Now that long TIPS yields are 60 bp off their highs I will…

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dcabler
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

Bill Bernstein wrote: Thu May 25, 2023 11:00 am
It's not obvious to me why TIPS funds shouldn't have ultra low expenses.
1) PIMCO. Need one say more?
2) Vanguard, Schwab, and Fido, who offer rock-bottom bond ETFs in other asset classes, are not yet interested. I'm guessing they will be sooner or later. (BlackRock is very hit and miss in the ER department. Some of their funds are inexpensive, but they never seem to miss an opportunity to charge 12-20bp if they think they can get away with it.)
LTPZ's assets are valued at $671M. Compare with SCHP at $12.4B, FIPDX at $9.4B and other intermediate TIPS funds.
I'd be surprised if it were the e/r driving these differences vs. less interest at the long end for any number of reasons...

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NiceUnparticularMan
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

Bill Bernstein wrote: Thu May 25, 2023 10:21 am Apropos this discussion, it's not immediately obvious to me how a demented spouse will find it easier to deal with TIPS funds than with a discrete ladder. Once the dementia proceeds beyond a certain point, either will prove beyond daunting.

In that instance, far, far more important than arranging the deck chairs on the TIPS Titanic is making sure that you identify someone well ahead of time who can manage your portfolio, preferably a trustworthy kid who can do the math, and if you don't have one of those, someone else who can do the job.
I don't disagree with your big picture point about backstopping with trustable successor agents, but my expectation is my spouse, or any other successor agent, would find it easiest to know we can safely spend/give any cash that shows up in cash accounts. That to me is the ideal, to have assets that don't need to be actively managed producing a cash flow that is likely to be adequate indefinitely.

In other words, what I really want is a fairly-priced inflation-adjusted annuity to layer on top of Social Security, including appropriate survivor provisions. But absent that being an option, next best in my view would be a setup where even if personalized active management of assets (meaning outside of what is being done by fund managers, robos, or so on) cuts off, in practice it will still track reasonably close to such an annuity anyway.

And then my spouse or other successor agent can focus on the management of our/their affairs on the spending/giving side, which is often challenging enough.

Given that context--assuming there is no automatic reinvestment turned on, a rolling bond fund will continue to produce cash indefinitely, although its real value will presumably decline over time.

This includes TIPS funds. As noted before, they distribute the inflation adjustments, so without reinvestment the income they produce will be declining in real value over time. However, they will not have any sort of hard cutoff.

A non-rolling ladder, in contrast, has such a hard cutoff.
Re. funds, it would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp.
Tangential comment, but I have long thought at 20+ years, I can probably do something a little more efficient than TIPS anyway for liability matching purposes. It would never be entirely risk free, but I think there is a lot of evidence that in those ranges, judicious use of stocks combined with things like annuities, stable value funds, or the TSP G Fund, might be so likely to do as well or better that choosing TIPS instead is unnecessarily cautious.

Anyway, as a result I have thought it is unlikely I will personally feel a strong need to stray beyond market TIPS funds and short-term TIPS funds for LMP purposes, which can get you out to a 15-yearish ladder equivalent. Meaning again not feeling a need to be overly precise with this stuff, I suspect a combination of those TIPS funds, stock funds, annuities, and eventually the TSP G Fund, will work out reasonably well for my liability-matching needs.

But if there is ever a really cheap LT TIPS fund, I might toss it in too. Or not.
Last edited by NiceUnparticularMan on Thu May 25, 2023 12:06 pm, edited 1 time in total.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

exodusing wrote: Thu May 25, 2023 10:38 am We're thinking of TIPS as an inflation adjusted annuity. Our existing ladder, in an IRA, should take us to our mid to late 90s. For management, all we have to do is withdraw cash (from interest and maturing principle), no trading or rebalancing needed. This seems much simpler than dealing with funds.
Again, that will probably work out fine, although personally I would ideally not want to build out a large TIPS ladder to my mid-late 90s until I was much closer to that age (off hand I don't know your age). Actual inflation-adjusted annuities with appropriate survivor provisions would be better for this purpose because then you would get the benefit of risk-pooling. But even that doesn't pool the risk of being alive but needing/wanting a lot less income at advanced ages. And absent any risk-pooling at all, self-insuring for that possibility far in advance does not strike me as particularly efficient.

So personally, if I was using individual TIPS, I would still only be using them to buy shorter ladders (at 70, say, at most I would only be going out to maybe 85), and would be planning to add additional rungs only conditionally, based on continued survivorship and health assessments.
A normal rule of thumb is duration/maturity should match horizon and for retirement you'd use 1/2 of expected remaining lifespan. This suggests reducing duration/maturity as time goes by, which means thinking about things with funds, rather than just withdrawing cash.
So I agree with this framework, but the problem is expected remaining lifespan changes each year you survive.

Like, here is an actuarial table compiled from information published by the SSA:

https://www.annuityadvantage.com/resour ... cy-tables/

Per this table, at 70 a woman has 16.57 years of life expectancy.

At 71, though, that doesn't go down to 15.57. It only goes down to 15.82.

By 80, it has not gone down to 6.57. It has only gone down to 9.74.

And of course at 87, it is not zero. It is 6.07.

And so on.

OK, so if you were following the framework you suggested, then your target duration is not going down one year with every year that passes. It is only going down some fraction of a year (which changes over time). And in fact if you were using a ladder, you should really be adding new ladder rungs as you survive additional years. Maybe not every year, but periodically if you make it a few more years, you should be extending the ladder some portion of those years.

Again, annuities do this automatically and give you credit for the pooled risks, so it would be nice if inflation-adjusted annuities existed.

But absent that--an unmanaged TIPS ladder isn't really going to track this like would be optimal. Either you will have to overshoot your expected lifespan to begin with, or you will have to add rungs periodically.

Again, unmanaged TIPS funds won't track this optimally either. But at advanced ages, I like their fit a little better.
Capital gains from sales due to real rate changes is the issue for funds that I referenced above (although the gain does provide cash). It's hard to say how much of a problem this will be, given the unpredictability of future real rates. Individual TIPS wouldn't have that problem if held to maturity.
So I think it is useful to remember that holding aside the inflation adjustments, using the BobK method as applied to TIPS funds implies you really should not end up with much in the way of additional net capital gains. I also note TIPS funds will typically carry forward capital losses, which will help smooth this out as well.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

bobcat2 wrote: Wed May 24, 2023 7:31 pm
watchnerd wrote: Tue May 23, 2023 3:16 pm
Kevin M wrote: Tue May 23, 2023 3:09 pm Several highly respected forum members here, e.g., BobK, have argued that you can accomplish an LMP (non rolling ladder) with two or three funds, as you suggest. I understand the argument, but I've never been convinced that there's no risk in the rebalancing part; i.e., selling shares of the long term fund when long term yields have increased significantly to buy shares of the shorter term fund. You don't get the benefit of the return to par at maturity effect for the longer term holdings.
<snip>
Here are some reasons I prefer using duration matched TIPS funds and I-bonds instead of creating a TIPS bond ladder for safe flexible retirement income.
Correct me if I'm wrong Bob. I've seen your posts as bobcat2, but believe your username used to be BobK, and that's the one I tend to remember. Perhaps there's an interesting story behind that?

