FIRECalc and Tips

[cute fuzzy bunny]

You ARE reducing the investment costs to zero from .18%?

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You ARE reducing the investment costs to zero from .18%?

Yup!

[cute fuzzy bunny]

(guessing) Then I expect its from firecalc not working quite the way an investor would, buying a lot of 20 year tips, holding them, then getting their full value back (despite deflation), buying another lot for the next 20 years, etc. I dont think firecalcs doing tips correctly, but I'm not sure it cant without asking a whole lot of questions or making a whole lot of assumtions. This is hand grenade and horseshoes material...

Its a bit of a screwup to go with 40 years as well, since that makes the most recent full run be 1964-present. We've had no deflation since then, but plenty of deflation in the earlier periods.

You'd be best to do it as a 10 year run, then look at the four worst ten year periods since the early 70's in aggregate for something a little more accurate with regards to modern economics. I dont think we're going to see a lot of heavy deflation going forward...

So I think there are 2 factors that suggest a higher "SWR" from all-TIPS than FIREcalc indicates:

1) A realistic mix of maturities would recover some of the principal FIREcalc thinks is lost to deflation, and

2) Deflation in the very early years, which seems to affect TIPS the most, could be an indicator to shift into stocks at very favorable levels. (I think that's why mixing just 10% stocks with the TIPS increases the FIREcalc SWR by almost 20%...)

[retire@40]

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Actually you ARE taxed on the inflation adjustment component of TIPS, every year, for the amount of the inflation adjustment. *You just dont get to HAVE that money until the bond reaches maturity. From the treasury web site; where they say "principal of your tips grows", that is the CPI inflation adjustment factor that is added in. "Like other marketable Treasury securities, TIPS are exempt from state and local income taxes, and subject to federal income tax. As for federal taxes, here's one other matter to consider: In any year when the principal of your TIPS grows, that gain is considered reportable income for that year even though you won't receive your inflation-adjusted principal until the security matures. If you hold your TIPS in TreasuryDirect, we send you two tax statements each year: an IRS Form 1099-INT showing the interest we paid you and a 1099-OID showing the increase or decrease in the principal value of your security."

I agree with that side of the equation. But every year the tax code adjusts for inflation to help counter in whole or in part that inflation adjustment for TIPS and other assets affected by inflation.

[retire@40]

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Starting portfolio * * * 1,000,000 Lifespan of Portfolio * 40 SS * * * * * * * * * * * * * * 0 Withdrawal 1 & 2 * * * 0 Stocks in portfolio * * *0 Tips @ * * * * * * * * * * * 2.5 Expenses * * * * * * * * * 0 Inflation * * * * * * * * * * PPI The maximum SWR was calculated @ $26,900.

Why are you using PPI when TIPS uses CPI?