Originally Posted by Roger_R
Or if you say, invested in TIPS with a real rate of return of 2%, you are drawing down your principle by 1% with a WR of 3%. So you might end up with maybe 2/3 of your principle at the end of 30 years. Which would make a mainly TIPS portfolio beyond extremely safe at a 3% withdrawal.
Roger, this is more or less true. I've done a spreadheet of a ladder of 5yr TIPS
with YTM=2.375% than supports 3.6% WR for about 40 years. Even at 4% it
lasts 33yrs or so. I imagine 3% would be close to perpetual. I think most
people believe it should be possible to achieve 4% for at least 30 years though.
But if your situation is such that you can live comfortably with an initial WR of
3%, then I suppose all-TIPS is tempting - but probably not really a great idea,
due to the extreme likelihood of doing way better with some equities - but
perhaps you WOULD want to consider a higher percentage of bonds than typical,
probably including a LOT of TIPS.
If you are all good with Excel, I'd urge you to mess around with some simple
spreadsheets, like I have done. One line per year, with a portfolio balance,
an inflation-adjusted version of your initial withdrawal (or alternatively, a fixed
WR of *current* portfolio value), an inflation value that varies from year to year,
and an overall portfolio return that is either absolute (if that's the right word) and
"real" (above inflation). Mess around and see how long it lasts. You'll tend to
find that if ROR tracks inflation (i.e. real return is constant) that you'll do quite
well with very modest-sounding RORs. The real killer is when the two are out
of sync, that is, you have some poor/negative ROR years where inflation is high.
The thing so appealing about TIPS is that real return IS constant, by definition.
Although you can find much more sophisticated spreadsheets than the ones you
or I might make, I frequently find them too complicated to comprehend. When you
do it on your own, you gain a better understanding, IMHO. Then you can cross check
against some of the calculators and see where you are.