Thanks for schooling us on your views of using funds instead of a ladder.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

NiceUnparticularMan wrote: Thu May 25, 2023 12:05 pm
exodusing wrote: Thu May 25, 2023 10:38 am We're thinking of TIPS as an inflation adjusted annuity. Our existing ladder, in an IRA, should take us to our mid to late 90s. For management, all we have to do is withdraw cash (from interest and maturing principle), no trading or rebalancing needed. This seems much simpler than dealing with funds.
Again, that will probably work out fine, although personally I would ideally not want to build out a large TIPS ladder to my mid-late 90s until I was much closer to that age (off hand I don't know your age). Actual inflation-adjusted annuities with appropriate survivor provisions would be better for this purpose because then you would get the benefit of risk-pooling. But even that doesn't pool the risk of being alive but needing/wanting a lot less income at advanced ages. And absent any risk-pooling at all, self-insuring for that possibility far in advance does not strike me as particularly efficient.

So personally, if I was using individual TIPS, I would still only be using them to buy shorter ladders (at 70, say, at most I would only be going out to maybe 85), and would be planning to add additional rungs only conditionally, based on continued survivorship and health assessments.
At an advanced age, we might have less vacation, etc. spending, but likely would need much more care spending.

We could always adjust later, but I find it reassuring to lock in adequate income to cover estimated needs (based on current spending).
NiceUnparticularMan wrote: Thu May 25, 2023 12:05 pm
A normal rule of thumb is duration/maturity should match horizon and for retirement you'd use 1/2 of expected remaining lifespan. This suggests reducing duration/maturity as time goes by, which means thinking about things with funds, rather than just withdrawing cash.
So I agree with this framework, but the problem is expected remaining lifespan changes each year you survive.

Like, here is an actuarial table compiled from information published by the SSA:

https://www.annuityadvantage.com/resour ... cy-tables/

Per this table, at 70 a woman has 16.57 years of life expectancy.

At 71, though, that doesn't go down to 15.57. It only goes down to 15.82.

By 80, it has not gone down to 6.57. It has only gone down to 9.74.

And of course at 87, it is not zero. It is 6.07.

And so on.
Actuarial tables are based on the average person. We are in much better than average health and have much better than average genetics based on parents' lifespans.
NiceUnparticularMan wrote: Thu May 25, 2023 12:05 pm
Capital gains from sales due to real rate changes is the issue for funds that I referenced above (although the gain does provide cash). It's hard to say how much of a problem this will be, given the unpredictability of future real rates. Individual TIPS wouldn't have that problem if held to maturity.
So I think it is useful to remember that holding aside the inflation adjustments, using the BobK method as applied to TIPS funds implies you really should not end up with much in the way of additional net capital gains. I also note TIPS funds will typically carry forward capital losses, which will help smooth this out as well.
It would seem to depend on what happens to real rates. As I wrote, it's hard to say how this will actually play out. A mitigating factor is that capital gains taxes are based on receiving capital gains, so you have that.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by slicendice »

Kevin M wrote: Wed May 24, 2023 11:48 am
slicendice wrote: Tue May 23, 2023 7:43 pm
Kevin M wrote: Tue May 23, 2023 6:56 pm
slicendice wrote: Tue May 23, 2023 3:30 pm I think it is a little soon to litigate the 20% in LTT thread as it was intended for long term investors who are able to overlook short term volatility. When we were staring into the abyss in March of 2020, they were sure nice to have in the portfolio. In times when they shine, one pines for holding more than only 20% that is for sure.

In line with the topic of this thread though,long TIPS at 1.7% real seem a much better deal than long treasuries at 3.8-4% nominal and with the time to retirement getting relatively short 100% of my new bond purchases are LTPZ.
What abyss? I barely noticed it, and simply added more stocks to the portfolios where it was appropriate.

My own portfolio was already over target in stocks, so all I did was a little market timing in my Roth, and have cashed out all but the first three of those lots at a 5-10% profit.

The last abyss I remember staring into was in late 2008, and I just continued to add to stocks even though my anxiety level was through the roof. Since then, nada in terms of an emotional response.
Well good for you I guess. Frankly, sitting in my house under lock down, unable to buy certain basic household commodities with a contagious, life-threatening virus circling in the air and 20+ percent unemployed with our only near-term path to a resolution of the crisis, the development of a highly effective vaccine based on a clinically unproven at the time technology was way more stressful than the 2008 debacle.
Ah, I thought we were talking about big stock market downturns associated with major financial crises. I don't remember March 2020 that way. I'm sure it was different for different people. It was a bummer not getting to see the kids and grandkids as much, I hated wearing a mask because it fogs up my glasses, and although we never ran out of TP, I was worried about it. My heart goes out to those who lost loved ones to COVID, or who lost jobs because of it, etc.. We personally did not experience any losses among our family and friends, nor were there any significant financial shocks to any of us.

I definitely do not remember feeling the gut wrenching anxiety as I watched the value of my relatively conservative portfolio plummet, as I did in 2008. At one point I had to stop watching or reading any financial news, and cut myself off as much as I could from even hearing what the stock market was doing, except for one day each week when I would gather up my courage and throw more cash into what appeared to be a black hole at the time. I haven't experienced anything close to that since late 2008.

Sorry if I offended you.

Kevin
No worries, no offense taken. I was just pointing out that the LTT's are great diversifiers in many crises, especially if you are equities heavy with big tilts to size/value as I was/am. They have their own economic kryptonite conditions which is probably why it is suggested they be capped at 20% of the portfolio. Actually the last year has helped show me why nominal bonds of any duration should probably just be capped at around 20-25% of the portfolio.

I have used the 1+% yielding long TIPS environment to extend the duration on the 10% I had in FIPDX to LTPZ last summer. Last october, I decided to move from 70:30 to 60:40 selling equities to buy LTPZ at > 1.7%. The low yields on bonds sort of forced me me to take a little more equity risk over the prior 4-5 years than I was comfortable with as time grows shorter. Since October, with long tips significantly positive I'm further gliding up my bonds slowly through directing new contributions to LTPZ, as bobcat2 has recommended here and previously. However, I'll join the chorus that clamors for a cheaper competitor to LTPZ. One would think if anyone is ever going to offer one, conditions are more favorable for starting one now than they have been in the last 15 years.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

slicendice wrote: Thu May 25, 2023 1:05 pm No worries, no offense taken. I was just pointing out that the LTT's are great diversifiers in many crises, especially if you are equities heavy with big tilts to size/value as I was/am. They have their own economic kryptonite conditions which is probably why it is suggested they be capped at 20% of the portfolio. Actually the last year has helped show me why nominal bonds of any duration should probably just be capped at around 20-25% of the portfolio.
Right. The way I've seen it characterized is that LTTs tend to be negatively correlated with stocks in a deflationary financial crisis, but positively correlated in an inflationary one. We've seen the latter in the latest relatively large downturn, and this is what I and others have always been concerned about with yields that were historically very low.

