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JWR1945
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Location: Crestview, Florida

PostPosted: Thu Mar 17, 2005 3:08 pm    Post subject: Something Worth Knowing Reply with quote

Here is something worth knowing from my latest analysis. It is from Overview: Using both Initial and Current Valuations dated Thursday, Mar 17, 2005.
http://nofeeboards.com/boards/viewtopic.php?t=3564

JWR1945 wrote:

An alternative baseline

These data shout at us to abandon stocks entirely at today's valuations. A portfolio consisting entirely of inflation-matched cash equivalents produces a safe withdrawal rate of 3.33% for 30 years. A portfolio consisting entirely of 2% TIPS produces 4.46% safe withdrawal rate for 30 years (subject only to minor idealizations).

If we were to withdraw 3.4% annually from a portfolio consisting entirely of 2% TIPS, we would end up with $43000 (plus inflation, based on an initial balance of $100000) at the end of 30 years.

Summary

We keep coming back to the frustratingly consistent story, however, that tells us to abandon stocks in favor of TIPS at today's valuations. Favorable outcomes are still possible with high stock allocations, but they are not likely.

Alternative choices include careful selection of stocks and other investments that differ significantly from the S&P500 as a whole.

Of course, there is a problem with 2% TIPS. They no longer exist. The issue is whether a person can actually construct a good equivalent portfolio. There is a requirement to be able to handle emergency cash needs. There is another requirement to match inflation. There is an additional requirement to produce sufficient income (above any return of capital that might distort the numbers).

The interesting thing will be to find out whether we can construct something that is at least as good as 2% TIPS.

Mike has pointed out some of the real world difficulties.

Have fun.

John R.


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peteyperson
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PostPosted: Thu Mar 17, 2005 5:18 pm    Post subject: Reply with quote

JWR1945 wrote:
Here is something worth knowing from my latest analysis. It is from Overview: Using both Initial and Current Valuations dated Thursday, Mar 17, 2005.
http://nofeeboards.com/boards/viewtopic.php?t=3564
JWR1945 wrote:

An alternative baseline

These data shout at us to abandon stocks entirely at today's valuations. A portfolio consisting entirely of inflation-matched cash equivalents produces a safe withdrawal rate of 3.33% for 30 years. A portfolio consisting entirely of 2% TIPS produces 4.46% safe withdrawal rate for 30 years (subject only to minor idealizations).

If we were to withdraw 3.4% annually from a portfolio consisting entirely of 2% TIPS, we would end up with $43000 (plus inflation, based on an initial balance of $100000) at the end of 30 years.

Summary

We keep coming back to the frustratingly consistent story, however, that tells us to abandon stocks in favor of TIPS at today's valuations. Favorable outcomes are still possible with high stock allocations, but they are not likely.

Alternative choices include careful selection of stocks and other investments that differ significantly from the S&P500 as a whole.

Of course, there is a problem with 2% TIPS. They no longer exist. The issue is whether a person can actually construct a good equivalent portfolio. There is a requirement to be able to handle emergency cash needs. There is another requirement to match inflation. There is an additional requirement to produce sufficient income (above any return of capital that might distort the numbers).

The interesting thing will be to find out whether we can construct something that is at least as good as 2% TIPS.

Mike has pointed out some of the real world difficulties.

Have fun.

John R.

There is an alternative. UK TIPS offer 30 year periods and 2% yield. Iceland ICEBonds offer higher yields and a strong investment-grade credit rating. Yields are higher there too. France offers decent rates I believe. So if one is willing to look outside of the US, better rates are available. Also if one were to consider a rather large allocation to TIPS, one would want to be currrency diversified.

I'm still not happy with any plan that expects a portfolio life of just 30 years. That might work for someone wishing to retire age 60 and accepting that they'll be broke at 90 (if they live that long), but for anyone younger I don't see it as viable at all. I also assume that as TIPS haven't been available long, one is not planning to buy TIPS falling due in 30 years, 29 years, 28 years, etc. and are planning instead to sell TIPS in those years when none are coming due. This opens up vulnerability to market pricing which will affect the withdrawal rate. Heavy investment in one asset class under such a plan would be ill-advised. One would have no way to mitigate such volatility by selling other investments that were not underwater.

Petey


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beachbumz
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PostPosted: Thu Mar 17, 2005 6:05 pm    Post subject: Reply with quote

Petey,
Do you have more info on teh ICEbonds? What's the yield? Currency? Where can you buy them?

Thanks,

Beachbumz Cool



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peteyperson
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PostPosted: Thu Mar 17, 2005 6:27 pm    Post subject: Reply with quote

beachbumz wrote:
Petey,
Do you have more info on the ICEbonds? What's the yield? Currency? Where can you buy them?

