A nearly riskless and stable spending rule for retirement? Lets discuss the ARVA strategy.

[big-papa]

The biggest problem is that TIPS only go out 30 years. Many of us are planning on retirement of 40+ years (the forum name is *early* retirement). Saying "keep buying the as they become available is not necessarily a great answer since it's subject to the whims not only of interest rates, but also of the stock you would sell to buy TIPS)

There are other ways to use TIPS to go beyond the 30 years imposed by the longest maturity TIPS you can purchase.

One way is the so-called "2 fund method" which is explained over on bogleheads. It is by no means perfect, but for some it might be good enough, at least until you can purchase a full 30 year ladder.

Short description is that you use 2 TIPS funds, one with a longer duration than the other, and hold them in such proportions that their net duration matches your investment horizon which is usually defined at the average duration of all future cash flows from which you wish to spend. In the limit, you can create cash flow for up to 2X the duration of the longest duration TIPS fund you can purchase. That would be LTPZ for most people, so about 36 years or so. Withdrawals are calculated using amortization.

I used this method for my first 2 years of retirement (years 32 and 31 of my plan), making quarterly withdrawals and it worked well. Once I was inside the 30 year window, I sold the proceeds and purchased a TIPS ladder. I held LTPZ and SCHP for this. The difference in the magnitude of the cash flow from the subsequent TIPS ladder and the 2-fund method was well under 1% for me. How much variation one might actually get in cash flows depends on a number of things including how often you rebalance between the two funds, and how the yield curve might move around between rebalancing/withdrawals. As I said, not perfect but, for some, good enough.

Other options include replacing LTPZ with actual TIPS with a similar duration. That will also require some management as well and will also give you the option of going even longer than 2X LTPZ's duration.

This method is definitely not for people who aren't comfortable with spreadsheets and periodically gathering the needed information to make the calculations and then performing the buying/selling/rebalancing steps or those who believe that there's a material difference between 99 angels dancing on the head of a pin and 100 angels dancing on the head of a pin.

Cheers.

 

[joejetski]

There are a lot of withdrawals strategies and each have pros and cons. There is one size fits all withdrawal strategy. IMHO most withdrawal strategies are trying to either "die with zero" or cutting it too close to goldilocks with a lot of assumptions/calculations. Or in cases like VPW, sacrifice quality of life. We are not OK with either case.

We are using "camel" strategy! Don't try to google it, it's a made up name.

Retired Asset Allocation Based on Portfolio Size

I've always liked getting more money, but don't find the game to be "fun." Good results = fun. Game = drudgery. YMMV :cool: Well, I also cringe at the comparison to a casino, but in a way I now feel a bit like a professional high roller at one: some days you win big, other days you lose big...

www.early-retirement.org

How does a recession impact my retirement?

In my view and observation, The ones who are impacted the most by a recession are those that (a) need the income from a job and/or business to live, and (b) have unmanageable debt which impacts their ability to save. From a FIRE point of view, one should not have to worry about those things if...

www.early-retirement.org

Camel strategy: Have a larger than required risky portfolio with a low (<3%) withdrawal rate. Our aim is to maintain the current lifestyle if things go south or inflate our lifestyle if ride one of the better SORR line.

So getting over the SORR hump, lol?

 

[Time2]

That one actually has a name: Retire again (and again)

Wouldn't that possibly cause a lowering of income if say 6 years in you had a 40% stock market drop. I have always wondered about restarting the 4% rule every year and just now thought of that downside. (Not that it matters, I think many of us live on way less than 4%)
Can someone do a side by side of a $1.5M portfolio using ARVA and the 4% rule?

 

[big-papa]

Wouldn't that possibly cause a lowering of income if say 6 years in you had a 40% stock market drop. I have always wondered about restarting the 4% rule every year and just now thought of that downside. (Not that it matters, I think many of us live on way less than 4%)
Can someone do a side by side of a $1.5M portfolio using ARVA and the 4% rule?

It depends. You've had a stock drop but you now have 6 fewer years on the planet. If you planned for 30 years originally, then you should now plan on 24 years. When using historical data to derive a % SWR, then 24 years remaining should have a higher SWR than 30 years would, which would help offset a loss that happens just before the reset.