With a stock heavy portfolio, it probably doesn't matter much what fixed income you own. For those of us with fixed income heavy portfolios, LTTs may not be a good idea at all (I'm with Bernstein on this, to do a little name dropping).
If I make a calculation error, #Cruncher probably will let me know.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by hudson »

bobcat2:
I don’t want to mess with TIPS bonds or TIPS funds beyond age 85 if I get there. Beyond age 85 most TIPS income will be replaced by I-bonds and longevity annuity income which I will begin purchasing in my late 70s. Buying longevity annuities, which are truly cheap, is also easier using TIPS funds rather than TIPS laddered bonds.
Good coaching! I want to use individual TIPs on to age 96, but I need to look hard at your recommendation. I do have a good backup man.


dcabler:
Another positive is you don't have to deal with the TIPS black hole - that is, those years for which there currently are no TIPS maturing. But there is maintenance involved regarding rebalancing. I'm doing it quarterly by rebalancing between the two funds since that's also when I'm making withdrawals
.

In 2024, my plan (age 75 to 96) is to convert to 50-70% individual TIPS. I don't think that I'll do a perfect ladder. It will be imperfectly duration matched (average duration 10 years). My holdings will be a blend of rolling and non-rolling. I won't go short.

Bill Bernstein:
It would be really, really nice if there was a long-term TIPS fund that charged less than 20 bp. Failing that, I'll happily deal with a nice slug of 2040-2050s maturity individual issues.
I could warm up to a low expense long TIPS ETF/Fund. LTPZ's .2 expense ratio has a lot of dealer profit.
I like that TIPS ETFs like SCHP or LTPZ payout monthly.
I sleep better owning individual treasuries than owning ETFs/Funds. It's a mental thing and an expense ratio thing.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Thu May 25, 2023 2:18 pm Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years?
Mmm, not sure how you came up with that?

A lot is going to depend on specific AA , returns, and inflation going forward.

Current 10 YR breakeven inflation is 2.25% + 1.5% = 3.75% just on the TIPS part
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

watchnerd wrote: Thu May 25, 2023 2:24 pm
JBTX wrote: Thu May 25, 2023 2:18 pm Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years?
Mmm, not sure how you came up with that?

A lot is going to depend on specific AA , returns, and inflation going forward.

Current 10 YR breakeven inflation is 2.25% + 1.5% = 3.75% just on the TIPS part
If the real rate is 0, then you are pulling out 3.33% per year in an equal weighted ladder. They adjust with inflation. Add in 1.5% real rate and you get to 4.83%.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

JBTX wrote: Thu May 25, 2023 2:18 pm Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years?
This calculates a 4.24% real withdrawal rate over 30 years: https://www.tipsladder.com/build?bondCh ... come=10000
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Prudence »

Sorry, I am just reading the end of this thread. The TIPS in my account (that I bought in late 2022) have all dropped in price. I can see that the YTM of TIPS that are currently for sale in the secondary market have increased, especially those maturing in the next few years. Two questions: why have the YTMs increased (what market forces), and does it make any sense to sell a TIPS at a loss and buy another with a higher YTM (with similar maturity date)?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

Code: Select all

Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years? 
Allan Roth came up with a 30-y SWR of 4.36% using #cruncher's spreadsheet when average TIPS rates were 1.83%, but if you think about it, it's a simple straight-line mortgage calculation, using, for example, the PMT function, which gives you the precise same 4.36%.

The current average TIPS yield is only slightly lower than that. Were it to fall to 1.5%, the 30-y SWR is 4.16%, and at an average 1.0% yield, it's 3.87%.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

Bill Bernstein wrote: Thu May 25, 2023 3:06 pm

Code: Select all

Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years? 
Allan Roth came up with a 30-y SWR of 4.36% using #cruncher's spreadsheet when average TIPS rates were 1.83%, but if you think about it, it's a simple straight-line mortgage calculation, using, for example, the PMT function, which gives you the precise same 4.36%.

The current average TIPS yield is only slightly lower than that. Were it to fall to 1.5%, the 30-y SWR is 4.16%, and at an average 1.0% yield, it's 3.87%.
See my post above linking tipsladder.com at 4.24% based on yesterday's pricing.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by oxothuk »

Prudence wrote: Thu May 25, 2023 2:43 pm Sorry, I am just reading the end of this thread. The TIPS in my account (that I bought in late 2022) have all dropped in price. I can see that the YTM of TIPS that are currently for sale in the secondary market have increased, especially those maturing in the next few years. Two questions: why have the YTMs increased (what market forces), and does it make any sense to sell a TIPS at a loss and buy another with a higher YTM (with similar maturity date)?
1) Nominal bond prices fall and rise with nominal interest rates, TIPS prices do the same with a fall or rise in real interest rates. Real interest rates have increased since late 2022, hence TIPS prices have fallen. None of this matters is you plan to hold the bonds to maturity.
2) No, it does not make any sense to exchange for another similar bond - no profit, and you'll have to pay the bid/ask spread on the exchange. You might come out ahead if you wanted to exchange for a bond with shorter duration, but presumably you had a good reason for choosing the bond you did.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

JBTX wrote: Thu May 25, 2023 2:30 pm
watchnerd wrote: Thu May 25, 2023 2:24 pm
JBTX wrote: Thu May 25, 2023 2:18 pm Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years?
Mmm, not sure how you came up with that?

A lot is going to depend on specific AA , returns, and inflation going forward.

Current 10 YR breakeven inflation is 2.25% + 1.5% = 3.75% just on the TIPS part
If the real rate is 0, then you are pulling out 3.33% per year in an equal weighted ladder. They adjust with inflation. Add in 1.5% real rate and you get to 4.83%.
Oh you were referring to a withdrawal rate just for the ladder.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by gasman »

Prudence wrote: Thu May 25, 2023 2:43 pm Sorry, I am just reading the end of this thread. The TIPS in my account (that I bought in late 2022) have all dropped in price. I can see that the YTM of TIPS that are currently for sale in the secondary market have increased, especially those maturing in the next few years. Two questions: why have the YTMs increased (what market forces), and does it make any sense to sell a TIPS at a loss and buy another with a higher YTM (with similar maturity date)?
It might if you were selling an individual TIPs in a taxable account and buying in a tax deferred account. Assuming this doesn't violate IRS wash sale rules about "substantially similar" investments. Something which there is little real clarity on.

Might also make a very weak case for picking a shorter maturity TIPs if you wanted to change your duration for some reason. Still have to deal with bid-ask spreads.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by JBTX »

Bill Bernstein wrote: Thu May 25, 2023 3:06 pm

Code: Select all

Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years? 
Allan Roth came up with a 30-y SWR of 4.36% using #cruncher's spreadsheet when average TIPS rates were 1.83%, but if you think about it, it's a simple straight-line mortgage calculation, using, for example, the PMT function, which gives you the precise same 4.36%.

The current average TIPS yield is only slightly lower than that. Were it to fall to 1.5%, the 30-y SWR is 4.16%, and at an average 1.0% yield, it's 3.87%.
Why wouldn’t it be 3.33 (1/30 years) plus 1.5 = 4.83? I’m talking withdrawal rate, not rate of returns.

Edit: I get it now. Your “principal” is decreasing so it will be less than 1.5% in the beginning balance after year one.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

JBTX wrote: Thu May 25, 2023 4:01 pm
Bill Bernstein wrote: Thu May 25, 2023 3:06 pm

Code: Select all

Don’t know if this is on topic, but has it been discussed that with real rates at 1.5% or higher, a tips ladder would almost allow a 5% SWR over 30 years? 
Allan Roth came up with a 30-y SWR of 4.36% using #cruncher's spreadsheet when average TIPS rates were 1.83%, but if you think about it, it's a simple straight-line mortgage calculation, using, for example, the PMT function, which gives you the precise same 4.36%.

