watchnerd wrote: ↑Fri May 26, 2023 10:04 pm
exodusing wrote: ↑Fri May 26, 2023 7:33 pm
If I have a TIPS ladder, I know exactly how much I will receive in inflation-adjusted dollars for each year of the ladder.
If I use funds, how do I compute the annual real payout? As an example, assume I want a 30 year level income stream of $100,000/year. How would I do this with existing funds, say LTPZ and the two Vanguard TIPS funds?
For a ladder I could use #cruncher's spreadsheet or tipsadder.com.
https://www.tipsladder.com/build?bondCh ... ome=100000 shows the exact bonds to buy and the $2,352,204 cost.
Dying to hear the answer to this because I've never been able to figure it out when it comes to funds.
Seems like, at best, you've got some fuzzy error bars.
In very broad, approximate strokes for duration matching using funds.
30 years of income is roughly 15 years investment horizon
Find current duration of LTPZ and your favorite intermediate bond fund. Let's just say SCHP
Calculate the weight of LTPZ and SCHP that results in a weighted duration that's 15 years. Hold that percentage of each.
Calculate the effective yield of this weighted combination of LTPZ and SCHP using the current real yields of these two funds
Withdrawal % is calculated with Excel function: PMT(Yield, 30, -1, 0, 1)
Withdraw the dollar amount.
Next year you have 29 years remaining, so a 29/2 years investment horizon
Rinse and repeat.
At some point in the future, the required duration needed is less than SCHP's duration. At that point, you will no longer own LTPZ, but instead you'll transition to owning SCHP and, say, STIP
Continue to rinse and repeat until the duration required is less than STIP's duration.
Then you have choices including:
STIP + some nominal investment (CD's, ultrashort bond fund, etc)
Ibonds - this is what BobK likes
Or even just sticking with 100% STIP to the bitter end.
Challenges
- Not every fund reports its real yield. Most report their nominal yields. SEC only recommends that such funds report real yields but they don't require it. But there are only a limited number of TIPS indexes around, so sometimes another fund reports it. For example while SCHP doesn't report real yields, iShares TIP does and they both track the same index. Sadly, there is no equivalent for LTPZ. #cruncher calculates and reports yields for all of the major indexes weekly in this thread:
viewtopic.php?p=7241758#p7241758
- Same thing with duration. Most bond funds calculate duration based on nominal yields, not real yields. Nominal-based might be close enough or you can use the data from #cruncher
Yes, there are definitely fuzzy error bars. Based on some backtesting I did with #cruncher's data, it's +/- a few percent but with a relatively flat mean. But this data is very limited. There is enough data out there in the wild to use #cruncher's technique to create a history that goes further back, if anybody wished to pursue it.
There are also some other methods of varying complexity to get close as well.
There's a shortcut method that vineviz proposed here:
viewtopic.php?p=6869837#p6869837
I'm not especially keen on this one as I don't think you can cover the longest timeframe you might need. It's main advantage is that you don't need to do any rebalancing between funds.
Another thing I've played with that seemingly does alright. A bit larger error bars, but less maintenance.
Start with LTPZ only. Find real yield for LTPZ. Withdrawal percentage = PMT(yield, 30, -1, 0, 1)
Same thing next year but PMT (yield, 29, -1, 0, 1)
At some point, move everything from LTPZ to SCHP and continue on.
Again at some point, move everything from SCHP to STIP and continue to the end
So instead of continually adjusting the ratios between 2 funds, you're just holding 1 fund at a time and doing the transition at pretty much the same points in time where you would transition in the original duration matching method.
Cheers.