TIPS with Inflation-adjusted pensions/SS

[friar1610]

Just curious what other retirees in a similar situation do.

If you have indexed-adjusted pension(s) and SS as your primary sources of income, to what degree do you feel that you need additional inflation protection via TIPS or I-Bonds? Do you consider yourself "covered" by virtue of the pensions/SS?

[sengsational]

I think it would depend upon your disposition. There's one manner of thinking (see: Larry Kotlikoff) that suggests if you've already "won", there's no reason to select investments with much risk. There's other thinking that there's a systematic difference between the official inflation rate and a retiree's personal inflation rate (and it's not to the retiree's benefit). Although this latter idea probably doesn't matter too much since the effect is slow, and spending tends to taper as we age anyway.

For me, the only inflation protected thing I have is (will be) SS, and that's enough. The value of predictability for me is not that high when I compare to the potential growth of a diverse portfolio on an efficient frontier curve.

[daylatedollarshort]

Quote:

Originally Posted by friar1610 Just curious what other retirees in a similar situation do. If you have indexed-adjusted pension(s) and SS as your primary sources of income, to what degree do you feel that you need additional inflation protection via TIPS or I-Bonds? Do you consider yourself "covered" by virtue of the pensions/SS?

We have more in TIPS and I-bonds than stocks. Our goal is more to avoid huge losses from either inflation or sequence of returns risk for our portfolio than it is to aim for growth in retirement. We have a house we could downsize and a hobby business we could ramp up if we needed more income in retirement, so for our circumstances and low risk tolerance we would do that rather than invest more aggressively.

[nun]

I have an index linked pension and rent and will eventually get SS from both the US and the UK so With those income streams I don't bother with TIPS in my 60/40 portfolio.


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[friar1610]

Just to clarify (and I probably should have given more detail in my initial question)...my current AA is about 47/50/3. I'm 71. My ideal equity allocation is in the 45% range with a view toward winding it down in the years to come to 35-40%. So I'm in the moderately conservative camp with no particular need to make a killing in stocks. So the question about TIPS/I-Bonds is asked from that perspective.

[mathjak107]

the problem with anything inflation adjusted via an index is that it may not represent your personal cost of living changes at all .

a price change index , which is what the cpi is does not really represent our personal cost of living .

our personal cost of living is very dependent on location , age , discretionary income level , how many times we buy things and our ability not to buy them or sub them as well as the level of quality we buy .

higher quality goods tend to see greater price inflation but can last longer too .

so i do not count on anything inflation adjusted to represent my actual cost of living . you can be left in the dust all to easily .

[exnavynuke]

To me it's a question of goals. If your "goal" is to just have your money "last until you're gone" then going as conservative as you can while keeping up with inflation is a fine strategy. If your goal is to maximize how much you can get for your money (to either increase your lifestyle spending now or to leave more to heirs), then more risk is appropriate imo. How much risk to take on at that point is the real question.

[Nature Lover]

Quote:

Originally Posted by friar1610 Just curious what other retirees in a similar situation do. If you have indexed-adjusted pension(s) and SS as your primary sources of income, to what degree do you feel that you need additional inflation protection via TIPS or I-Bonds? Do you consider yourself "covered" by virtue of the pensions/SS?

Hi Friar1610,

I'm 56, so no SS yet, but cola'd pension income currently covers my basic expenses and a little extra. Cola's are capped, so I do need to consider longer-term inflation risk. Planning for a potential 40 year retirement period, I don't look at TIPS or I-Bonds for inflation protection. Instead, I maintain a slightly higher equity position overall in my portfolio (currently 55-60%). That means I carry some market risk, but that's a risk I feel I can afford.

BTW, I'm a "total return" investor, and I do hold some TIPS/I-Bond investments; but the decision to hold them (and how much) is determined by their impact on portfolio volatility and pricing compared to other available FI investments.

NL

[friar1610]

Quote:

Originally Posted by mathjak107 the problem with anything inflation adjusted via an index is that it may not represent your personal cost of living changes at all . a price change index , which is what the cpi is does not really represent our personal cost of living . our personal cost of living is very dependent on location , age , discretionary income level , how many times we buy things and our ability not to buy them or sub them as well as the level of quality we buy . higher quality goods tend to see greater price inflation but can last longer too . so i do not count on anything inflation adjusted to represent my actual cost of living . you can be left in the dust all to easily .

Thank you.

So what do you use to track your actual COL? A high allocation to equities? Real estate? Something else?

[mathjak107]

i don't need to track my rate of inflation .

i use a dynamic system of withdrawals that adjusts automatically based on my spending needs .

a diversified portfolio tends to more than cover it . i use a broad assortment of passive investments .