The current average TIPS yield is only slightly lower than that. Were it to fall to 1.5%, the 30-y SWR is 4.16%, and at an average 1.0% yield, it's 3.87%.
Why wouldn’t it be 3.33 (1/30 years) plus 1.5 = 4.83? I’m talking withdrawal rate, not rate of returns.

Edit: I get it now. Your “principal” is decreasing so it will be less than 1.5% in the beginning balance after year one.
Might want to refer to this post by #cruncher - PMT function in Excel will get you there in one fell swoop.
viewtopic.php?p=6993987#p6993987

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Re: Now that long TIPS again yield more than 1.70% I will…

Post by McQ »

TIPS and the SWR

The PMT method suggested by Bill (and favored by #Cruncher) is exact, but not readily extrapolatable to different yields than whatever you just ran the PMT function on.

Elsewhere I developed a simple rubric:
“For each 25 bp increase in yield, expect a 14 bp increase in the SWR.”

-So, at 0% across the curve, the 30-year SWR is 3.33%.
-At 1.75% yields, as now and when Allan put his ladder together in October, it is 3.33% + (7 * .14) = 4.31%

Conclusions
1. AN SWR of 4% using TIPs just requires a yield across the curve of about 1.25% more or less. Not a rare or uncommon circumstance.

2. To get the SWR up above 4.5% requires real yields above 2.0%, not so common and the prospect of which was the precipitating circumstance for this thread.

3. To get an SWR above 5.0% will require TIPs yields above 3.0%, which I don’t think any of us expects to see.

And as always, a TIPs ladder turns into a pumpkin as the 31st year dawns. Not a problem if the first digit in your age is 7, but thinkers when the first digit is 6.

Last: the rubric is back-of-the-envelope stuff and works best when the yield curve is relatively flat. As Kevin M will tell you, yield curves are fascinating creatures and can dance around quite a bit. The rubric will be least exact when the curve is very steep or multi-peaked.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

McQ: How true! Plus, I see I just violated my own rule, encapsulated by this ditty, seeing as I'm doing a calculation "precise" to hundredths of a percent:

Q: How do you know that financial economists have a sense of humor?

A: They use decimal points.

Ie., these sorts of calculations are accurate as long as you don't get sick, incur any other emergencies or other life changes, and the world around you is perfectly stable.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by FactualFran »

JBTX wrote: Thu May 25, 2023 2:30 pm If the real rate is 0, then you are pulling out 3.33% per year in an equal weighted ladder. They adjust with inflation. Add in 1.5% real rate and you get to 4.83%.
Rates do not combine additively. This type of calculation can be done by a spreadsheet PMT function. In this case, PMT(1.5%,30,100,0), which returns -4.16 and indicates that taking 4.16% of the initial balance annually, at the end of the year, would deplete the account in 30 years, if the account had a return of 1.5% each year. An inflation-adjusted return of 1.5% each year would support inflation-adjusted withdrawals over 30 years with an initial withdrawal rate of 4.16%.

For a 5% initial withdrawal rate and later withdrawals adjusted for inflation, the return adjusted for inflation needs to be 2.84%, which can be calculated using a spreadsheet rate function RATE(30,-5,100,0,0).
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

McQ wrote: Thu May 25, 2023 4:30 pm TIPS and the SWR

The PMT method suggested by Bill (and favored by #Cruncher) is exact, but not readily extrapolatable to different yields than whatever you just ran the PMT function on.
Not really following why this is an issue when you just cut and paste the formula line by line with different yields... ??
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by McQ »

Bill Bernstein wrote: Thu May 25, 2023 4:45 pm McQ: How true! Plus, I see I just violated my own rule, encapsulated by this ditty, seeing as I'm doing a calculation "precise" to hundredths of a percent:

Q: How do you know that financial economists have a sense of humor?

A: They use decimal points.

Ie., these sorts of calculations are accurate as long as you don't get sick, incur any other emergencies or other life changes, and the world around you is perfectly stable.
One of my favorite economist jokes :wink: But so many to choose from: https://www.equities.com/news/a-look-at ... conomists/

Much more rare are actuary jokes. Here is one:

Q. How can you tell that someone claiming to be an actuary is an impostor?
A. He expresses mortality to two decimal places
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by McQ »

dcabler wrote: Thu May 25, 2023 5:37 pm
McQ wrote: Thu May 25, 2023 4:30 pm TIPS and the SWR

The PMT method suggested by Bill (and favored by #Cruncher) is exact, but not readily extrapolatable to different yields than whatever you just ran the PMT function on.
Not really following why this is an issue when you just cut and paste the formula line by line with different yields... ??
Not an issue at all with a spreadsheet and the fill function. But if you aren't careful and systematic about spacing the yields to which you apply PMT, you'll miss the handy little rubric (which can doubtless be reduced to an expression in e).
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by muel87 »

Jaylat wrote: Thu May 25, 2023 10:37 am
muel87 wrote: Thu May 25, 2023 6:39 am I read that whole thread. I assumed by "underperformance" you were referring to something specific, otherwise are you referring to the idea that bonds return less than stocks as a risk of bonds?
I'm referring to the underperformance of one fixed income portfolio vs. another. The underperformance risk arises when an investor chooses to buy LTT (or otherwise lock in his fixed income return) at a time when rates are historically low. BobK refers to this risk as being subject to a "whatever level" of income based on prevailing rates. See his comments above:
It is difficult to build a TIPS ladder over time. Ideally you want to begin purchasing your safe retirement assets 15-20 years before your expected retirement year. You don’t want to have a portfolio of risky assets until some financial target is hit in the future such as 25x or funded ratio of 100%. The problem is that your risky portfolio may never reach the target, resulting in a “whatever level” of safe retirement income. The level of safe income produced that way is hugely different in February 2000 compared to May 2002. It is hugely different from August 2008 to February 2009. A TIPS ladder is easy to construct at one time using this unsafe method that jeopardizes your targeted safe retirement income stream. It is significantly more difficult to construct safely over many years leading up to retirement.
The entire premise of this thread "Now that long TIPS again yield more than 1.70% I will…" is that some years are objectively better than others to make long term fixed rate investments. Unlike with stocks, you can actually make an objective statement that timing most certainly does matter in buying bonds, just as some years are better than others in refinancing your mortgage. Using TIPS real yields as a gauge is a pretty good way to determine if the current time to invest in LTT is right.

Investors who locked in their fixed rate portfolios at very low historic interest rates, such as the poor guy who sent me the PM, are seeing a significant underperformance of their fixed rate portfolio. That underperformance is reflected in the current reduced value of their portfolio, and reflects the annual deficit in interest income vs. someone who bought at higher current yields.
And if their fixed rate portfolios were all funds, how would that lock in those low rates?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

bobcat2 wrote: Wed May 24, 2023 7:31 pm
It is difficult to build a TIPS ladder over time. Ideally you want to begin purchasing your safe retirement assets 15-20 years before your expected retirement year. You don’t want to have a portfolio of risky assets until some financial target is hit in the future such as 25x or funded ratio of 100%. The problem is that your risky portfolio may never reach the target, resulting in a “whatever level” of safe retirement income. The level of safe income produced that way is hugely different in February 2000 compared to May 2002. It is hugely different from August 2008 to February 2009. A TIPS ladder is easy to construct at one time using this unsafe method that jeopardizes your targeted safe retirement income stream. It is significantly more difficult to construct safely over many years leading up to retirement.
I really don't see the problem with making a pretty steep pivot to TIPS once you're <5 years from retirement and / or have 'hit your number'.

