If you have no 401k pension or any other option but you can contribute to an IRA would contributing equal amounts into ibonds total stock market fund & 5 year CD every year be a reasonable strategy that would beat inflation over time?
Retirement saving strategy
- Thread starter Free bird
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Independent
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First, I'm not sure that it's convenient to buy I-Bonds in an IRA. Last I knew, you couldn't simply have TreasuryDirect hold your bonds in an IRA. If you buy through an IRA account with a broker, then TIPS might be a better option.
Since I-Bonds pay CPI + a fixed rate (currently 0.2%) they are guaranteed to beat CPI. Whether they beat inflation depends on your opinion on CPI vs. inflation. There is also some risk that the gov't would default, and some loss in high inflation scenarios due to the trailing calculation.
Regarding CDs and stocks, if I knew the answer I'd be living in a warm climate and trading futures. (I'll note that the average rate on 5 year CDs is currently below 1%. I'll go out on a limb and guess inflation will average more than that over the next 5 years.)
Mostly, you're asking what has been the historic performance. Shiller's data shows some 10 year time periods when stocks didn't keep up with the CPI. But, the worst performance for a 35 year period is about CPI + 5%. So, what's your time frame? And, is that history predictive of the future?
I couldn't find any long history of 5 year CDs. According to FRED, they've paid about as much as 5 year Treasuries since 2000. And FRED has a history for 5 year treasuries since 1954. I compared yields on new 5 year treasuries to the CPI over the following 5 years. I found one long period when they were roughly the same - 1964 to 1979. Other periods generally had the Treasury rate above the CPI. BUT, note that those relationships may have a lot to do with the direction of interest rates and the CPI. It seems that increasing CPI kind of "surprised" investors in the 1970s, and falling CPI "surprised" investors in the 1980s.
Therefore ...?
Since I-Bonds pay CPI + a fixed rate (currently 0.2%) they are guaranteed to beat CPI. Whether they beat inflation depends on your opinion on CPI vs. inflation. There is also some risk that the gov't would default, and some loss in high inflation scenarios due to the trailing calculation.
Regarding CDs and stocks, if I knew the answer I'd be living in a warm climate and trading futures. (I'll note that the average rate on 5 year CDs is currently below 1%. I'll go out on a limb and guess inflation will average more than that over the next 5 years.)
Mostly, you're asking what has been the historic performance. Shiller's data shows some 10 year time periods when stocks didn't keep up with the CPI. But, the worst performance for a 35 year period is about CPI + 5%. So, what's your time frame? And, is that history predictive of the future?
I couldn't find any long history of 5 year CDs. According to FRED, they've paid about as much as 5 year Treasuries since 2000. And FRED has a history for 5 year treasuries since 1954. I compared yields on new 5 year treasuries to the CPI over the following 5 years. I found one long period when they were roughly the same - 1964 to 1979. Other periods generally had the Treasury rate above the CPI. BUT, note that those relationships may have a lot to do with the direction of interest rates and the CPI. It seems that increasing CPI kind of "surprised" investors in the 1970s, and falling CPI "surprised" investors in the 1980s.
Therefore ...?
I wouldn't hold the ibonds in an IRA. I'd just use them as a conservative way to defer taxes & maybe keep up with inflation. I understand investing & strategies all have their consequences. Just another idea that may or may not look good 10 or more years from now. With limited access to deferred space & a conservative mindset I thought I'd table the idea. Also buy 2-3 ounces of gold every year just for lookin at mostly. But if the fed overshoots & the inflation cat gets out of the bag the gold & ibonds might look pretty good. If ifs & buts were candy & nuts we'd all have a merry Christmas.
MasterBlaster
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Your portfolio will indeed work and there is ample evidence for it.
Check out the Scott Burns "couch potato" formulas for portfolios.
http://assetbuilder.com/couch_potato/couch_potato_cookbook
Check out the Scott Burns "couch potato" formulas for portfolios.
http://assetbuilder.com/couch_potato/couch_potato_cookbook