The retire (and retire again) method is nothing more than one in a long list of hacks to the basic SWR idea which attempts to improve the outcomes. And, no doubt, many of them will. However, because future sequences of returns are under no obligation to follow past sequences of returns, there is no way to know in advance whether the improvement will ever be good enough.

Doing a complete side by side comparison between ARVA and the 4% (so-called) rule which is really just a crude rule of thumb, at best, is difficult. Some of this is because the ability to even be able to build a full 30 years TIPS ladder without a lot of holes in it is a fairly recent thing. And even today, there are 4 years in which there are no TIPS maturing (but can be dealt with starting in January of 2026 and for the 3 years thereafter). Besides that, the 4% so-called rule was derived based on the worst case historical sequence of returns and that would be for a retirement that started around 1966 or so. TIPS weren't even an apple in somebody's eye at that point in time.

To at least get an idea of one part of ARVA, this is something you can do. Go to tipsladder.com today and click "estimate" and use the slider at the top to slide all the way to the right so that you're creating a 30 year income stream, you'll see that a tips ladder today can create an income stream that is the equivalent of a 4.5% SWR. And it's a 4.5% SWR that is about as close to risk-free as anything you are going to find vs. a 4% rule-of-thumb where you can not guarantee that future sequences of return won't be worse than the one that set the 4% number in the first place.

Still, the author of the paper, using some assumptions about TIPS, did attempt some simulations. The paper is posted in one of the earlier posts in the thread, but it can be found here: https://www.tandfonline.com/doi/epdf/10.1080/0015198X.2025.2541567?needAccess=true

That is, you can use current TIPS yields and calculated real income and for the stock portion use historical sequences with amortization with different initial allocations between stock and TIPS and get a reasonable idea what total income would look like and how it might have varied in the past.

Cheers.

 

[richardsok]

We persist in thinking of another stock market crash a la 1929, but I've long believed our next financial crisis will occur not from stocks but when the global markets refuse to accept Treasury bonds at stated interest rates; when the Fed loses its power to control rates and the global debt markets take over. The immediate cause will be massive, titanic Federal debt shocked by some unanticipated damned calamity or another. The US dollar's special status as world currency will be shaken. Loans, large or small will be available only at obscene rates..... and THAT will hammer equities. The greenback fast devalued. Gasoline goes for $30/gal when it's available at all. Hoarding starts. Your stock losses will be just one episode of a dismal story we've never seen before. But the 1970s fuel crisis rhymes.
.
We are increasing our annual debt now at the rate of $THREE Trillion a year and go about like it's business as usual.
.
Meanwhile, in simple terns, I agree with steelpony's thinking: assure yourself that your spending/investing/ savings ratios always remain positive. As far as it goes, that's 100% correct. (My pension and social security alone cover almost all our expenses. My investments simply add to our wealth annually. ) But beyond that, I also ask where I'd be if interest rates should suddenly spike and a debt-driven hyper-inflation would gather steam. I would favor income-producing hard assets (like farmland, ex: symbol FPI) and hard assets/precious metals funds paying distributions such as GGN and GNT. Add to that a precious metals fund holding the actual metal in vaults (and not in the form of paper contracts) like GLTR and also holding my own actual PM coins or bars in a safe deposit box.
.
Even precious metals markets could well panic when the first investment houses cannot deliver the actual contracted metal as global physical demand soars. The actual metal available at any one time is but a small fraction of all the paper contractual gold trading out there.
.
Real estate aside, slightly over 15% of my family's net wealth is allocated in these kinds of investments. Secondly -- until the big calamity arrives -- I hope to disregard my personal opinions and remain flexible in my investments with a disciplined application of technical indicators driving all other allocations. Third, I hope to stay healthy long enough to build wealth for my wife's and daughter's entire lifetimes.
.
It's the best I can think of.

