Deep vs. Shallow Risk: ER'd too soon

[daylatedollarshort]

(Schwab is showing me the 10 year T-note at 2.9% this morning. 10 year TIPs are showing at 1.1% YTM.)

IMO TIPS are a hugely unappreciated investment for individuals, especially in tax-sheltered accounts.

A significant allocation to TIPS ladders and a low consumption / sustainable lifestyle are the cornerstones of our retirement plan, with the TIPS part as outlined in this article -

"But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

Source - http://www.prospercuity.com/swr.htm

 

[pb4uski]

A significant allocation to TIPS ladders and a low consumption / sustainable lifestyle are the cornerstones of our retirement plan, with the TIPS part as outlined in this article -

"But even a TIPS portfolio that yielded only 1.3% real would sustain a 4%, inflation-adjusted, safe withdrawal rate over a 30-year period. That is, it would safely sustain just as generous a level of retirement expenditures as a risky portfolio, to which the 4%-SWR rule was applied, but with a lot less heartburn."

Source - http://www.prospercuity.com/swr.htm

But isn't it also true that a 30-year retirement funded with TIPS as described and a 4% inflation adjusted withdrawal rate would essentially result in no money left after 30 years? Where a more conventional 60/40 portfolio would result in a range of 0 to 4.5x the retirement date portfolio balance with an average balance of 1.4x the retirement date balance.

IOW, perhaps the spending and risk of ruin is similar with a TIPS ladder or a conventional 60/40 portfolio, but for the 60/40 portfolio the additional assumed risk would be expected to result in a larger ending balance for heirs and charities. So if one is willing and able to assume the risk and stomach the volatility, the risk of ruin is similar but the residual benefit for heirs and charities are dramatically different (assuming that is a factor that is important to the individual).

 

[kevink]

When you say "current returns" you are considering the inflation component, right? For example, at the current trailing 12 mo. inflation rate of 2.2% and maybe 50 bps of TIPS interest payments, you're at 2.7%. IMO that's not too shabby considering the 100% inflation protection.

(Schwab is showing me the 10 year T-note at 2.9% this morning. 10 year TIPs are showing at 1.1% YTM.)

IMO TIPS are a hugely unappreciated investment for individuals, especially in tax-sheltered accounts.

Thanks Oldshooter and yes, I stand corrected due to the very recent increase in TIPS baseline interest rates. McClung goes into how and when to use TIPS ladders in the final chapter of his book and recommends them highly though in tax-sheltered accounts only and only for the relatively small percentage of investors who can deal with the complexity of setting up and managing a 30 year ladder of them.

 

[daylatedollarshort]

But isn't it also true that a 30-year retirement funded with TIPS as described and a 4% inflation adjusted withdrawal rate would essentially result in no money left after 30 years? Where a more conventional 60/40 portfolio would result in a range of 0 to 4.5x the retirement date portfolio balance with an average balance of 1.4x the retirement date balance.

That is true. There is no free lunch. $0 left after 30 years if you spend the maximum possible withdrawal rate each year with an all TIPS portfolio. For us that is where the sustainable living and low consumption part comes in, plus we are not 100% TIPS and do have some stocks, though not enough for any heart burn when the market drops

We plan to have a 0 - 1% withdrawal rate, and 5 year TIPS are currently at 1.12%, plus we have some older TIPS at over 2%. Our net worth will be more or less the same when we die as it is today with no worries in between, and that is enough to leave a nice amount to each of the kids.

 

[kevink]

So if you replace Portfolio 3 in the Portfolio Visualizer link with this Merriman Ultimate portfolio, twealed with a slightly reduced equity allocation to reflect your tilt on the Merriman Ultimate portfolio, what do the results look like from Jan 2008 to Nov 2018?

Not bad (CAGR 4.26%, St. Dev. 8.32%, Max Drawdown 25.44%) but Portfolio Visualizer doesn't have all of the asset classes Merriman uses so it's a rough approximation. I rarely use Portfolio Visualizer anymore since I find the Portfolio Charts site so much more useful.

 

[OldShooter]

... the relatively small percentage of investors who can deal with the complexity of setting up and managing a 30 year ladder of them.

Hmm... I don't see it as complex.

First of all, the Fido and Schwab bond guys can help the most naive investors easily build govvie ladders. IIRC people have said that there are some good tutorials on the Fido site.

Second, AFIK the reason for building ladders of conventional bonds is to cushion the effect of interest rate changes. Further, those changes are thought to be due to investors' changing perception of future inflation. With TIPS none of this matters. I have never paid much attention to TIPS yield curves but in theory they really don't need to exist. Having taken inflation out of the picture, the only reason for a yield curve is if people want a little extra for tying up money for a longer time even if there is no inflation risk. I have never seen a good discussion of this, though.

So a TIPS ladder is probably only needed if you want to to match maturities to cash needs. In our case, in 2006, we bought the longest, lowest coupon TIPS that were then available. Just the one single issue, 2s of 26. If/when we wanted cash from them we just sell a few. They are very liquid and there is little cost to sell.

Edit: I just spent 1/2 hour Googling to find articles on TIPS yield curves and was surprised that I didn't find much and most were academic rather than oriented to investors.

Here is Larry Swedlow, who seems to be popular here, in August 2018: https://www.etf.com/sections/swedroe-tips-vs-nominal-bonds

Here is a more academic paper, somewhat elderly from around 2004: https://www.cfapubs.org/doi/abs/10.2469/faj.v60.n1.2592
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Both are quite favorable to TIPS. I can't guarantee that this is not due to confirmation bias on my part. YMMV.

 

[Seagirt]

I just wanted to comment on going out job hunting.

After retiring I picked up a part-time casual job (fill in on sick leave/vacations) quite easily. For one thing, I'm available to be on call because I don't have to work full-time like everyone else. I could now turn it into more work if I wanted to.

I used to be management and now I'm a worker, but as I see it, I don't have to go to meetings or make decisions, I just do the work and forget it when I leave.

I applied within the same general field, so my knowledge/affinity for that area was demonstrated on my resume. An experienced person also has a level of trustworthiness, intelligence, etc, that employers are happy to see.

Most places expect to have to train anyone new, the important thing is to be trainable.

One issue is to try to line up one former boss who can confirm you worked at x job for an extended period and who will say yes, they would reccomend you be hired, preferably that person will still be employed in the field themselves.

It's also best to just be straight about why you're looking for work, everyone will understand it as perfectly reasonable, you really want to avoid being cagey in case they think you've been in prison or something!

I don't love the work, but I love the pressure it's taken off, at 57, from having to scrimp because I 'm worried about my savings.

Edited to added: I've found it helpful to realize that the employer/employee relationship is mutual exploitation/benefit, play the game according to their rules and get what you need from it, but you don't have to sell your soul.

 

[REWahoo]

^ Very good advice.

 

[Bongleur]

This article should be useful, at least the graph showing how each category of expense changes as you get older, and that total spending drops too. Graph from an article by Pfau: https://www.kitces.com/blog/vanguar...-health-care-costs-in-retirement-projections/