After all, plenty (although not all) of target date retirement funds have a steep bond fund pivot in the final years before retirement, including adding TIPS late in the game, not in the accumulation years:

Image

We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path -- didn't accumulate any TIPS 15-20 years before retirement and used a stock heavy accumulator portfolio (70/30) up until the last few years when we hit both 51 years old / <5 years from retirement and 40x, then sold a bunch of stocks and starting building the TIPS ladder.

This allowed us to use a more aggressive portfolio strategy in the accumulation years than if we have been trying to buy TIPS for 15-20 years.

Once it got 'big enough' and time was 'short', we de-risked, added short duration TIPS first, then starting adding individual longer TIPS.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Bill Bernstein »

We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path
Exactly.

A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by billaster »

Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

Bill Bernstein wrote: Thu May 25, 2023 10:16 pm
We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path
Exactly.

A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by TheTimeLord »

billaster wrote: Thu May 25, 2023 10:41 pm
Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
Not sure what duration you are referring to but I think it has been more than 2 months. I believe the coupon for the January 10 year auction was 1.125% and I think the October 5 year auction was somewhere around 1.625% if memory serves.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

billaster wrote: Thu May 25, 2023 10:41 pm
Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
I actually doubt it.

Chancellor's "Price of Time" would argue that the QE/ZIRP period was imbalanced with interest rates too far below natural interest rates, and thus the system was inherently unstable and going to be heading towards a regime change eventually.

The affects we're seeing now with labor inflation being high has a lot to do with demographics, which would have been true with or without Covid.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by Kevin M »

TheTimeLord wrote: Thu May 25, 2023 10:58 pm
billaster wrote: Thu May 25, 2023 10:41 pm
Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
Not sure what duration you are referring to but I think it has been more than 2 months. I believe the coupon for the January 10 year auction was 1.125% and I think the October 5 year auction was somewhere around 1.625% if memory serves.
Not sure exactly what time periods y'all are talkin' about, but the chart below shows the 10y CMT real yield over the last 11 years. We can see when and for how long it was above 1% in those 11 years.

Image

But why focus on 1%? I would think 0.5% real wasn't too shabby compared to the alternatives over much of the time period shown, although it may not have seemed so at the time; it didn't to me, which is why I went for direct CDs with a yield premium over Treasuries of more than 1 percentage point--perhaps a better way than short Ts to hang out while waiting for higher real rates, unless you're dealing with many more millions than I have.

Perhaps more waiting was appropriate when real yields were negative than when they were low positive, but then again, perhaps not. It's easy to be right retrospectively when you're right retrospectively.

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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

Bill Bernstein wrote: Thu May 25, 2023 10:16 pmA little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
Whether tightening will raise longer term real rates, especially without depressing the price of equities or things you might sell to buy the cheaper higher yielding TIPS, is far from clear.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Thu May 25, 2023 9:05 pm I really don't see the problem with making a pretty steep pivot to TIPS once you're <5 years from retirement and / or have 'hit your number'.

After all, plenty (although not all) of target date retirement funds have a steep bond fund pivot in the final years before retirement, including adding TIPS late in the game, not in the accumulation years.
So as I have pointed out before, the relatively small DFA Target funds do all their pre-retirement de-risking with TIPS, and the federal Thrift Savings Plan in the L Funds also primarily de-risks with the G Fund (which is their rough TIPS equivalent), and yet none of the really big Target fund companies like Vanguard ever use much TIPS.

It is possible that DFA/TSP being on one side and all the big marketed Target funds on the other side is a difference in modeling results, but I personally suspect not. Rather, I think the issue is that the big Target funds are so big that if they actually tried to use mostly TIPS for de-risking, they would completely dominate the TIPS market and likely make it illiquid/inefficient. In contrast, DFA is far too small for that to be a concern, and of course the G Fund is only available in the TSP and has its returns set by statute with reference to the market rates for Treasuries.

To be clear, I don't think this has anything to do with using risky bonds as part of your risky portfolio. But I personally would not rely on the really big Target funds for guidance on optimal de-risking before and through retirement, because I think they are practically constrained by the size of the TIPS market to only use a relatively small amount of TIPS for de-risking.
We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path -- didn't accumulate any TIPS 15-20 years before retirement and used a stock heavy accumulator portfolio (70/30) up until the last few years when we hit both 51 years old / <5 years from retirement and 40x, then sold a bunch of stocks and starting building the TIPS ladder.

This allowed us to use a more aggressive portfolio strategy in the accumulation years than if we have been trying to buy TIPS for 15-20 years.
So as I have also mentioned before, at a high level the point of starting the de-risking process well before retirement is basically just to smooth out the relative pricing of risky assets and very-low-risk assets. This smoothing helps reduce sequence of real returns risk, since if you wait until shortly before retirement to de-risk, it is possible that risky assets at that point will be in a temporary low cycle of prices relative to very-low-risk assets. The opportunity cost associated with this strategy is it is possible in retrospect that you will have given up some accumulation returns if the sequence of real returns for your risky assets does not result in such a low cycle in relative pricing during a de-risking period concentrated much closer to retirement.

In your case, it sounds like a bad sequence of real returns simply didn't happen during your relatively concentrated de-risking period. Meaning it sounds like by the time you started de-risking, your risky portfolio had decent pricing relative to TIPS.

But I would caution against thinking because that worked for you it means there is no such risk at all. I think the proper interpretation is more just that because your sequence of real returns ended up not being bad, you got that extra accumulation from waiting to de-risk. But of course if your sequence of real returns had ended up with your risky assets in a relative price down cycle, you might have been better off de-risking sooner.

Of course that analysis doesn't mean you made a mistake. If you are likely to have a relatively high supply of savings (through human capital, inheritances, a good early sequence of returns, or so on) relative to your target retirement income, it is entirely rational to decide to take more risk with those savings pre-retirement in the pursuit of possible upside scenarios, since you can still meet your retirement income goals with a broader range of possible downside scenarios. If you look at a lot of Target fund white papers, you will see this frequently discussed, that depending on your exact goals for retirement, different amounts of risk can rationally lead to different glidepaths.

For example, here is a chart from Vanguard's white paper:

Image

In their model, if you were on the "maintaining lifestyle" end of their spectrum (basically meaning you were averse to taking much risk to your sustainable retirement income), you would potentially start de-risking very early. If you were instead on the "prioritizing legacy" end of their spectrum (basically meaning you were fine taking some more risk as to where your sustainable retirement income ended up in order to improve your chances of ending up with a decent amount extra to give away), you would rationally follow a riskier glidepath.

However, I think it is worth noting that in almost all the model comparisons like this that I have seen, the main variable ends up not being when you de-risk, but instead the level of risk you take throughout the glidepath. Which makes sense--the exact timing of your de-risking process is really small ball compared to that entire-life-cycle decision.

