peteyperson wrote:Were these run the same way as TIPS or rushed because you were short on time when you posted? When you can, I would appreciate an extension like with TIPS out to 45 and 50 years to cover 50 years olds too.
I look forward to hearing your thoughts on my long post when you have more time.
I have put these on another post, but I repeat them here. 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.
You have some great ideas on several threads.
I notice that you would limit TIPS to 20% or so of your portfolio. Is this enough? We want to be able to take advantage of low stock prices when they appear (eventually). Although this would not be an emergency, we want to take advantage of opportunities.
Still, something around 20% corresponds well with unclemick's mutual fund portfolio with its 16% drop after 2000.
I want to do this right. I am trying to identify essential elements such as the TIPS allocation with its ability to be converted rapidly to cash. There is also the use of higher dividend investments to bring the withdrawal rate up to 4%.
As an aside, 2% TIPS by themselves (and subject to a few idealizations) deliver 4.0% for 35 years, which is better than stocks plus commercial paper did around 1965-1970. Maybe the traditional numbers are too low even now.
[No bets or side bets allowed. Probably not.]
It is difficult to believe that I-Bonds paying just 1.05% can give a 40-year retiree 3.07% inflation-adjusted withdrawals. If so, it certainly gives one pause. The thing here is that it is crucial to ensure one actually gets that return and does not suffer safe withdrawal rate losses set against total returns because of poorly timed sales. As a simple example, one can perhaps afford to lose 3% of a withdrawal on a 7% real return asset class but not one using your 3.07% number over 40 years. There is no room for error there.
In terms of the allocation percentage, it was designed purely to cover the difference between the diversified income stream of 2% and the planned 4% withdrawals, 10-year TIPS, and removing the market price volatility by way of the redemption at the end of the term. The problem here is should one retire planning on the 3.07% return from age 60 thru age 100, will you be able to buy TIPS again in a decade for the same yield? This presents real problems because all we've seen from TIPS so far is a falling yield thru time. I have less of a concern on the I-Bonds here however because they have been issued for 35 years now and the rate is so low already (albeit with no tax implications). So I would feel more comfortable using that even though it is on a 5-year term and so returns are locked in for less time.
The alternative is to buy 20-year and 30-year TIPS in developed countries where they are available. I believe they offer 30-year TIPS here and in the US. I might be wrong but I think France is 10-years and 25-years. So there are a mix of options available but the difficult term would not work for the sample portfolio I've shown and the reason for holding the 20% allocation on a ten year term with 2% coming due automatically per year. With I-Bonds on a 5-year term here, I suppose one would still allocation 20% but have 4% coming due each year. Unavoidable if one is to ensure 10 years of cash flow on tap.
In terms of "is it enough?", I would answer that it is for this portfolio model. You're working on something completely different and so everything needs to be considered fresh. I may be wrong but you appear to desire a solution where you get as little volatility as possible in order to ensure an ability to redeem shares, etc., without market price impact on your expected withdrawal rate. If one can successfully ladder enough TIPS over a long timeframe like 30 years, then perhaps. It may require a combination of TIPS from different countries but for many that will cost more in foreign taxation on the income, transactions costs, full tax on total return whereas some investors are only taxed on the income coupon (my situation). So it is not a level playing field in getting int'l diversification for diversification sake or a spread of redeemable periods to work with.
I am not sure what assets one could use in order to avoid the problem of "what price capital at sale?" REITs and Timber provide a lovely yield one can live off, but you are still accepting 15-17.5% SD on the capital (if only 5-7.5% SD on the rental/harvest yields. Any plan that requires the sale of assets as you go along brings into question how to extract the full return. You then have the same problem I have. How do you cover halting capital sales when market tank? I am not sure I have heard an answer from you on that score.
Purely in terms of a balanced mix of assets you are trying to put together, certainly a good case can be made for holding a higher allocation to TIPS/I-Bonds if real returns can be obtained of circa 3% over 40 years. This would look acceptable for people aiming to retire at 55 who most likely won't actually make it till 60 (I expect this to be me). This has to be on the basis of being able to ensure one can get those returns by avoiding selling in the open market. So one perhaps could hold 40% in TIPS in a 10-year ladder and just reinvest what you don't use. Have that be the most stable cash flow provider - as I plan in my setup - knowing that in this setup 4% comes due. With your spend-down-plan, you would be spending some of the capital and reinvesting some, plus using the coupon which is received separately. So the "inconvenience" of having 4% fall due a year when you don't need that much most years would be fine. I know that you're looking at this from the perspective of a mix of assets and getting as close to 4% as possible - as a simple rule of thumb target as much as anything. You see 3%+ spending down over 40 years (which for me looking at a typical 60 y.o. FIREee is plenty) and opinioning that loading up on other assets that might not give you 4% today or much more than 4% long-term is questionable. I would not go quite that far, but I would agree that if 3% on TIPS/I-Bonds is do-able as you say (as yet I have no way to verify the numbers and I check everything myself as I'm the one who would pay the price if it were wrong!) then one could afford to hold 20-40% as long as one owned 5-6% real returning assets too.
