Advice for a Newbe..... Please

OK Based on the I Bond Rates.  For Today (May) If I purchased some, I would get 1% fixed and 1.19% interest.  I have some 2.675% CDs how do they differ:confused:

If I do the Math for $1000  with a TIP at the end of 1 year I will have roughly....  $1022  My CD would accumulate $1026.75
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Well, first of all, the current annualized interest for an i-bond is 3.39% (1% fixed + 2 * 1.19% semi-annual CPI).

Secondly, that rate will go up or down with inflation, whereas your CD will stay at the same rate regardless of inflation.

Thirdly, i-bonds are not the same as TIPS. Among other things, I-bonds mature in 5-years but can be held for up to 30-years. Whereas TIPS are available in fixed maturities of 5-, 10-, 20-, and 30-years (30's are only available on the secondary market).

The fixed rate goes up with maturity. The daily yield curve link I gave you shows how the fixed rate changes as you go from 5- to 7- to 10-years. As of yesterday, the 5-year yield was 1.43%, 7-years was 1.82%, 10-years was 2.18%. If you go out to 20+ years, you'll get a fixed rate of about 2.5%.

All of the fixed rates are added to the CPI-U, so for example, if inflation hits 4% this year, a 10-year will yield about 6.18%.
 
I apologize for my ignorance. I thought the 1.19 was Per Year. I assume the tax implications are the same as CDs. All income. The Gov site requires a lot of reading and sifting through links to ge the information for TIPS. There is a good section on I-Bonds though.

Is it normal for TIPS and Ibonds to Beat a good CD? At what looks like 33%.

OH I just read a little, I noticed IBONDS have a $60k limitation per year. Come January I will need a place to throw $500 - 800k.

I am currently looking for info on TIPS. This seems to be harder to find.
SWR
 
I assume the tax implications are the same as CDs.
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TIPS (and all treasuries) are free of state tax. I-bonds are tax deferred until you cash them in (and tax-free if you use the interest for education).

Is it normal for TIPS and Ibonds to Beat a good CD?  At what looks like 33%.
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Are you comparing the same maturities? And what assumptions are you making about inflation? If inflation stays low, CDs will likely outperform TIPS. If inflation goes up, TIPS will do better.

All of the ingredients are in place for high inflation, but the Fed says they will aggressively fight inflation, so the coming years are likely to be very interesting. To me, it seems inevitible that inflation will rise. And the only tool the Fed has to fight inflation is to raise interest rates, which will have its own set of side-effects.
 
I think the capital appreciation (the inflation adjustment) component of TIPS is taxable every year, too. For that reason, people are advised to hold them in their 401ks, preferably in a Roth.

I've had the same problems with I-bonds vs Tips with the 60k a year. And I can't bring myself to buy TIPS with a yield under 4% or so -- think about it -- you are guaranteeing a real return under the SWR, so you've shot the SWR analysis for that portion of your portfolio.

I am pretty risk averse, but I guess not as much as you, Shock-Wave Rider. I agree you should read Bernstein, because your biggest risk over the long run is the erosion of your portfolio by inflation, not capital losses. Fine, lock in a huge portion of your portfolio in bonds, but start to find a way even there to take on an acceptable level of risk. For me, the light came on with the asset allocation approach and realizing that you can have roughly the same return as the S&P500 with half the risk by diversifying. You'll get a little primer on Modern Portfolio Theory, which means blending non-correlated asset classes. My favorite example of this (not from Bernstein's book) is: imagine you have one asset that only pays out on sunny days, and another that only pays out on cloudy or rainy days. Short of a total eclipse on a sunny day, this portfolio of two risky assets becomes a nice all-weather portfolio that will pay out quite steadily and consistently.

Obviously real world is different, but if/when you get over the hump, you have the assets to put together a nice portfolio that will happily throw of a 4% SWR a year, grow (at historical levels) in excess of 8% with a Standard Deviation around 7%.

The dilemma is there is no safe place to earn a meaningful return right now, so the game all becomes about managing risk (imho).

If TIPS yielded 4%+ then 'Game Over', you could snap them up and never think about an investment again. Even there, you'd be giving up the possible upside that is inherent in all these projections -- SWRs aim to show you a withdrawal rate that is 90% or so safe, but many of the scenarios end up with terminal values very much higher than the minimum.

You may never get treasury yields of 4% real -- it is historically pretty rare (I think). So then you are stuck moving into credit risk etc.

Any way I have been able to slice it, you still are carrying risk of some sort -- interest rate risk, credit risk, market risk etc etc.

Here's another risk: what if you and your wife don't make it? Divorce Risk is generally a major financial setback, perhaps the most devastating thing that could ever happen to an ERs portfolio (aside from the human toll). My point is that risks are everywhere, no matter what you do, and the best you can hope for is to manage them. In the words of an old reggae song, "there is nowhere to hide".

