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How Much Inflation Protection Do I Need?
Old 10-01-2020, 04:32 PM   #1
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How Much Inflation Protection Do I Need?

How Much Inflation Protection Do I Need?

I see many references here and on the Boglehead board about inflation protection via TIPS, Treasuries and ibonds as well as real estate and equity investments. For me I think I have it covered by 1) I have a Federal COLAd pension (DW has a small partially COLAd teachers pension) 2) we own our condo mortgage free 3) our AA is targeted at 50/50 (currently 45/44/11, stock, bond, cash) 13% of that 44% bond is in the Federal TSP G Fund which is something of a stable value fund. DWs IRA RMDs are used for QCDs, I will not have RMDs for a couple years. I am 70 retired March 08, DW 72 retired 06,

I don’t know where/if Treasuries and TIPS fit. We could put $20K each year into ibonds but at our age I’m not sure how much that would help. It looks like our pensions, condo and portfolio will carry us nicely through about anything we will will encounter but I do want to ‘optimize’ the portfolio for passing on to our two sons or at least not see it wither away if some cheap ‘insurance’ will protect it.
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Old 10-01-2020, 05:04 PM   #2
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How Much Inflation Protection Do I Need? ...
Like so many things in investing, that answer can only come from looking in the rear view mirror. DW and I are probably on the lunatic fringe here, but 90+% of our fixed income tranche is in TIPS.

In 2006 we were in our late 50s, pretty well off, and decided that the only real threat to our retirement would be a period of high inflation like what occurred in late 1970s/early 1980s. So we bought a pretty good quantity of the 2s of 2026. The longest TIPS with the lowest coupon. Frankly, we didn't even look the yield on a similar treasury bond. We viewed the TIPS purchase just like we view the insurance premium on our home fire insurance. It allowed us to lay off a risk we didn't want to carry. We had/have no thought of wishing for high inflation, no more than we hope our house will burn down.

I don't want to use the word "hyperinflation" but if we again see the 10+% inflation rates, the traditional protections of equities, PMs, will at best be uncertain and possibly nonexistent.

You have a huge leg up with COLA-ed pensions and no one can say what additional protection you should have (until after the event). We do believe, though, that for serious TIPS inflation protection the rule has to be "Go big or go home." A few I-bonds probably would represent a trivial percentage of your portfolio -- not worth the effort IMO.

All that said, it's been15 years since we executed on our TIPS strategy and inflation has been calm. Good. But unfortunately it also means that the time we will need protection has also diminished by 15 years, so we are now looking at winding down part of the TIPS portfolio. I'm not sure where that plan will go, particularly with near-zero interest rates but we'll probably begin talking about it during our annual portfolio review at the end of the year.

All that blather, and no answer to your question ...
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Old 10-01-2020, 05:54 PM   #3
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I also figure inflation is a valid threat to my plan. I'm close to half of my non-equities in TIPS (VAIPX fund).
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Old 10-02-2020, 06:02 AM   #4
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Other than even more unpredictable calamities, I view inflation as my number 1 "reasonable" financial "fear." No way to know "how much" or even what kind of protection is required. I have some old I-bonds (wish I had MORE), some PMs in a safety deposit box and a paid-for primary residence. Other than that, I try to spread the risk with index funds (bond and stocks.)

I also have back-ups which including returning from Paradise to the mid west or deep south (think Mississippi and you get the idea.) Hope none of these preparations are ever actually needed. I sort of like the expression "All you can do is all you can do." It doesn't really mean anything specific but sort of fits my circumstances. You just can not prepare for everything so YMMV.
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Old 10-02-2020, 06:49 AM   #5
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Rick Ferri suggests retirees have 20% of their FI in TIPS.

Given the OP's COLA'd pensions and (apparently) very low withdrawal rate and age, I might not worry about it.
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Old 10-02-2020, 06:55 AM   #6
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I count on the equities in the portfolio to keep up with inflation over the long term. If I recall correctly, historically even just a 30% exposure to equities has been enough to keep up inflation. With Firecalc, 45% equities is more than sufficient as portfolio survival is about as good as higher equity allocations.

I don’t worry about the fixed income portion alone keeping up with inflation.
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Old 10-02-2020, 08:18 AM   #7
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I guess we look at our stock index funds and, eventually, SS, as our inflation hedges and our bond indexes and our home as deflation hedges. I say the home, because home values tend to move in inverse proportion to interest rates, though population growth in our area also keeps demand and prices strong.
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Old 10-02-2020, 12:30 PM   #8
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Originally Posted by yakers View Post
How Much Inflation Protection Do I Need?

I see many references here and on the Boglehead board about inflation protection via TIPS, Treasuries and ibonds as well as real estate and equity investments. For me I think I have it covered by 1) I have a Federal COLAd pension (DW has a small partially COLAd teachers pension) 2) we own our condo mortgage free 3) our AA is targeted at 50/50 (currently 45/44/11, stock, bond, cash) 13% of that 44% bond is in the Federal TSP G Fund which is something of a stable value fund. DWs IRA RMDs are used for QCDs, I will not have RMDs for a couple years. I am 70 retired March 08, DW 72 retired 06,

I don’t know where/if Treasuries and TIPS fit. We could put $20K each year into ibonds but at our age I’m not sure how much that would help. It looks like our pensions, condo and portfolio will carry us nicely through about anything we will will encounter but I do want to ‘optimize’ the portfolio for passing on to our two sons or at least not see it wither away if some cheap ‘insurance’ will protect it.
I have an Ibonds + TIPs ladder that I will tap when I start social security at age 70. All together they will provide what I need to cover my minimum living expenses in a COLA'd way for 15 years. When the ladder runs out, I'll consider a SPIA to take me the rest of the way. Everything else is invested Stocks and Treasuries (which by the way are not automatically adjusted for inflation) in a portfolio which I'll make more aggressive over time.
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Old 10-02-2020, 05:05 PM   #9
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In the book "Don't Count on it" by JBogle, David Einhorn of Greenlite Capital reminds us that the USA has reworked the way it calculates inflation numerous times in the 70s/80s specifically to fit its goals.
He also states in his relocation of passed data he sees (usa) inflations closer to 8-9% in certain sectors, on page 20/XX of the books forward.
I see no penny candy FS anywhere anymore.

Good luck & Best wishes.
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