In terms of holding more TIPS to be able to take advantage of low stock prices later, that is a personal choice. One has to consider the opportunity cost on either side of that equation. That is a little like someone who wishes to overweight value and particularly small cap value. You are right on long-term data to do so, but one cannot be sure over 20 years that you'll be right. Here in the UK I feel I have lower valuations and history on my side there. We just went thru a 20 year period where small cap index did not beat large cap index (value did). So given the starting point today, odds are especially good that the next 20 years will deliver better returns for small & micro than large-cap. That would be my reasoning for going much heavier into those areas almost to the complete exclusion of UK large-cap. But I plan that knowing I am playing the odds but that the odds are in my favor (yet I might still lose). One does much the same thing when one refuses to own stock in favor of treasuries waiting for stocks to fall. You're playing a waiting game. Certainly I would not be in large cap index in the US for the next decade. There has never been three decades of P/E expansion nor avoidance of revision-to-the-mean after two decades of P/E expansion. It would be unprecidented then if we reached the end of 2009 and P/Es have not mean reverted. But that could still be the way of it. One has the choice whether to overweight over more affordable, better returning equity asset classes instead or whether one wants to sticks with country/regional weightings and when one cannot do that due to low future real return expectations then one holds TIPS instead. That would be a fairly strict interpretation. Perhaps it is different in distribution phase to accumulation phase in this instance because I anticipate new funds each year to deploy and someone already fully allocated & no longer in employment is not. So perhaps I feel I can take advantage of cheaper markets as I go along and so holding cash makes less sense? I still believe I see 4-8% real from certain equities and so holding 1.05% net I-Bonds or 1.25% net TIPS doesn't make too much sense. Whilst returns would be boosted in a market fall, large cap especially this isn't as much as it seems. Jeremy Siegel's new book discusses how some cheap sectors like railroad stocks actually outperformed the S&P 500 index because they started dirt cheap in the 1930s and if you had reinvested the large dividends (due to low P/E), you would have accumulated so many extra cheap shares that you go out ahead. This ignores taxes on those dividends tho' (perhaps this is diff. in the US). If one paid taxes on them, then the math doesn't work out like he says so it is a little bit of wishful thinking on dividends there. This is also one of the reasons why small cap can beat large cap even though the dividends are so much lower historically. Small cap gains much more than 1.8% real growth in the US (and 0.50% real growth in the UK) and this is tax deferred for as many years as you can afford. This tax deferral overcomes the lower dividends and lower reinvestment. Ignoring the effects of taxes on dividends changes the whole picture.
Apologies for length, but your post covered a range of subjects spanning two different portfolio structures!
P.S. It is easy to see that the 30-year TIPS/I-Bonds return being circa 4% matches the S&P500/Treasury Bond Balanced withdrawal rate spending down that capital over 30 years (especially at today's expected returns). For my own purposes though, I reject the notion of planning to spend capital down and yet being FIREd at 60. With modern medicine and staying healthy one can live to be 100 or more. So a plan that runs out at 90 doesn't work for me and I dare say most people. For those who retire late at 70, most certainly it will be of greater interest! So I reject any plan for "30 years and bust". Particularly because the markets are so volatile that a bad early return series would blow apart a 75/25 S&P 500/Bond Index portfolio, leaving you broke not much past 20 years into retirement. For people retiring at 60, this would leave them age 80, pretty unemployable and screwed. So as a general rule, I would not want a spend-down-plan on stocks. One needs to be able to know exactly how long an asset class will last when spending it down - to lock that down exactly - which is why I favor a plan that has TIPS/I-Bonds held to maturity. The problem comes into paradise on your plan there on the matter of what reinvestment rate one achieved for TIPS. This will change the withdrawal rate and so potentially cause the same problem as the 30-year S&P 500 spend-down-plan. Possible less impactful though due to lower volatilty instruments. On my plan I work as close to perpetual funds as I can - the endowment fund model - and use TIPS as a source of cash flow insurance in the first decade rather than as a way to lock-in close to 3% w/r rates on a good chunk of the portfolio in an ultra-safe manner. Of course I could adopt two TIPS allocations. The first as the insurance policy and the second as one of several investment asset classes (I don't plan to rebalance the 20% TIPS-for-cash-flow, just the 80%). I could then plan to have perpetutual funds on everything else that is far more volatile but plan to spend down the TIPS and realise a higher return on this lower-risk asset class. That then speaks more to your plan in combination with mine.