can target whatever maturity I want. With a ladder, we know with high certainty what our annual real cash flows will be, so we simply build the ladder with the real cash flows we want for each year (or perhaps more often; e.g., quarterly for shorter maturity TIPS).

You didn't say specifically what years you are trying to cover, but I suspect that your ladder wouldn't have been similar to SCHP holdings:

If your ladder did look something like this, like RB said, the value of the ladder would have declined about as much as the fund, but I suspect your ladder will be much shorter, so you've probably lost more in the fund than you would have with a properly constructed ladder.

What better time to fix this than now, unless you want to roll the dice that real yields will decline, and you'll recoup more of your loss before you swap to a ladder. I might start swapping now, and then gradually continue the process, since this would result in less regret than if I did it all now, then yields declined a lot (and the fund NAV increased), or if I waited and they went even higher (more losses to recoup).
thanks for this! after the price fell, I decided to repurpose the position for post-social security liability matching, which doesn't start for another 2 years or so. In the meantime, I bought some individual tips to bridge us to ss with the hope that at some point, interest rates will decline and we'll be whole on the schp position. Even when ss starts, I could delay liquidating the position and purchase ladder rungs now. or I could liquidate schp now and use the proceeds to purchase ladder rungs.

not concerned that I missed the height of tips yields, can't time the market. We have a retirement model based on 2% real for our entire portfolio, so getting that on the fixed income side of our portfolio seems pretty sweet.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### TIPS update for June 5, 2024

LTPZ yield decline (price incline) could be slowing down today:

So as of now price up only 0.7%. Might be interesting to take a glance at the %<Hi52 and %>Lo52; e.g.,
• LTPZ price is 9.41% below the 52week high, so yields are up some duration-related amount from their 52w lows.
• LTPZ price is 11.30% above the 52week low, so yields are down some duration-related amount from their 52w highs.
• The short and broad funds are a smidge, but there are some interesting variations between the ones with comparable durations.
• TIPS and TIPZ are both broad TIPS funds, with durations of 6.65 and 6.99 years respectively, but they have some noteworthy differences in the numbers.
• Generally, short and broad prices are more off their highs than they are above their lows, so yields should be more off there lows than below there highs. The exception is TIPZ, which seems to be closer to the middle of it's low and high prices.
Turning to yield charts, we now have FRED yields through yesterday, Tuesday June 4, and I can share the yields for today. For this chart I chose the 2047, which has consistently been among the top long term TIPS yields, and is again today, and the Jan 2030 whose yield is near the trough of the yield curve; let me show the yield curve first so this is clear:

(I've increased the point size of the X mark for the red SA curve, so we can see them under the light orange SA+O curve.)

And here's the FRED chart showing the Jan 3030 and the Feb 2040 yields for the last two months, Apr 4 through Jun 4:

Now we see that relatively steep drop from Wed May 29 through Tues Jun 4, with the 2047 ending at 2.185 and the Jan 2030 at 1.985. Today, Wed Jun 5, theses yields are 2.163% and 1.973% respectively, so down about 2 and 1 basis points respectively--this correlates to the relatively small price moves we're seeing so far today.

Stepping back, we see the steady, relatively steep decline since Wed Apr 30, which followed a relatively steep incline from Tues May 21 to Wed May 29, and there was a bit of an increase before that starting from the recent lows on May 15, which levels we're slightly below today.

So the question for us market timing traders is, will we continue the decline below the 2-month lows, which we've already broken below for the 2047, or do we turn around and hit and maybe surpass the 6 month highs of Apr 24 for the 2047 and Apr 30 for the 2047?

Personally I'd like to swap more 2025s for some 2029-2033, but these yields are all at least a smidge below 2.00% now, seasonally adjusted, and ditto for all maturities through 2034, so you have to to out to at least 2040 to get > 2%--currently at 2.081 ask, which is about 2.04% SA. I think I'll sit today out, unless we get a bump in the Apr or Oct 2029 yield above 2.00% SA. Yields of most of the 2029s are > 2.00% ask, but SA knocks them lower at this time of year.

We could be really optimistic and hope for the 1 year highs of 2.668 for the 2047 on Oct 25, 2023 and 2.551 for the Jan 2030 on Oct 29, 2023; be still my heart!
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### TIPS update for June 7, 2024

Earlier today LTPZ was down about 1.8%, so big down move for price. It's recovered some now.

I sold some Oct 2025s and bought some Apr 2029s, but I'll post details in the trading Treasuries thread.

Here's some recent history for the 2047 yields:

We saw some leveling off yesterday, Jun 6, which is the last point on the chart at 2.115%, and today when I pulled quotes it was at 2.257%, and I'm still seeing that yield now at Schwab (for min qty 1, best price).

Here's the yield curve from the quotes I pulled earlier:

And here it is through 2029, which is as far out as I'm buying at these yields:

Note that all yields are back above 2.00%.
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Kevin M
Posts: 16088
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

### Re: What's up (or down) with TIPS?

Long-term TIPS prices down, yields up again today.

The 2046-2048 ask yields are 2.30%.

Yield curve:

Short end:

If I make a calculation error, #Cruncher probably will let me know.
rockstar
Posts: 6944
Joined: Mon Feb 03, 2020 5:51 pm

### Re: What's up (or down) with TIPS?

Any idea why the April 2026 TIPS is at 2.766 while the July 2026 is down to 2.435? That’s a big cliff. Trying to wrap my head around it.