So personally, I think generally speaking the most robust way of thinking about all this is actually to separate out your safe retirement income portfolio from your legacy/giving portfolio. Your safe retirement income portfolio can follow a very conservative path when it comes to sequence of real returns risk--again, I personally think the DFA/TSP path is likely the best guide. But then you can layer on top of that a legacy/giving portfolio which could arguably be entirely in risky assets the whole time.

In fact, I strongly suspect DFA's typical Target client does exactly that, meaning they put only a portion of their wealth in a DFA Target fund for retirement income purposes, and then probably invest the rest more aggressively.

So personally, I do think starting to de-risk on the early side specifically with retirement income savings tends to make sense, understanding that you might not de-risk at all with the portion of your savings that is really more about legacy/giving.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

billaster wrote: Thu May 25, 2023 10:41 pm
Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
My two cents is that when it comes to the de-risking discussion, it is really critical to understand what you should care about is not the absolute pricing of IP bonds, nor the absolute pricing of your risky assets, in isolation. Rather, it is their relative pricing that you should care about. Basically, ideally you do want to sell risky assets high in order to buy IP bonds low at the same time, you don't want to sell risky assets low to buy IP bonds high, and you can be OK if they are either both low or both high.

And we touched on this a bit before, but we know both stocks and IP bonds are affected by market real rates, and therefore a decrease or increase in real rates does not automatically mean a change in the relative pricing of stocks and IP bonds (nor of nominal bonds, but I am going to hold those aside because for these purposes that is just going to complicate the discussion unnecessarily).

Instead, what really matters most for relative pricing issues is the equity risk premium (or premiums). And that is very much a variable, and when equity risk premium(s) are relatively low, that means stock to IP bond prices are relatively high, and when the equity risk premium(s) are relatively high, that means stock to IP bond prices are relatively low.

OK, so what determines whether equity risk premium(s) are relatively high or low? Well, in multi-factor models, there is not one answer to that question, which is interesting and leads to a whole other discussion. But as a general rule, equity risk premiums tend to, say, get lower after long periods of relative economic stability, and higher after economic crises.

Of course all that can affect real rates too, but again for these purposes I think you need to hold that aside and really focus on the equity risk premiums.

All right, so generally speaking it would tend be good to be de-risking after a long period of relative economic stability, because that would usually mean there were relatively low equity risk premiums, and you'd be selling stocks relatively high in price to buy IP bonds. And generally speaking it would tend to be bad to be de-risking right after a crisis, because that would usually mean there were relatively high equity risk premiums, and you'd be selling stocks relatively low in price to buy IP bonds.

As applied to recent times--actually, this really gets into that interesting side discussion about multi-factor models. Because it turns out that most types of stocks, basically everything but US Large Growth, seemed to experience a sharp increase in equity risk premiums recently, such that their relative pricing to TIPS might have not been so favorable recently despite the drop in TIPS prices due to real rate increases.

However, much less so US Large Growth, and indeed it looks like for US Large Growth, there may have been basically NO increase in equity risk premiums, just a price drop explainable entirely by the real rate increase.

And because US Large Growth plays such a large role in cap-weighted US "total market" indices, and in fact in cap-weighted GLOBAL total-market indices, then there hasn't necessarily been much if any increase in equity risk premiums for those indices either (although maybe a little more so for global than US).

So if you are amenable to this sort of thinking, recently might have remained a good time to be selling US Large Growth stocks to buy TIPS, and also cap-weighted US Total Market, and mostly cap-weighted Global Total Market too.

But maybe not so much other US stocks and ex-US specifically, meaning anything not so dominated by US Large Growth.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

exodusing wrote: Fri May 26, 2023 4:25 am
Bill Bernstein wrote: Thu May 25, 2023 10:16 pmA little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
Whether tightening will raise longer term real rates, especially without depressing the price of equities or things you might sell to buy the cheaper higher yielding TIPS, is far from clear.
Exactly. What matters is relative pricing of what you are selling and what you are buying, and a lot of conceptual mistakes can happen if you focus just on TIPS pricing and forget to consider what is likely to be going on with the pricing of the risky assets you would be selling to buy TIPS at those prices.

The inherent prudence of the long glide paths used by DFA, the TSP, and so on is to smooth this relative pricing issue out by spreading the selling of risky assets/buying very low risk assets over a long period. That makes the ultimate retirement income that you can sustain less risky, but also reduces your upside accumulation potential.

And Bogleheads should generally understand that there isn't going to be some magical market-timing scheme that gets you out of that risk/reward tradeoff. You can reduce your retirement income risk with a long de-risking period, or increase your accumulation upside with a shorter de-risking period, but you can't increase your accumulation upside without taking more risk.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by TheTimeLord »

If someone has decided to purchase TIPS is there a target, guideline or maximum percentage of a portfolio that should be devoted to a non-rolling TIPS ladder? Either in terms of percentage or number of years. Could money invested in a non-rolling TIPS ladder be considered as the "stop playing" part of "If you have won the game stop playing"?
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by dcabler »

TheTimeLord wrote: Fri May 26, 2023 6:56 am If someone has decided to purchase TIPS is there a target, guideline or maximum percentage of a portfolio that should be devoted to a non-rolling TIPS ladder? Either in terms of percentage or number of years. Could money invested in a non-rolling TIPS ladder be considered as the "stop playing" part of "If you have won the game stop playing"?
There are so many ways to crack this nut and are all very much personally determined. For me, I think in terms of dollar amounts and number of years. And the dollar amount for me is the answer to the question "What is the minimum amount of safe income I want throughout retirement, in today's dollars?" And "number of years" for me means to max age I'm planning for in retirement. How to achieve it for me is a combination of nonrolling TIPS (or duration matched TIPS funds), and SS with a possibility of converting TIPS to a SPIA later in life depending on a number of factors.

How to determine what that dollar amount is? Again, it's a personal choice, much like deciding on an AA. How much of your spending do you want to be covered by risk-free dollars and how much are you willing to have coming from a risk portfolio and do you want to leave a bequest? Do you want to risk-free portion to be able to cover all of your known spending or just some of it? I've settled on a dollar amount for risk-free and will be using something similar to ABW for withdrawal calculations from the risk portfolio, and I'm willing to live with a good deal of variability in withdrawals on the risk side.

Your mileage most certainly will vary.

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Re: Now that long TIPS again yield more than 1.70% I will…

Post by bogswenbern »

I use a Google doc spreadsheet to track asset allocation and where to direct new money and rebalance. Is there a way to update the value of individual TIPS automatically, maybe using the CUSIP? If not, isn't that a big advantage of the fund/ETF? These long TIPS are volatile...
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

NiceUnparticularMan wrote: Fri May 26, 2023 5:30 am
watchnerd wrote: Thu May 25, 2023 9:05 pm I really don't see the problem with making a pretty steep pivot to TIPS once you're <5 years from retirement and / or have 'hit your number'.

After all, plenty (although not all) of target date retirement funds have a steep bond fund pivot in the final years before retirement, including adding TIPS late in the game, not in the accumulation years.
So as I have pointed out before, the relatively small DFA Target funds do all their pre-retirement de-risking with TIPS, and the federal Thrift Savings Plan in the L Funds also primarily de-risks with the G Fund (which is their rough TIPS equivalent), and yet none of the really big Target fund companies like Vanguard ever use much TIPS.

