TIPS as primary retirement asset???

[jsbindex]

An article in today's WSJ (2/28/05) by Alfred Rappaport says that "The exceptionally fortunate can achieve their financial goals with the income from government bonds such as Treasury Inflation-Protected Securities (TIPS) and llocate remaining funds to stocks without much worrying. . . ."

My question is how much in investible assets would one have to have to rely primarily on TIPS to achieve an income of say, $100,000 per annum for 30+ years (and still have some dollars left over for heirs)?

Also, what would "rely primarily" mean in terms of percentage of investible assets in TIPS vs other asset classes?

Does anyone know whether there's any research on this that's available and understandable?

Thanks!

 

[cute fuzzy bunny]

Sure, thats easy. TIPS pay ~ 2% plus CPI adjustment.

That means you'd need $5M invested in them to make the $100k/year.

You didnt specify what "money leftover for heirs" means, so you could do some sort of sliding thing where you eat principal as well.

The only dangers in such a strategy are:

- You need a ridiculous amount of money to get a safe withdrawal at a reasonable income level.
- Your spending needs hopefully never go up, because your TIPS coupon rate wont, so you'll have to consume more principal.
- You dont live a lot longer than you think, because principal consumption could leave you penniless. Medical advances are working geometrically. Someone in their 40's today might live a lot longer than 80 or 90.
- You believe CPI is an accurate representation of inflation.

Given the above parameters, if you put $4M into any broad stock index and keep $1M in a CD ladder to cover 10 years worth of income, you would be able to spend at a much higher rate, and according to historic rates of return you would not only never spend all your money, you would leave a huge pile of cash to your survivors even if you lived to be 150.

Also, you better have some slush room because there is plenty of evidence that CPI isnt keeping pace with inflation. Ask anyone thats been on social security for 10+ years how their buying power is working for them now vs 10-20 years ago...

 

[Bill J.]

Zvi Bodie's book talks about that approach ("Worry Free Investing"). I believe his premise is that you should determine your base level expenses in retirement, and that these should be funded with inflation protected investments, such as TIPS, I Bonds, inflation protected fixed annuities, Social Security (yes, he said that), and so forth.

Only after you have funded your base level needs with relatively risk free investments would you invest in the market for growth. He thinks stocks are too risky to fund basic retirement expenses, even in the long run.

You could check out Bodie's book for details on this method of investing for retirement.

 

[Jarhead*]

Sure, thats easy.  TIPS pay ~ 2% plus CPI adjustment.

That means you'd need $5M invested in them to make the $100k/year.

You didnt specify what "money leftover for heirs" means, so you could do some sort of sliding thing where you eat principal as well.

The only dangers in such a strategy are:

- You need a ridiculous amount of money to get a safe withdrawal at a reasonable income level.
- Your spending needs hopefully never go up, because your TIPS coupon rate wont, so you'll have to consume more principal.
- You dont live a lot longer than you think, because principal consumption could leave you penniless.  Medical advances are working geometrically.  Someone in their 40's today might live a lot longer than 80 or 90.
- You believe CPI is an accurate representation of inflation.

Given the above parameters, if you put $4M into any broad stock index and keep $1M in a CD ladder to cover 10 years worth of income, you would be able to spend at a much higher rate, and according to historic rates of return you would not only never spend all your money, you would leave a huge pile of cash to your survivors even if you lived to be 150.

Also, you better have some slush room because there is plenty of evidence that CPI isnt keeping pace with inflation.  Ask anyone thats been on social security for 10+ years how their buying power is working for them now vs 10-20 years ago...

TH: You beat me answering this question. ($100,000.00 inflation protected is a very ambitious goal, if you're against tapping the principal.

What I personally have done, (Mainly because I have grown weary of the "cardiac stock mkt"), is come up with an inflation adjusted figure my wife and I can be comfortable with, and placed 80% of our funds with that thought in mind. Have figured everyway through Sunday, and have concluded that we can accommpish that for minimum of 20 years. Hedge fund, I Bonds, Tips, short term corp., and CD"s.
If we aren't both pushing up daisys at that point, we'll have the 20% commited to the market and the sale of house to take us into the "twilight zone."
I mentioned this in another post, as being a "light-bulb"moment after the 2000-2003 "correction".
I basically finally realized that I could get my "competitive juices" handled on the golf course, and reaching for higher returns was not worth the risk, as long as we could do what we wanted to by taking the low risk route. I would like to leave my children something,(and probably will) but my allegiance is with my wife for putting up with me as long as she has.
INMHO, nothing wrong with spending down principal at a certain point.

 

[JWR1945]

Here are a couple of posts that I put up in January. They include links to the formulas.

From my first post on the Safe Withdrawal Rate board thread about Vanguard Now Offering Inflation-Adjusted Annuities dated Jan 5th, 2005.
http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=saferate_board;action=display;num=1104939037

Don't forget TIPS.


At 2% interest they would provide 4.07% of your original balance (plus inflation) for 30 years and leave you 15.8% of your initial balance (plus inflation) at maturity. They have no caps on inflation. OTOH, they will match deflation if it occurs. (You have a guaranteed minimum of par at maturity.)

[There are some approximations built into this calculation. For example, you have to sell some bonds along the way. I am assuming that you can recover the principal without any losses (or gains).]

Have fun.

John R.

From my first post at the Investment Strategies board about Safe and how much dated Jan 6th, 2005.
http://early-retirement.org/cgi-bin...t_board;action=display;num=1105041624;start=2

You can withdraw 3% (plus inflation) annually for 49.5+ years with complete safety.

What this requires is TIPS (and/or I bonds) that yield 2% above inflation. If so, you can withdraw 3% for 30 years and still have 59% of your principal (in real dollars). If you can match inflation (i.e., get a real interest rate of zero percent or better), this will last another 19.5 years.

Here are the links. They include the formulas:
3% SWR for 56 Years from Mon Oct 13, 2003.
http://nofeeboards.com/boards/viewtopic.php?t=1541
http://nofeeboards.com/boards/viewtopic.php?p=12536#12536

What you forgot is that you can draw down principal.

Have fun.

John R.

Today's TIPS are yielding just under 2% on the secondary market. [The 20-year TIPS were yielding 1.95%. The 30-year TIPS were yielding less.]

Depending upon how long you are planning for and how much you want to leave to your heirs, you would need between $2.5 million and $3.3 million to produce an annual income of $100000 (plus inflation).

Have fun.

John R.

 

[cute fuzzy bunny]

My first thought on reading this post was "great, another setup for the Wonder Twins"... :