I know right now you are feeling very conservative and you should honor that . don't do anything fast. but slowly start to get your mind to come to grips with the eventual future need to start to take on reasonable, carefully-managed types of risk, or else you may never have a positive rate of return (after taxes and inflation) to live on, thus no ability to use your Portfolio to work for you to support a non-work lifestyle. Cash/CDs just wont do it for you -- they can dampen the volatility in a portfolio but they can't support you over the long run.

Anyway, that is the conclusion I've come to. Not exactly what you wanted to hear, probably, but it is the truth as I've been able to get my brain around it. Hope it helps.

ESRBob
 
And I can't bring myself to buy TIPS with a yield under 4% or so -- think about it -- you are guaranteeing a real return under the SWR, so you've shot the SWR analysis for that portion of your portfolio.
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I don't think that's exactly correct ESRBob. That would leave you with the entire principal that has been inflation protected.

If you are willing to spend down your priciple as most of us are, you may be able to have a 4% SWR with a 2% yield. Granted this would eat up the principle over your 30 or 40 years, but if you don't care - Well you don't care!
 
I'm not planning on eating my principal at all.

There are a couple of risks with this plan, and I almost guarantee one of them will occur.

One major or a bunch of minor unexpected expenses. We had someone here a while ago with $50k in termite damage. Would force you to liquidate some bonds (dont you have to pay federal taxes on tips when you sell?), and lose the 4% locked rate, along with a chunk of your principal. A divorce as mentioned is another. A child or parent with a serious uncovered health problem.

The other is outliving your money. Medical science seems to be accelerating and with the human genome, stem cells, cloning and other stuff poking around, its possible we'll cure heart disease, cancer, and create healthy extended lives. We might live past 100 with ease, as we have no stress in our lives that isnt self induced.

Of course you could refuse the medical treatments...
 
There are a couple of risks with this plan, and I almost guarantee one of them will occur.
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I agree with you here, but that is why I think it more important to have plenty of slop in your budget to cover this stuff. Lots of stuff that could be eliminated if need be. Travel, Eating Out, Electronic Toys etc. etc. That is why I advocate a FWR (Flexible Withdrawal Rate) - taking less when the Market does poorly and more when it does better. And re-evaluating every year. The notion that you retire, compute your SWR, and go on autopilot for 45 years is unrealistic to me!

I would not recommend retiring by coming to the conclusion that a 4% withdrawal rate will allow me to squeak by with no unexpected disasters.

But I am a firm believer in drawing down at least half or 2/3 of the principal by the time you reach 90!  My wife and I will be able to collect over 30K in SS alone. And we could live on this if we had to!  

Someone can always create a scenario where you are absolutely screwed in Life. If the doctor tells you that you only have 18 months to live because you have pancreatic cancer, I'll bet you don't jump up and Yell .......... 'YES'...... I CAN INCREASE MY SWR TO 50%!!
 
Hey Cut-Throat, get a grip man! You have got to stop
thinking abouit what might happen if you (or your wife)
live to be 90. Totally irrelevant..........You might be dead
by the time I log on in the morning; your wife too.
If you are seriously planning for what you will be
doing if you get to be 90 years old, you need more help
than I can provide. I will go further..........the chances
are you will never see 90, and even if you do, you will wish you'd died 30 years before.

John Galt
 
I don't think that's exactly correct ESRBob. That would leave you with the entire principal that has been inflation protected.

If you are willing to spend down your priciple as most of us are, you may be able to have a 4% SWR with a 2% yield. Granted this would eat up the principle over your 30 or 40 years, but if you don't care - Well you don't care!
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It seems to me that particulary you guys who have not yet hit 50 should be careful about things like TIP liquidation plans. Say your wife is 40, it may actually be pretty likely that she might live another 50 years, or even longer. All the females(4 of them) in my grandfather's family made it at least to 95. And he made 88. Without any medical care whatsoever. He didn't even have running water. If one is dealing with what is really important, absolute survivability, you and your wife's $30,000 in SS payments would have to capitalized pretty close to the 2.2% "real return" that we are discussing. Get a load of this: $30,000/0.022= $1.5 million!! Of course if you were funding it now, well ahead of the SS payments that it is being compared to it would be different, as you would have some years of compounding. Also, there is no residual cash once you both have departed this mortal coil.

I may change my moniker to Social Security Mikey. Or maybe I'll go with SS Mickey, for little change.

Mikey
 
Not a clue what your point was Mikey - And BTW I'm over 50!

Did you read what I posted?


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I agree with you here, but that is why I think it more important to have plenty of slop in your budget to cover this stuff. Lots of stuff that could be eliminated if need be. Travel, Eating Out, Electronic Toys etc. etc. That is why I advocate a FWR (Flexible Withdrawal Rate) - taking less when the Market does poorly and more when it does better. And re-evaluating every year. The notion that you retire, compute your SWR, and go on autopilot for 45 years is unrealistic to me!
**********************************************
 
John Galt,

I think if you re-read my post, you will know that it is because I am planning on dying some day! That is why I plan on depleting principle.