It is possible that DFA/TSP being on one side and all the big marketed Target funds on the other side is a difference in modeling results, but I personally suspect not. Rather, I think the issue is that the big Target funds are so big that if they actually tried to use mostly TIPS for de-risking, they would completely dominate the TIPS market and likely make it illiquid/inefficient. In contrast, DFA is far too small for that to be a concern, and of course the G Fund is only available in the TSP and has its returns set by statute with reference to the market rates for Treasuries.

To be clear, I don't think this has anything to do with using risky bonds as part of your risky portfolio. But I personally would not rely on the really big Target funds for guidance on optimal de-risking before and through retirement, because I think they are practically constrained by the size of the TIPS market to only use a relatively small amount of TIPS for de-risking.
We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path -- didn't accumulate any TIPS 15-20 years before retirement and used a stock heavy accumulator portfolio (70/30) up until the last few years when we hit both 51 years old / <5 years from retirement and 40x, then sold a bunch of stocks and starting building the TIPS ladder.

This allowed us to use a more aggressive portfolio strategy in the accumulation years than if we have been trying to buy TIPS for 15-20 years.
So as I have also mentioned before, at a high level the point of starting the de-risking process well before retirement is basically just to smooth out the relative pricing of risky assets and very-low-risk assets. This smoothing helps reduce sequence of real returns risk, since if you wait until shortly before retirement to de-risk, it is possible that risky assets at that point will be in a temporary low cycle of prices relative to very-low-risk assets. The opportunity cost associated with this strategy is it is possible in retrospect that you will have given up some accumulation returns if the sequence of real returns for your risky assets does not result in such a low cycle in relative pricing during a de-risking period concentrated much closer to retirement.

In your case, it sounds like a bad sequence of real returns simply didn't happen during your relatively concentrated de-risking period. Meaning it sounds like by the time you started de-risking, your risky portfolio had decent pricing relative to TIPS.

But I would caution against thinking because that worked for you it means there is no such risk at all. I think the proper interpretation is more just that because your sequence of real returns ended up not being bad, you got that extra accumulation from waiting to de-risk. But of course if your sequence of real returns had ended up with your risky assets in a relative price down cycle, you might have been better off de-risking sooner.

Of course that analysis doesn't mean you made a mistake. If you are likely to have a relatively high supply of savings (through human capital, inheritances, a good early sequence of returns, or so on) relative to your target retirement income, it is entirely rational to decide to take more risk with those savings pre-retirement in the pursuit of possible upside scenarios, since you can still meet your retirement income goals with a broader range of possible downside scenarios. If you look at a lot of Target fund white papers, you will see this frequently discussed, that depending on your exact goals for retirement, different amounts of risk can rationally lead to different glidepaths.

For example, here is a chart from Vanguard's white paper:

Image

In their model, if you were on the "maintaining lifestyle" end of their spectrum (basically meaning you were averse to taking much risk to your sustainable retirement income), you would potentially start de-risking very early. If you were instead on the "prioritizing legacy" end of their spectrum (basically meaning you were fine taking some more risk as to where your sustainable retirement income ended up in order to improve your chances of ending up with a decent amount extra to give away), you would rationally follow a riskier glidepath.

However, I think it is worth noting that in almost all the model comparisons like this that I have seen, the main variable ends up not being when you de-risk, but instead the level of risk you take throughout the glidepath. Which makes sense--the exact timing of your de-risking process is really small ball compared to that entire-life-cycle decision.

So personally, I think generally speaking the most robust way of thinking about all this is actually to separate out your safe retirement income portfolio from your legacy/giving portfolio. Your safe retirement income portfolio can follow a very conservative path when it comes to sequence of real returns risk--again, I personally think the DFA/TSP path is likely the best guide. But then you can layer on top of that a legacy/giving portfolio which could arguably be entirely in risky assets the whole time.

In fact, I strongly suspect DFA's typical Target client does exactly that, meaning they put only a portion of their wealth in a DFA Target fund for retirement income purposes, and then probably invest the rest more aggressively.

So personally, I do think starting to de-risk on the early side specifically with retirement income savings tends to make sense, understanding that you might not de-risk at all with the portion of your savings that is really more about legacy/giving.


In our case, though, it won't actually look like that 'maintaining lifestyle' because we'll be on a rising equity glide path as the LMP gets consumed.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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watchnerd
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by watchnerd »

bogswenbern wrote: Fri May 26, 2023 8:51 am I use a Google doc spreadsheet to track asset allocation and where to direct new money and rebalance. Is there a way to update the value of individual TIPS automatically, maybe using the CUSIP? If not, isn't that a big advantage of the fund/ETF? These long TIPS are volatile...
The market to market value shows up every day in your brokerage account.

But tracking all those fluctuations sounds like a huge PITA and I'm not sure why would one bother, as it's the value at maturity that usually matters.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
NiceUnparticularMan
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

TheTimeLord wrote: Fri May 26, 2023 6:56 am If someone has decided to purchase TIPS is there a target, guideline or maximum percentage of a portfolio that should be devoted to a non-rolling TIPS ladder? Either in terms of percentage or number of years. Could money invested in a non-rolling TIPS ladder be considered as the "stop playing" part of "If you have won the game stop playing"?
Depends on the portfolio's purpose.

If you want very low risk real USD income for periods up to 30 years, up to 100% of such savings could be in TIPS. And probably not less than 75-80% should be in TIPS (the rest in diversified stocks).

Less than that, and I would think you would rationally be doing that for some different goal--a legacy/giving motive, or being willing to take some risk for more upside income potential, or something like that.
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TheTimeLord
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by TheTimeLord »

watchnerd wrote: Fri May 26, 2023 9:01 am
NiceUnparticularMan wrote: Fri May 26, 2023 5:30 am
watchnerd wrote: Thu May 25, 2023 9:05 pm I really don't see the problem with making a pretty steep pivot to TIPS once you're <5 years from retirement and / or have 'hit your number'.

After all, plenty (although not all) of target date retirement funds have a steep bond fund pivot in the final years before retirement, including adding TIPS late in the game, not in the accumulation years.
So as I have pointed out before, the relatively small DFA Target funds do all their pre-retirement de-risking with TIPS, and the federal Thrift Savings Plan in the L Funds also primarily de-risks with the G Fund (which is their rough TIPS equivalent), and yet none of the really big Target fund companies like Vanguard ever use much TIPS.

It is possible that DFA/TSP being on one side and all the big marketed Target funds on the other side is a difference in modeling results, but I personally suspect not. Rather, I think the issue is that the big Target funds are so big that if they actually tried to use mostly TIPS for de-risking, they would completely dominate the TIPS market and likely make it illiquid/inefficient. In contrast, DFA is far too small for that to be a concern, and of course the G Fund is only available in the TSP and has its returns set by statute with reference to the market rates for Treasuries.

To be clear, I don't think this has anything to do with using risky bonds as part of your risky portfolio. But I personally would not rely on the really big Target funds for guidance on optimal de-risking before and through retirement, because I think they are practically constrained by the size of the TIPS market to only use a relatively small amount of TIPS for de-risking.
We did exactly the opposite of what you suggest, and a lot closer to the Vanguard glide path -- didn't accumulate any TIPS 15-20 years before retirement and used a stock heavy accumulator portfolio (70/30) up until the last few years when we hit both 51 years old / <5 years from retirement and 40x, then sold a bunch of stocks and starting building the TIPS ladder.