Thanks,

Beachbumz Cool

Iceland - Rating BB- Inflation 4.1-5%
(IBN are non-callable. Housing authority but same guarantee as Treasury)
http://bonds.is/

Canada (bottom of page) Yld: 2%
http://www.bankofcanada.ca/en/bonds.htm

Bylo's how to:
http://www.bylo.org/rrbs.html

France
http://www.aft.gouv.fr/article_681.html

Page 3 has Oati 10-years 1.4% - 30-years 1.74%
http://www.aft.gouv.fr/IMG/pdf/177_BMT_GB_fev_-2.pdf

US TIPS - Yld: 1.24-1.82%
http://www.bloomberg.com/markets/rates/index.html

One issue is whether one is protected by owning foreign TIPS. Their inflation rate is not your own. That said, real returns on bonds have been terrible over time. A bond that delivers local inflation + coupon is likely to still fair as well - or better - than standard bonds I believe.

What I would hope to see a global Ibond fund at some point. Poss. in ETF setup.

UK TIPS detailed in Bylo's site.

UK page on global TIPS issuers - New 30 year issue - Yld 2%:
http://www.dmo.gov.uk/gilts/indexlink/global/isutable.htm

Petey


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JWR1945
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PostPosted: Thu Mar 17, 2005 8:08 pm    Post subject: Reply with quote

peteyperson wrote:
I'm still not happy with any plan that expects a portfolio life of just 30 years. That might work for someone wishing to retire age 60 and accepting that they'll be broke at 90 (if they live that long), but for anyone younger I don't see it as viable at all.

Thank you, peteyperson.

Thirty years is a good standard time frame for data analysis purposes.
1) The US stock market changes from good to bad to good in 30 to 35 year increments. (For example, the Great Depression to the hyperinflation of the 1960s and 1970s to the year 2000.) An analysis based on 30 years (as opposed to 40 or 50 years) includes conditions with one good period and one bad period. An analysis based on only 20 years does not include a full cycle.
2) If we use 40 years, we have no complete sequences for the middle 1960s. Yet, the 1960s were the hardest on many portfolios, especially those with high stock allocations.
3) Thirty years is long enough to be realistic for many retirees (as opposed to 10 or 20 years).
4) Our calculators summarize data in increments of 10 years.

I believe that the greatest value from our research is not the Safe Withdrawal Rate percentages themselves. It is what we can learn from them. We can compare strategies, identify sensitivities and so forth. It is helpful to have standard conditions when making these kinds of comparisons.

Have fun.

John R.


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peteyperson
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PostPosted: Sat Mar 19, 2005 12:57 am    Post subject: Reply with quote

JWR1945 wrote:
peteyperson wrote:
I'm still not happy with any plan that expects a portfolio life of just 30 years. That might work for someone wishing to retire age 60 and accepting that they'll be broke at 90 (if they live that long), but for anyone younger I don't see it as viable at all.

Thank you, peteyperson.

Thirty years is a good standard time frame for data analysis purposes.
1) The US stock market changes from good to bad to good in 30 to 35 year increments. (For example, the Great Depression to the hyperinflation of the 1960s and 1970s to the year 2000.) An analysis based on 30 years (as opposed to 40 or 50 years) includes conditions with one good period and one bad period. An analysis based on only 20 years does not include a full cycle.
2) If we use 40 years, we have no complete sequences for the middle 1960s. Yet, the 1960s were the hardest on many portfolios, especially those with high stock allocations.
3) Thirty years is long enough to be realistic for many retirees (as opposed to 10 or 20 years).
4) Our calculators summarize data in increments of 10 years.

I believe that the greatest value from our research is not the Safe Withdrawal Rate percentages themselves. It is what we can learn from them. We can compare strategies, identify sensitivities and so forth. It is helpful to have standard conditions when making these kinds of comparisons.

Have fun.

John R.

Hi John,

I wasn't really referring to the length of the return series from a data perspective, but from the length of the payout only.

i.e. you suggest numbers that one might be able to live off redeeming TIPS over a 30 year period, suggesting that one can get a higher withdrawal rate because you sell an increasing number of TIPS bonds each year until they are all sold off over 30 years.

Incidentally, TIPS are probably the best example of such a strategy because at least one knows that the investment is keeping up with inflation at all times. If one can ensure no market price volatility on sales in order to remove question marks as to cash flow, as well as lose the second brokerage fee on resale, then that might be a workable strategy. I have proposed a 10-year TIPS ladder in your new thread so I won't duplicate what I've written there which was lengthy but it is a very different approach using I-Bonds/TIPS as cash flow to avoid selling equities, not using an all-TIPS/all-I-Bonds strategy selling them down systematically. I gather you might blend in other asset classes that one might sell down in the same manner - diversify and raise the income levels - but you are using TIPS as an example because it is somewhat controllable. i.e. one can avoid market price volatilty issues by just having them held to 10-year maturity in a ladder.

