Running_Man
Thinks s/he gets paid by the post
- Joined
- Sep 25, 2006
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This post is not a recomendation of 100% Fixed Income Allocation. I always reccomend at least a 25% holding of stocks to even the most conservative of investors. However I have seen many posts that a fixed income portfolio dooms one to not being able to keep up with inflation and that inflation is the killer of fixed income.
My thesis is this is incorrect, because as in stocks it is the percentage of the portfolio draw that will cause failure to meet inflation. Additionally, as inflation increases yields increase so that if inflation increases to 8 percent in a year from 4 percent and the 30 year bond moves from 4 percent to 8 percent as well, the increase in interest income is 100 percent while spending needs only increase by 8 percent a 12.5 leverage. The question is how to take advantage of this advantageous math. The following calculations are all necessary to occur in a tax-deferred account. In a taxable account the taxes register these calculations invalid.
Attached is a spreadsheet with inflation statistics from the US government and the 30 year treasury yield for each year from 1977(with 10 year yields for the 3 years of no issue of 30 year treasuries). My initial quest was to see if a 4 percent draw and increasing the withdrawls by the inflation rate over 30 years could have been me looking back over the past 30 years.
Any additional funds earned in a year were added to a new 30 year bond the following year, creating an ever increasing income stream. To succeed every years spending needs would need to be met by income received so that no sales of bonds would be necessary.
The answer to my intial interest of a 4 percent withdrawl starting 30 years ago adjusted for inflation was yes and an original portfolio of $100,000 in 1977 would be $208,335 today and the spending of $14,413 would be met with income of $16,106 today, with no need to cash in any of the bonds. However I noted this is not valid today with rates available.
In entering other years I noted that the key though is to hold initial spending to no more than 50 percent of the starting income received. This allows the portfolio time to accumualate the additional savings to meet inflation needs. This would have allowed a draw in 1981 of 6.75 percent but today you would be limited to a 2.3 percent withdrawl rate as the safe rate due to the drop in interest rates. The higher the initial interest rate, the higher the amount of draw.
So currently this is not a very feasible strategy unless you were EXTREMELY conservative, but if rates do head up, and particularly as the 30 year gets much above 7.5 percent, this would be a strategy that would allow you to determine how much of your fixed income portfolio you could draw while meeting inflation in that portfolio, for a tax deferred account.
This was an experiment I wanted to run to see if this could hold up for 30 years, if inflation were to shoot up rates again like the 70's, and I was surprised to see how well it worked no matter what year from 1977 on you key in, so long as you hold to 50 percent of the original interest. You can change the year and the spreadsheet will calculate each years activity your ending 2007 balance, the inflation adjusted value of that balance at 12/31/2007, starting withdrawl and inflation adjusted spending needed in 2008. For years past 2008 it will assume the 2008 data goes on forever.
My thesis is this is incorrect, because as in stocks it is the percentage of the portfolio draw that will cause failure to meet inflation. Additionally, as inflation increases yields increase so that if inflation increases to 8 percent in a year from 4 percent and the 30 year bond moves from 4 percent to 8 percent as well, the increase in interest income is 100 percent while spending needs only increase by 8 percent a 12.5 leverage. The question is how to take advantage of this advantageous math. The following calculations are all necessary to occur in a tax-deferred account. In a taxable account the taxes register these calculations invalid.
Attached is a spreadsheet with inflation statistics from the US government and the 30 year treasury yield for each year from 1977(with 10 year yields for the 3 years of no issue of 30 year treasuries). My initial quest was to see if a 4 percent draw and increasing the withdrawls by the inflation rate over 30 years could have been me looking back over the past 30 years.
Any additional funds earned in a year were added to a new 30 year bond the following year, creating an ever increasing income stream. To succeed every years spending needs would need to be met by income received so that no sales of bonds would be necessary.
The answer to my intial interest of a 4 percent withdrawl starting 30 years ago adjusted for inflation was yes and an original portfolio of $100,000 in 1977 would be $208,335 today and the spending of $14,413 would be met with income of $16,106 today, with no need to cash in any of the bonds. However I noted this is not valid today with rates available.
In entering other years I noted that the key though is to hold initial spending to no more than 50 percent of the starting income received. This allows the portfolio time to accumualate the additional savings to meet inflation needs. This would have allowed a draw in 1981 of 6.75 percent but today you would be limited to a 2.3 percent withdrawl rate as the safe rate due to the drop in interest rates. The higher the initial interest rate, the higher the amount of draw.
So currently this is not a very feasible strategy unless you were EXTREMELY conservative, but if rates do head up, and particularly as the 30 year gets much above 7.5 percent, this would be a strategy that would allow you to determine how much of your fixed income portfolio you could draw while meeting inflation in that portfolio, for a tax deferred account.
This was an experiment I wanted to run to see if this could hold up for 30 years, if inflation were to shoot up rates again like the 70's, and I was surprised to see how well it worked no matter what year from 1977 on you key in, so long as you hold to 50 percent of the original interest. You can change the year and the spreadsheet will calculate each years activity your ending 2007 balance, the inflation adjusted value of that balance at 12/31/2007, starting withdrawl and inflation adjusted spending needed in 2008. For years past 2008 it will assume the 2008 data goes on forever.