Posted: Wed Feb 23, 2005 4:49 pm
There is a timing mismatch between when inflation occurs and when it shows up as an adjustment to the TIPS interest payment. Most workers and retirees with cost-of-living-adjustments are familiar with this. Inflation occurs first. Later, usually after a year, your income increases. Notice that your income does not increase while inflation is occurring. The adjustment is after the fact.
An ideal inflation-matched cash equivalent matches inflation when it happens, not after the fact.
In our mathematics, we use the mortgage formula and an ideal form of TIPS. We must also assume that we can sell TIPS along the way without any capital gains or losses.
This accounts for the discrepancy between the output from calculators (that use the historical sequence method) with TIPS in a portfolio and the result of direct mathematical calculation.
Have fun.
John R.
An ideal inflation-matched cash equivalent matches inflation when it happens, not after the fact.
In our mathematics, we use the mortgage formula and an ideal form of TIPS. We must also assume that we can sell TIPS along the way without any capital gains or losses.
This accounts for the discrepancy between the output from calculators (that use the historical sequence method) with TIPS in a portfolio and the result of direct mathematical calculation.
Have fun.
John R.