 

[junkanoo]

We persist in thinking of another stock market crash a la 1929, but I've long believed our next financial crisis will occur not from stocks but when the global markets refuse to accept Treasury bonds at stated interest rates; when the Fed loses its power to control rates and the global debt markets take over. The immediate cause will be massive, titanic Federal debt shocked by some unanticipated damned calamity or another. The US dollar's special status as world currency will be shaken. Loans, large or small will be available only at obscene rates..... and THAT will hammer equities. The greenback fast devalued. Gasoline goes for $30/gal when it's available at all. Hoarding starts. Your stock losses will be just one episode of a dismal story we've never seen before. But the 1970s fuel crisis rhymes.
.
We are increasing our annual debt now at the rate of $THREE Trillion a year and go about like it's business as usual.
.
Meanwhile, in simple terns, I agree with steelpony's thinking: assure yourself that your spending/investing/ savings ratios always remain positive. As far as it goes, that's 100% correct. (My pension and social security alone cover almost all our expenses. My investments simply add to our wealth annually. ) But beyond that, I also ask where I'd be if interest rates should suddenly spike and a debt-driven hyper-inflation would gather steam. I would favor income-producing hard assets (like farmland, ex: symbol FPI) and hard assets/precious metals funds paying distributions such as GGN and GNT. Add to that a precious metals fund holding the actual metal in vaults (and not in the form of paper contracts) like GLTR and also holding my own actual PM coins or bars in a safe deposit box.
.
Even precious metals markets could well panic when the first investment houses cannot deliver the actual contracted metal as global physical demand soars. The actual metal available at any one time is but a small fraction of all the paper contractual gold trading out there.
.
Real estate aside, slightly over 15% of my family's net wealth is allocated in these kinds of investments. Secondly -- until the big calamity arrives -- I hope to disregard my personal opinions and remain flexible in my investments with a disciplined application of technical indicators driving all other allocations. Third, I hope to stay healthy long enough to build wealth for my wife's and daughter's entire lifetimes.
.
It's the best I can think of.

Through the years, your posts are always thought-provoking. Happy Holidays!

 

[Koolau]

We persist in thinking of another stock market crash a la 1929, but I've long believed our next financial crisis will occur not from stocks but when the global markets refuse to accept Treasury bonds at stated interest rates; when the Fed loses its power to control rates and the global debt markets take over. The immediate cause will be massive, titanic Federal debt shocked by some unanticipated damned calamity or another. The US dollar's special status as world currency will be shaken. Loans, large or small will be available only at obscene rates..... and THAT will hammer equities. The greenback fast devalued. Gasoline goes for $30/gal when it's available at all. Hoarding starts. Your stock losses will be just one episode of a dismal story we've never seen before. But the 1970s fuel crisis rhymes.
.
We are increasing our annual debt now at the rate of $THREE Trillion a year and go about like it's business as usual.
.
Meanwhile, in simple terns, I agree with steelpony's thinking: assure yourself that your spending/investing/ savings ratios always remain positive. As far as it goes, that's 100% correct. (My pension and social security alone cover almost all our expenses. My investments simply add to our wealth annually. ) But beyond that, I also ask where I'd be if interest rates should suddenly spike and a debt-driven hyper-inflation would gather steam. I would favor income-producing hard assets (like farmland, ex: symbol FPI) and hard assets/precious metals funds paying distributions such as GGN and GNT. Add to that a precious metals fund holding the actual metal in vaults (and not in the form of paper contracts) like GLTR and also holding my own actual PM coins or bars in a safe deposit box.
.
Even precious metals markets could well panic when the first investment houses cannot deliver the actual contracted metal as global physical demand soars. The actual metal available at any one time is but a small fraction of all the paper contractual gold trading out there.
.
Real estate aside, slightly over 15% of my family's net wealth is allocated in these kinds of investments. Secondly -- until the big calamity arrives -- I hope to disregard my personal opinions and remain flexible in my investments with a disciplined application of technical indicators driving all other allocations. Third, I hope to stay healthy long enough to build wealth for my wife's and daughter's entire lifetimes.
.
It's the best I can think of.

I guess that's why I think at least some of one's commitment to PMs should be physical and not paper. No, they don't pay interest or dividends, so keep it small. But in an economy you picture, "real" things may be the only things of value. Hope I'm gone by then.

 

[pb4uski]

Wouldn't that possibly cause a lowering of income if say 6 years in you had a 40% stock market drop. I have always wondered about restarting the 4% rule every year and just now thought of that downside. (Not that it matters, I think many of us live on way less than 4%)
Can someone do a side by side of a $1.5M portfolio using ARVA and the 4% rule?

No, because of stocks drop then you just stay the course with your current withdrawal rate. You only reset if your end of period portfolio balance exceeds your beginning of period portfolio balance. If you use a tool like FIRECalc to set a SWR then each time that you reset your SWR benefits from both the portfolio increase and the shorter time horizon.