So my point was that a plan to sell TIPS systematically over 30 years until they are all gone, 30 years may not be a long enough timeframe for many people. One could retire at 60 and maybe take that one hoping in some odd way that you don't live beyond 90. Otherwise you'll be old and broke - not a happy prospect to be sure. I would assume a 40 year scenario for a 60 year old retiree or a 50 year scenario for a 50 year old early retiree would be much more appropriate. The only problem here I assume is that one would not be able to sell much capital off over such an extended timeframe and so the added returns for the spend-the-capital-down strategy would not be very much improved from the TIPS yield alone.

If you are able I would like to see the numbers for 2% TIPS over 30 to 50 years at 5 year increments. I would also like to see how it might work on UK I-Bonds at their 1.05% tax-free yield with the same sell down approach.

Clearly if one was only able to retire really late, like age 70, then one would just say "to hell with it!" and use the spenddown plan in order to be able to retire in the first place. It is a way to enable you to retire sooner if your lifespan remaining is not as long. You effectively need less capital as one can spend the funds down a little faster on the plan. With TIPS the net return would be more tricky to calculate as only the 2% coupon is taxable here and not the uplift on capital, but on the I-Bonds it is all tax-free.

Petey


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kathyet
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PostPosted: Sat Mar 19, 2005 6:50 am    Post subject: Reply with quote

Can I-Bonds be bought for a ira/sep and if you can how do you do it?

Kathyet


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JWR1945
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PostPosted: Sat Mar 19, 2005 7:45 am    Post subject: Reply with quote

peteyperson wrote:
If you are able I would like to see the numbers for 2% TIPS over 30 to 50 years at 5 year increments. I would also like to see how it might work on UK I-Bonds at their 1.05% tax-free yield with the same sell down approach.

Thank you for a series of outstanding posts. You have some great ideas. I am not able to respond to them adequately at this time. I can help out with some of the numbers right away (although without addressing taxes and without examining the tax-free UK I-Bonds).

Here are the numbers that you asked for (and a few others). The payments from 2% TIPS produce a withdrawal rate of:
1) 11.13% for 10 years or
2) 7.78% for 15 years or
3) 6.12% for 20 years or
4) 5.12% for 25 years or
5) 4.46% for 30 years or
6) 4.00% for 35 years or
7) 3.66% for 40 years or
8 ) 3.39% for 45 years or
9) 3.18% for 50 years.

As you can see, a portfolio consisting entirely of 2% TIPS is a strong baseline. It has a withdrawal rate of 4.00% and it is truly safe for 35 years. In contrast, portfolios of stocks and commercial paper with Historical Surviving Withdrawal Rates of 4.0% have lasted only 30 years.

The numbers come from the mortgage formula.

The mortgage formula works with TIPS. It tells you how much your payments will be if you have a mortgage. You multiply the calculated rate times the total balance.

People normally think of mortgages from the buyer's perspective. TIPS are similar to mortgages from a lender's perspective. The formula tells you what TIPS payments are if you draw the principal down to zero over N years. Mortgage payments are in terms of nominal dollars (or pounds). TIPS payments are in terms of real, inflation-adjusted dollars (or pounds).

Here is the formula:

The total payment (which I refer to as the TIPS Equivalent Safe Withdrawal Rate) with an interest rate r over N years can be simplified to: r / [1-(1/[1+r]^N ) ] This particular form is good when using a scientific calculator.

The following post has several formulas of this type. From the 3% SWR for 56 Years thread dated Monday, Oct 13, 2003. They come in handy when constructing risk-free baselines.
http://nofeeboards.com/boards/viewtopic.php?p=12536#12536

Have fun.

John R.


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JWR1945
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PostPosted: Sat Mar 19, 2005 7:52 am    Post subject: Reply with quote

kathyet wrote:
Can I-Bonds be bought for a ira/sep and if you can how do you do it?

Kathyet

I don't know.

Here is what I do know.

The main requirement for an IRA is to have a qualified custodian of the account. This includes banks and stock brokers.

I do not know whether there are special restrictions related to I-Bonds. If so, they come from the restrictions from issuing I-Bonds, not from the IRA rules.

Generally speaking, people can buy $60K of I-Bonds per social security number per year.

Here is a link to the Government website:
http://www.publicdebt.treas.gov/sec/sec.htm

Have fun.

John R.