This allowed us to use a more aggressive portfolio strategy in the accumulation years than if we have been trying to buy TIPS for 15-20 years.
So as I have also mentioned before, at a high level the point of starting the de-risking process well before retirement is basically just to smooth out the relative pricing of risky assets and very-low-risk assets. This smoothing helps reduce sequence of real returns risk, since if you wait until shortly before retirement to de-risk, it is possible that risky assets at that point will be in a temporary low cycle of prices relative to very-low-risk assets. The opportunity cost associated with this strategy is it is possible in retrospect that you will have given up some accumulation returns if the sequence of real returns for your risky assets does not result in such a low cycle in relative pricing during a de-risking period concentrated much closer to retirement.

In your case, it sounds like a bad sequence of real returns simply didn't happen during your relatively concentrated de-risking period. Meaning it sounds like by the time you started de-risking, your risky portfolio had decent pricing relative to TIPS.

But I would caution against thinking because that worked for you it means there is no such risk at all. I think the proper interpretation is more just that because your sequence of real returns ended up not being bad, you got that extra accumulation from waiting to de-risk. But of course if your sequence of real returns had ended up with your risky assets in a relative price down cycle, you might have been better off de-risking sooner.

Of course that analysis doesn't mean you made a mistake. If you are likely to have a relatively high supply of savings (through human capital, inheritances, a good early sequence of returns, or so on) relative to your target retirement income, it is entirely rational to decide to take more risk with those savings pre-retirement in the pursuit of possible upside scenarios, since you can still meet your retirement income goals with a broader range of possible downside scenarios. If you look at a lot of Target fund white papers, you will see this frequently discussed, that depending on your exact goals for retirement, different amounts of risk can rationally lead to different glidepaths.

For example, here is a chart from Vanguard's white paper:

Image

In their model, if you were on the "maintaining lifestyle" end of their spectrum (basically meaning you were averse to taking much risk to your sustainable retirement income), you would potentially start de-risking very early. If you were instead on the "prioritizing legacy" end of their spectrum (basically meaning you were fine taking some more risk as to where your sustainable retirement income ended up in order to improve your chances of ending up with a decent amount extra to give away), you would rationally follow a riskier glidepath.

However, I think it is worth noting that in almost all the model comparisons like this that I have seen, the main variable ends up not being when you de-risk, but instead the level of risk you take throughout the glidepath. Which makes sense--the exact timing of your de-risking process is really small ball compared to that entire-life-cycle decision.

So personally, I think generally speaking the most robust way of thinking about all this is actually to separate out your safe retirement income portfolio from your legacy/giving portfolio. Your safe retirement income portfolio can follow a very conservative path when it comes to sequence of real returns risk--again, I personally think the DFA/TSP path is likely the best guide. But then you can layer on top of that a legacy/giving portfolio which could arguably be entirely in risky assets the whole time.

In fact, I strongly suspect DFA's typical Target client does exactly that, meaning they put only a portion of their wealth in a DFA Target fund for retirement income purposes, and then probably invest the rest more aggressively.

So personally, I do think starting to de-risk on the early side specifically with retirement income savings tends to make sense, understanding that you might not de-risk at all with the portion of your savings that is really more about legacy/giving.


In our case, though, it won't actually look like that 'maintaining lifestyle' because we'll be on a rising equity glide path as the LMP gets consumed.
Ditto. In my case it will look more like a very long bond tent.
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NiceUnparticularMan
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by NiceUnparticularMan »

watchnerd wrote: Fri May 26, 2023 9:01 am In our case, though, it won't actually look like that 'maintaining lifestyle' because we'll be on a rising equity glide path as the LMP gets consumed.
So if you have both legacy/gift and retirement income motives, then it could make sense as you age for the legacy/gift portion of the portfolio to grow while your retirement income portion of the portfolio shrinks, and that could take the former of a rising equity glide path at an overall portfolio level.

That said, you could (and I would say should) also consider giving out of your legacy/gift portfolio while alive. In which case the overall effect could be something different.

For just the retirement income portion of your portfolio, declining duration (although not at a 1:1 rate) would make sense, but not necessarily a significant risky/non-risky shift.
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by bogswenbern »

watchnerd wrote: Fri May 26, 2023 9:03 am
bogswenbern wrote: Fri May 26, 2023 8:51 am I use a Google doc spreadsheet to track asset allocation and where to direct new money and rebalance. Is there a way to update the value of individual TIPS automatically, maybe using the CUSIP? If not, isn't that a big advantage of the fund/ETF? These long TIPS are volatile...
The market to market value shows up every day in your brokerage account.

But tracking all those fluctuations sounds like a huge PITA and I'm not sure why would one bother, as it's the value at maturity that usually matters.
Currently I copy and paste the value from the brokerage website. It's not just the value at maturity that matters, because when adding new money I need to know where to direct it to keep my desired asset allocation, stock/bond ratio etc. Also need the value for rebalancing in a boom or crash. Using GOOGLEFINANCE is how I get values automatically for funds/ETFs.
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Re: If long TIPS hit a real yield above 2.0% I will…

Post by Prudence »

Jaylat wrote: Mon Sep 19, 2022 9:45 am
McQ wrote: Sun Sep 18, 2022 11:08 pm 6. Already converted all my bonds to the 20-year TIPS as soon as it yielded 1.0% real…just some weeks ago. Positive real returns, government guaranteed, are … positive real returns.
I actually did just this, but not for all my bonds, just enough to cover most inflation-affected expenses. If the TIPS real rates keep rising I'll consider locking in the rest.

I have to say, it makes no sense to me why TIPS real rates are so high. You'd think people would pay a premium to be insured against inflation?
Do you plan on holding to maturity these 20-year TIPS you just bought and using the income they distribute to cover your expenses?
billaster
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by billaster »

TheTimeLord wrote: Thu May 25, 2023 10:58 pm
billaster wrote: Thu May 25, 2023 10:41 pm
Bill Bernstein wrote: Thu May 25, 2023 10:16 pm A little financial history and a pinch of Minsky go a long way. IOW, good things almost always come to those who wait, especially with fixed income, for the simple reason that from time to time,the central banker swallows have to return to tightening Capistrano.
The thing is, you could find yourself waiting a very long time, hoping for a black swan to show up. TIPS have been above 1% for only two months out of the previous 11 years and could have easily been much longer if not for a world-wide pandemic.
Not sure what duration you are referring to but I think it has been more than 2 months. I believe the coupon for the January 10 year auction was 1.125% and I think the October 5 year auction was somewhere around 1.625% if memory serves.
Sorry if I wasn't clear. I was referring to the 11 years before the pandemic. As Kevin's plot shows above, there was only a brief couple of months at the end of 2018 when rates were above 1%. And even before the pandemic, rates were headed down toward zero.

If there were no pandemic, who is to say there wouldn't have been another 11 years of low TIPS rates.

If one is going to promote the idea of market timing TIPS, then they should be indicating their buy and sell criteria beforehand, not after the fact.
exodusing
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Re: Now that long TIPS again yield more than 1.70% I will…

Post by exodusing »

A longer history.

Image
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