NiceUnparticularMan wrote: ↑Fri Mar 10, 2023 6:35 am
Just my own back of the envelope calculations.
There are something like $1.9 trillion in TIPS outstanding:
https://fiscaldata.treasury.gov/dataset ... utstanding
As of Morningstar's last report there were over $3 trillion in Target funds, which have been growing over time, not least by becoming an increasingly popular option in 401Ks:
https://retirementincomejournal.com/art ... rningstar/
https://assets.contentstack.io/v3/asset ... 22_(2).pdf
As explained there, the top five Target companies make up about 79% of that, so like $2.6 trillion as of that report, and again that has generally been growing over time. I note Vanguard alone, the market leader, in that report had about $1.2 trillion in its Target funds.
I don't know what the total fixed income held by all those Target funds is exactly (although I do know the ones closer to retirement tend to have bigger AUMs, and those are the ones with more fixed income). But I am confident it is enough that if they all tried to fill those buckets with TIPS, it would at least dominate the TIPS market in adverse ways. And if Target funds keep collectively increasing their share of assets held in 401Ks and such (which seems quite likely), then the problem is going to get worse and worse.
Thanks for the detailed explanation. Truly appreciated!
I'd still love to see an academic article for reference that games this out further, and maybe even an explanation from Vanguard themselves explaining Vanguard's 53% utilization of standard Bond Funds (versus Inflation Protected bonds) for the Withdrawal phase.
I would guess there should be some current Vanguard TDF investors in withdrawal phase who could also indicate whether holding 17% Short Term TIPS has proved sufficient to their needs in the current inflation environment. (Or do people, by and large, move away from their TDFs at that point into other vehicles making this a moot point?)
In response to
NiceUnparticularMan wrote: ↑Fri Mar 10, 2023 6:35 am
So the concept of IP bonds being preferable for personal retirement savers actually has a long history, one which actually well pre-dates TIPS as it was one of the reasons TIPS were created. Again, DFA does it, the TSP does a version of it, and so on, so it really isn't a new concept in practice either.
I actually think what happened is that since inflation was more unexpectedly low than high in the period of years following the introduction of TIPS, many people ended up concluding nominal bonds were just fine and TIPS were addressing a non-problem.
But to me that was actually an example of recency bias and performance chasing.
The above thought makes me think that there should be a low cost, Boglehead product that solves for this challenge directly. Basically, adding a 'retirement phase appropriate' level of Inflation Protection into retail Bond Index funds intended to be used in the manner we use Bond Funds in the Three Fund portfolio.
ie. Rather than putting the onus on individual investors to game out the level of TIPS to hold, wouldn't it make more sense for all basic Bond Market Index funds incorporate some level of protection from unexpected inflation if this is a fairly universal concern for retirement savers?
We've been steadily adding I Bonds as a long term holding / inflation hedge, but we have also have been honest with ourselves about the likely lack of an any real return after taxes.