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kathyet
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PostPosted: Sat Mar 19, 2005 8:14 am    Post subject: Reply with quote

Thank you John I have that site but I need to read it again to find that out..
I was looking for the easy way out.

Kathyet


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JWR1945
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PostPosted: Sat Mar 19, 2005 8:28 am    Post subject: Reply with quote

This may be an easier way.

You can call and/or email the question to your IRA/SEP custodian. He better know the answer. After all, he would have to do it. You cannot give him I-Bonds. You can only give him dollars. He cannot send I-Bonds to you. He must send you dollars. Those are the IRA rules.

[Of course, he is likely to send you some paperwork to get your signature for any I-Bond transaction.]

Have fun.

John R.


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kathyet
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PostPosted: Sat Mar 19, 2005 8:37 am    Post subject: Reply with quote

Thanks by Ira/Sep Custodian you mean at Vanguard or at the Treasury site?

Kathyet


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peteyperson
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PostPosted: Sat Mar 19, 2005 2:01 pm    Post subject: Reply with quote

JWR1945 wrote:
peteyperson wrote:
If you are able I would like to see the numbers for 2% TIPS over 30 to 50 years at 5 year increments. I would also like to see how it might work on UK I-Bonds at their 1.05% tax-free yield with the same sell down approach.

Thank you for a series of outstanding posts. You have some great ideas. I am not able to respond to them adequately at this time. I can help out with some of the numbers right away (although without addressing taxes and without examining the tax-free UK I-Bonds).

Here are the numbers that you asked for (and a few others). The payments from 2% TIPS produce a withdrawal rate of:
1) 11.13% for 10 years or
2) 7.78% for 15 years or
3) 6.12% for 20 years or
4) 5.12% for 25 years or
5) 4.46% for 30 years or
6) 4.00% for 35 years or
7) 3.66% for 40 years or
8 ) 3.39% for 45 years or
9) 3.18% for 50 years.

As you can see, a portfolio consisting entirely of 2% TIPS is a strong baseline. It has a withdrawal rate of 4.00% and it is truly safe for 35 years. In contrast, portfolios of stocks and commercial paper with Historical Surviving Withdrawal Rates of 4.0% have lasted only 30 years.

Hi John,

Thanks for that.

When you have time I would like to see this for the 1.05% I-Bond case. That is cleaner for me as there are no tax issues on it though one is restricted to a total of $75k in I-Bonds revolving over 5-years.

As to an idea of all TIPS, I could never go that route. Whilst I do acknowledge that companies will fold before either U.S. Treasury or H.M. Treasury do, it would still make me uncomfortable to be riding with them. One could broaden the exposure to other countries but I think I would much prefer a spread of other assets in a spend-down-plan. Probably mostly high yielding ones.

P.S. If if takes you time to pull the 1.05% IBonds figures together, pls PM me to let me know where you posted them.

Petey


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Mike
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PostPosted: Sat Mar 19, 2005 7:30 pm    Post subject: Reply with quote

Quote:
Can I-Bonds be bought for a ira/sep and if you can how do you do it?

I bonds generally yield less than TIPS, because of their tax advantage for taxable accounts. TIPS most often offer a better yield for IRA type accounts.


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kathyet
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PostPosted: Sun Mar 20, 2005 6:48 am    Post subject: Reply with quote

Thank you Mike,

Kathyet


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JWR1945
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PostPosted: Sun Mar 20, 2005 12:09 pm    Post subject: Reply with quote

kathyet wrote:
Thanks by Ira/Sep Custodian you mean at Vanguard or at the Treasury site?

Kathyet

Vanguard.

I agree with Mike.

I-Bonds are tax advantaged and you must hold them for a year before selling. I recommend holding them in a taxable account.

TIPS are tax disadvantaged and you can sell them at any time on the secondary market. If held in a taxable account, you must pay taxes on each year's inflation adjustment. Ouch!

Have fun.

John R.


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JWR1945
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PostPosted: Sun Mar 20, 2005 12:13 pm    Post subject: Reply with quote

peteyperson wrote:
When you have time I would like to see this for the 1.05% I-Bond case. That is cleaner for me as there are no tax issues on it though one is restricted to a total of $75k in I-Bonds revolving over 5-years.
Petey

Here are the numbers that you asked for (and a few others). The payments from 1.05% I-Bonds produce a withdrawal rate of:
1) 10.59% for 10 years or
2) 7.24% for 15 years or
3) 5.36% for 20 years or
4) 4.40% for 25 years or
5) 3.90% for 30 years or
6) 3.43% for 35 years or
7) 3.07% for 40 years or
8 ) 2.80% for 45 years or
9) 2.58% for 50 years.
Have fun.

John R.


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