Gone4Good
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Sep 9, 2005
- Messages
- 5,381
He references funding a 4.46% withdrawal by buying an annual series of TIPS strips, such that one matures each year for 30 years. It requires a 2% real yield on the TIPS, which is not available now but has been for much of the time since TIPS have been issued, and even most of the time during which TIPS have been debated on this board. It also requires a more liquid market for TIPS strips, which IMO would come rapidly if this idea were widely publicized. Many individuals might not be able to understand it, but advisors should be able to.
I think it could be done without strips. You know the coupons from day one so it shouldn't be much trouble to back into a maturity schedule that gives you the annual cash flow you need using both income and principal. Early year cash flow would be dominated by interest from a 30 year portfolio and later years would be dominated by maturities.
Longevity risk is a concern. But even that could be mostly overcome by allocating sufficient excess capital to the 25-30 year maturity tranches (for purposes of creating a new ladder at that time). This exposes the retiree to reinvestment risk for retirement plans longer than 30 years but that can be smoothed over almost as many years as you want.
Other risks include taxation of inflation compensation, inflation tracking error, and probably a lagging standard of living during retirement (which is also the case with a strict adherence to FIRECalc methodology too).
I can certainly see moving to something similar over time for at least part of the portfolio. And I can see doing it under two separate scenarios. 1) As I age and my investment time horizon becomes more certain. 2) If my portfolio outperforms visa vie my withdrawal expectations, lock in that outperformance by moving excess capital into long-dated TIPS.