Read it again! And then tell me at what age is your principle half gone?
 
I agree with Cut-Throat here. TIPS at 2.532% (I just bought some at that rate) would have provided a 100% SWR of about 3.3% for 40 years per FIRECalc. Sure, there's no upside, and you wouldn't leave much of an estate, but for those who can make it on 3% -3 1/2%, I can't think of a safer way to do it. The biggest risks I see are that you can only lock in for around 25 years now, and the feds may play around with the CPI.

Regarding unexpected expenses, I've lived on an income and held almost no assets for much of my adult life. And I've encountered many unexpected expenses along the way, but I've always handled that without digging in to my assets (because I had none). It won't be any different now that I'm retired. I'll just pay myself an income and figure out how to make it on what I pay myself, just like I've always done.
 
Hello Bob_Smith...............how do you
"pay yourself an income" if you hold no assets??
I am sure it is quite simple, but it seems slightly
oxymoronic.

John Galt
 
Hello Bob_Smith...............how do you
"pay yourself an income" if you hold no assets??
I am sure it is quite simple, but it seems slightly
oxymoronic.

John Galt
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John you need a reading comprehension course. He said he HAD no assets for most of his life and managed on his income. He HAS assets today, which he can derive an income.
 
Hi John,

I do have assets now, but I didn't for most of my adult life. I'm just saying that I view my current situation in much the same way as I did when I was younger and working. I'll pay myself what I consider to be a reasonable amount from my assets, and that will be it. That's how I had to do it when an employer was paying me, and that's how I plan do do it when my assets are paying me. If I encounter unexpected expenses, the need to protect of my asset base will supersede the need to pay the unexpected expense. I'll figure out a way to live within my means as I've always had to do.
 
uh oh. do we have another "blow me!" moment coming ;)

the boy is testy lately!

cut-throat, what you say makes sense and i'm not on any withdrawal rate at all. I takes what I needs and leaves the rest.

By the way, I dont plan on dying, but I imagine by the time I'm 100 I might smell that way...
 
Looks like John Galt got into the home brew pretty heavy this evening.
Cutthroat actually showed amazing restraint.
:D
 
Bob Smith

You should not have any problem because of your self discipline. (Hard to shake mid-western values).
You are a young guy, so don't short change yourself though early in retirement, while you really have the energy and desire to do some of the things you didn't have a chance to do while you were on the grind stone.
My wife and I still have an active outdoorsey life style, but really have lost the desire to travel much anymore.
A good thing, because that's pretty expensive to do a lot of it.
Its amazing how your perspective changes with time, so again, I think from reading your posts, you may have a tendency to put a little too much forward. While I won't be 67 until October, and both my wife and I are in pretty good shape for a couple of old crows, believe me, you won't want to do anywhere near as much later, as you do now.
Not worried about you, you'll be fine.
Regards, Jarhead
 
No home brew here. I buy it all at the store. Also,
I don't need a reading comp. course. Sometimes
I don't read everything there is and just shoot from the hip, partly in order to stir things up. Works pretty well don't you think :)

John Galt
 
And another thing.................we are just as Jarhead
describes, i.e. outdoorsy and active but without much
desire to travel anymore. I was telling someone
today about how busy I manage to stay, even without
working and as former activities drop off. It's
natural.

John Galt
 
This thread has been interesting to follow for a new guy. I might only add a smaller detail on I Bonds. While they "mature" at 5 years, they can be cashed in after 12 months with a 3 month penalty in earnings. They probably don't fit in for longer term thinking, but even with the early cash in penalty they will probably beat the returns from most of the one or two year CD's I've seen.
 
Bob Smith

You should not have any problem because of your self discipline. (Hard to shake mid-western values).
You are a young guy, so don't short change yourself though early in retirement, while you really have the energy and desire to do some of the things you didn't have a chance to do while you were on the grind stone.
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Hi Jarhead,

This will be a balancing act I'll struggle with. I was the oldest in a large family and grew up on a farm and my parents just got by. It was a great life for a kid, but we never had much. Then I started my own family and one of my children had huge medical problems when we were just getting started, and that set us back for a long time. So if there were such a thing as a continuum with a cliff that falls off into a financial abyss on one end, and total financial security on the other, I have always felt much closer to the abyss and still do, despite the reality of my current net worth. So I have built some extras into our financial plan and removed that money from the assets that will cover our survival. That money is off the table and will be spent on things we've always wanted to do. I've removed it from the reach of my sometimes excessive self discipline and my wife (who was raised by relatively wealthy parents and has a generally more positive outlook) has instructions to keep me away from it no matter what. :D
 
At present we get economical health care in Canada.
<snip>
We will be filing Taxes in Florida next this/next year.
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If you are using the Canadian health care system then you are a Canadian resident.  That means that you will be taxable in Canada too.  Even if you don't use the health care system then you still might be a Canadian resident for taxes.  IIRC you are a Canadian citizen and if you spend more time in Canada as opposed to Florida you might still be a Canadian resident for taxation.
 
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