Thought: TIPS & Withdrawal Rate

[ERasap]

With TIPS Real Rates reaching 2.3%, it is getting in range where the real rate is getting close to the withdrawal rate that many have. In 2000, TIPS real rates were around 4%, right at the Trinity Withdrawal Rate.

With a 4% real rate, one would have your money growing at the rate of inflation, in addition 4% for spending....all Guaranteed.

If TIPS Real rate is greater than withdrawal rate and I held all TIPS to maturity in a ladder, would this not be a 100% guaranteed retirement, for at least the 30 year horizon?

In any case when TIPS real rates > Withdrawal rate, 100% won the game?

The only downside I see is paying tax on the full amount of growth each year vs deferring with stocks.

Maybe someone one has already posted this and it has been discussed, if so I apologize.

Thoughts?

 

[tulak]

There have been discussions here regarding TIPS, but not for fully funding your retirement. There are a lot of discussions about using bonds to do what you suggest. A few members here have no or little equity exposure because of high FI yields right now.

In your example, yes, if the TIPS real yield exceed your WR, then you can load up on TIPS for 30 years and call it good.

The only issue is that you have to figure out how to deal with the TIPS gap between 2034-2039, since there are no TIPS maturing during that time. And there are no TIPS beyond 30 year maturity, so you can only go out 30 years. tipsladder.com is a good resource to build a ladder.

I’m a fan of TIPS to deal with SORR and I’m in the process of building a TIPS ladder. After my last batch of treasuries mature, I won’t hold any FI besides TIPS. Once I retire, I’ll hold a nominal amount in short-term treasuries.

 

[tulak]

Here’s a 30 year ladder for you: https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

For 2.17 million, you can guarantee 100k/year for 30 years.

The same amount in firecalc:

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $2,166,029 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles. The lowest and highest portfolio balance at the end of your retirement was $-2,815,710 to $11,092,163, with an average at the end of $3,014,355. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 24 cycles failed, for a success rate of 80.5%.

 

[braumeister]

would this not be a 100% guaranteed retirement, for at least the 30 year horizon?

I see a couple of big assumptions in that scenario.
First, will your expenses remain fairly constant, and second, will your personal inflation rate match the official one?

 

[tulak]

I see a couple of big assumptions in that scenario.

First, will your expenses remain fairly constant, and second, will your personal inflation rate match the official one?

Good points. I assumed that the expenses would be constant. I compare this approach to buying an annuity, basically it’s a diy inflation protected annuity. Since you can’t buy an inflation protect annuity, using TIPS is a good alternative.

Personally, I don’t like this approach since it doesn’t provide any flexibility if you have a change in expenses, but that’s the same with an annuity.

If I was to use this approach, then I’d only do it for minimum income required and invest the rest. This way you are guaranteed income if SHTF.

 

[Willers]

If I was to use this approach, then I’d only do it for minimum income required and invest the rest. This way you are guaranteed income if SHTF.

That is exactly what we did. We built a TIPS ladder covering our average yearly spend. We didn't build a 30 year ladder, but rather scaled it back for the post-SS years that effectively yields the same income. (a drop in SS benefits was assumed through income-testing). It cost us about 30% of our investible assets and gives us a great base of income into our 80's. It allows us to use the other two-thirds for large expenses and long-term growth.

It is definitely a conservative approach, but might be a good option for those in a similar position.

 

[mrfeh]

If TIPS Real rate is greater than withdrawal rate and I held all TIPS to maturity in a ladder, would this not be a 100% guaranteed retirement, for at least the 30 year horizon?

Nothing is guaranteed.

30 years is a long time...expenses could be higher than expected...life can throw curve balls.

Doing something like this puts a floor on your portfolio value, but it also adds a ceiling.

 

[copyright1997reloaded]

For those who want to watch the 10-year TIPS in real time (but don't have access to a Bloomberg terminal), CNBC provides this link:
https://www.cnbc.com/quotes/US10YTIP

I own some of the 28 and 33 Tips (which are underwater as the real rates have been going up), but might buy some more if the real rate keeps going up.

 

[ERasap]

Good points. I assumed that the expenses would be constant. I compare this approach to buying an annuity, basically it’s a diy inflation protected annuity. Since you can’t buy an inflation protect annuity, using TIPS is a good alternative.

Personally, I don’t like this approach since it doesn’t provide any flexibility if you have a change in expenses, but that’s the same with an annuity.

If I was to use this approach, then I’d only do it for minimum income required and invest the rest. This way you are guaranteed income if SHTF.

Not sure what you mean by no flexibility if expenses change... You can always sell the TIPs on secondary market, or just pocket the extra income if spending drops. Much more flexible than an annuity.

Further, like Yogi once said, "it is difficult to make predictions, especially about the future" - but we do know historically TIPS have traded from +4% (2000-ish) to negative real rates. Based on history, a 2.3% real rate is pretty good. If real rates were to decline, the TIPS would appreciate in value.

 

[Montecfo]

With TIPS Real Rates reaching 2.3%, it is getting in range where the real rate is getting close to the withdrawal rate that many have. In 2000, TIPS real rates were around 4%, right at the Trinity Withdrawal Rate.



With a 4% real rate, one would have your money growing at the rate of inflation, in addition 4% for spending....all Guaranteed.



If TIPS Real rate is greater than withdrawal rate and I held all TIPS to maturity in a ladder, would this not be a 100% guaranteed retirement, for at least the 30 year horizon?



In any case when TIPS real rates > Withdrawal rate, 100% won the game?



The only downside I see is paying tax on the full amount of growth each year vs deferring with stocks.



Maybe someone one has already posted this and it has been discussed, if so I apologize.



Thoughts?

Well since the TIPS distribution rate will initially be far less than most folks' withdrawal rates, I guess you are laddering every year?

It is awkward to build an annual ladder with TIPS, since they are only issued for 5, 10 and 30 year durations.

 

[tulak]

Not sure what you mean by no flexibility if expenses change... You can always sell the TIPs on secondary market, or just pocket the extra income if spending drops. Much more flexible than an annuity.

Sorry, wasn’t clear with my wording. Yes, TIPS are a lot more flexible than annuity because you can always sell them. The downside is if you are forced to sell, you may need to sell at a loss. That’s why I hold until maturity and only buy up to a min spending level.

 

[pb4uski]

... It is awkward to build an annual ladder with TIPS, since they are only issued for 5, 10 and 30 year durations.

Have you looked at tipsladder.com that tulak posted earlier in this thread? It looks pretty simple to me.

 

[bmcgonig]

Have you looked at tipsladder.com that tulak posted earlier in this thread? It looks pretty simple to me.

Alan Roth wrote a good article about how he bought 1M worth of TIPS to,give himself a 4.38% real withdrawal for 30 yrs. He mentions the link above as well. He had some difficulties implementing it, but as you say it’s simple.

https://www.advisorperspectives.com/articles/2022/10/24/the-4-rule-just-became-a-whole-lot-easier