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Old 10-21-2015, 11:53 PM   #21
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Posts like this make me glad of my 3% minimum annual interest (currently producing 4% because of declared extra interest) from TIAA-Traditional account. Assuming 4% initial withdrawals and 2% inflation I can do that for about 33 years before I run out of money.
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Old 10-22-2015, 12:19 AM   #22
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If we are going to have low inflation and low returns for the next 10 years, I would start looking at some investment grade perferred stock yielding 5 to 6 1/2% to replace some of my bond funds. That's if your already retired.
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Old 10-22-2015, 05:55 AM   #23
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If we are going to have low inflation and low returns for the next 10 years, I would start looking at some investment grade perferred stock yielding 5 to 6 1/2% to replace some of my bond funds. That's if your already retired.
But again, low inflation and low returns might be the same as higher inflation and higher returns. Isn't 1% inflation+2% returns the same as 3% inflation and 4% returns?

Having said that I still believe that a 30-40 year SWR calculation takes into account decades of good performance, decades of bad performance, decades of high or low inflation in the number crunching.
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Old 10-22-2015, 06:06 AM   #24
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But again, low inflation and low returns might be the same as higher inflation and higher returns. Isn't 1% inflation+2% returns the same as 3% inflation and 4% returns?
Not entirely I think.

When you transition from +2% nomimal to +4% nominal due to higher inflation, somewhere along the road, the principal typically loses value (depending on how you structured the portfolio).

That means that if you depend on eating into principal (slowly) over the years, the portfolio will last a shorter time. In addition there are inflation targets of central banks.

I much rather have a 4% interest, 2% real vs. 2% interest and 0% real for those two reasons. The higher the interest rate, the lower the chance it will go up. That in turn gives me confidence to lock in rates for longer times.
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Old 10-22-2015, 07:37 AM   #25
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Having said that I still believe that a 30-40 year SWR calculation takes into account decades of good performance, decades of bad performance, decades of high or low inflation in the number crunching.
Yes it does, but how it takes those into account is important. It might just use a rolling average of historical data or it might use a Monte Carlo method to "randomize" the returns. Pfau's latest paper uses current bond and equity market data to estimate baseline returns and then applies a statistical variation derived from historical data.
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Old 10-22-2015, 09:34 AM   #26
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Yes it does, but how it takes those into account is important. It might just use a rolling average of historical data or it might use a Monte Carlo method to "randomize" the returns. Pfau's latest paper uses current bond and equity market data to estimate baseline returns and then applies a statistical variation derived from historical data.
Yes, but we shouldn't adjust our SWRs based on current/assumed short-term market performance--in either direction.
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Old 10-22-2015, 02:42 PM   #27
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Yes, but we shouldn't adjust our SWRs based on current/assumed short-term market performance--in either direction.
Well, many withdrawal strategies call for doing just that each year and of course the "4% rule" includes annual inflation adjustments. What many people like Pfau are suggesting is that the returns for bonds and stocks derived from historical data are bad starting points and that you should put more weight on current returns. This has lead to some suggesting a reduction in SWR to numbers less than 4%.
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Old 10-22-2015, 04:29 PM   #28
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While ZIRP certainly lowers nominal returns are real returns really that much different or is the decrease in nominal return largely balanced by reduced inflation? If the latter I don't see any big reason to change my assumptions.
In April of 1999, the Treasury auctioned 30 year TIPS with coupons of 3.875%. The price produced a 3.899% yield.

In February 2015, they auctioned 30 year TIPS with coupons of 0.750%. The price produced a 0.842% yield.

So, yes, I'd say that real returns can vary over time.

In 1999, retirees could put part of their portfolio into TIPS with a gov't guaranteed, CPI-adjusted cash flow of 3.875%, with the principal growing at the CPI. That put a lot less stress on the rest of the portfolio.

The other bonds they may have held in 1999 had similar expected real yields. And, the other bonds we have in 2015 have correspondingly lower expected real yields.
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Old 10-22-2015, 07:18 PM   #29
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All my spreadsheet projections are based on 3% inflation, 1% SS increases until a 25% haircut in 2033 and investment returns of 2.5% - We are good to go for 35 years.
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Old 10-22-2015, 10:59 PM   #30
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In April of 1999, the Treasury auctioned 30 year TIPS with coupons of 3.875%. The price produced a 3.899% yield.

In February 2015, they auctioned 30 year TIPS with coupons of 0.750%. The price produced a 0.842% yield.

So, yes, I'd say that real returns can vary over time.

In 1999, retirees could put part of their portfolio into TIPS with a gov't guaranteed, CPI-adjusted cash flow of 3.875%, with the principal growing at the CPI. That put a lot less stress on the rest of the portfolio.

The other bonds they may have held in 1999 had similar expected real yields. And, the other bonds we have in 2015 have correspondingly lower expected real yields.
This is why I'm using TIAA-Traditional as part of my bond allocation. 4% looks amazing right now. The mortality credits on an SPIA also start to look good....and that's saying something.
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Old 10-25-2015, 01:17 AM   #31
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But again, low inflation and low returns might be the same as higher inflation and higher returns. Isn't 1% inflation+2% returns the same as 3% inflation and 4% returns?



Having said that I still believe that a 30-40 year SWR calculation takes into account decades of good performance, decades of bad performance, decades of high or low inflation in the number crunching.

No, taxes are nominal.


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