Withdrawal rates and size of nest egg needed in current negative real interest rate world

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Hal
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Sun Jun 13, 2021 5:42 am

Well this is surprising....
Didn't expect just cash and gold to do so well.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by johnnywitt » Thu Jul 15, 2021 5:25 pm

vincent_c wrote:
Thu Jun 10, 2021 11:28 pm
How does one avoid all asset classes?
I meant to not bet on any one Asset Class disproportionately. If there was ever a time for holding one's core assets in a PP, or a PP like portfolio, it's probably right about now.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by pp4me » Fri Jul 16, 2021 2:52 pm

sophie wrote:
Fri Jun 11, 2021 8:05 am
I haven't looked into TIPS but you could think about those too.
I refreshed my memory on TIPS this morning after reading this and now I wonder where TIPS would fit in with the PP/GB strategy if you went that route.

If it's for inflation protection then it seems to me you should logically fit it in with gold to maintain the strategy of a certain percentage as an inflation hedge. Maybe start buying TIPS instead of gold for a while, or sell some gold and buy some TIPS?

Doesn't seem to make much sense for long bonds as deflation protection. Based on my understanding it wouldn't do well with deflation. Mostly the opposite of your long bonds if what I read was true.

Cash? That's an interesting idea and what I was thinking considering we're getting close to 0% or less right now and they might do well in times of prosperity. Then again, do you want to put your cash at so much risk?
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Fri Jul 16, 2021 7:29 pm

It seems to me that iBonds are perfect to use as part of the cash allocation. No downside to them other than the paltry 10K per person annual purchase limit.

THE go-to site on TIPS and iBonds is Tipswatch, and they've had an excellent series of posts in the past couple of weeks comparing the performance of TIPS of both intermediate and short duration, nominals and BND over various economic conditions:

https://tipswatch.com

I don't see a lot of downside to buying your iBond limit and perhaps putting a bit more into VTIP, treating the latter fund as kind of an inflation-adjusted equivalent to the short-term Treasury funds (e.g. SHY, SCHO) that many PP'ers have historically used for some or all of their cash instead of MM funds. But no way would I ever use longer-duration tips as a substitute for LTT's.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Fri Jul 16, 2021 7:34 pm

Kevin K. wrote:
Fri Jul 16, 2021 7:29 pm
It seems to me that iBonds are perfect to use as part of the cash allocation. No downside to them other than the paltry 10K per person annual purchase limit.

THE go-to site on TIPS and iBonds is Tipswatch, and they've had an excellent series of posts in the past couple of weeks comparing the performance of TIPS of both intermediate and short duration, nominals and BND over various economic conditions:

https://tipswatch.com

I don't see a lot of downside to buying your iBond limit and perhaps putting a bit more into VTIP, treating the latter fund as kind of an inflation-adjusted equivalent to the short-term Treasury funds (e.g. SHY, SCHO) that many PP'ers have historically used for some or all of their cash instead of MM funds. But no way would I ever use longer-duration tips as a substitute for LTT's.
Can someone explain iBonds to a Canadian?
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Sat Jul 17, 2021 6:01 am

“ For both types, bonds are redeemable after 12 months, but there is a penalty of three months' interest if they are redeemed before 5 years. Tax on the interest can be deferred until the bond is redeemed.[10]”

Seems like a bad deal yet I keep seeing how there are no downsides compares to TIPS or t-bills.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by D1984 » Sat Jul 17, 2021 6:29 am

vincent_c wrote:
Sat Jul 17, 2021 6:01 am
“ For both types, bonds are redeemable after 12 months, but there is a penalty of three months' interest if they are redeemed before 5 years. Tax on the interest can be deferred until the bond is redeemed.[10]”

Seems like a bad deal yet I keep seeing how there are no downsides compares to TIPS or t-bills.
I-Bonds have no duration risk (i.e. they have no interest rate risk); if real rates go up then a TIPS's value can fall (for that matter so can any other fixed rate bond's) but an I-Bond's will not; after the first 12 months you can simply cash the I-Bond in, take the penalty (obviously you would only do this if the penalty amount was less than the new I-Bond at the new higher rate was paying....although after 5 years there is no penalty anyhow; also, if you are in a period of low inflation--or for that matter deflation--the penalty won't be that much anyway since part of an I-Bond's combined coupon interest rate is based on inflation), and buy new I-bonds at the now higher rate. A TIPS's value can also fall if we have deflation whereas if we have enough deflation to overcome the fixed coupon on an I-Bond the worst you will get for that six-month period on your I-Bond is zero i.e. an I-Bond's value cannot ever fall because of deflation. I-Bonds thus have a sort of "heads you win, tails the government loses" put feature that virtually no other type of Treasury security has (EE bonds have this sort of feature as well but they aren't inflation-indexed so they do have inflation risk). Also, I-Bonds are tax-deferred whereas the inflation adjustment on TIPS is taxable as current income each year (i.e. "phantom income" ) even though you don't get it in real life until you either sell the TIPS or until it matures (which can be as much as twenty or thirty years into the future for a long-term TIPS).

I-Bonds also have no inflation risk; you will (at worst....this depends on when your I-Bond was issued and what the fixed portion of the coupon was at issue) get whatever inflation is so you will at least lose no money in real terms. T-Bills do have inflation risk and thus can have severe real losses during times when short-term Treasury rates are lower than inflation (see 2009-2017, some parts of the 1970s, mid-1950 through most of 1951, 1941-1948, 1934-1937, 1916-1920, 1912, 1909, and 1902. The real (inflation-adjusted) maximum drawdown ever on US T-Bills from 1900 to 2021 was around 50%!

Finally, I-Bonds share the feature that (like any other type of Treasury security) they are exempt from any state and local income taxes whereas bank account or CD interest is not.

Given that I-bonds are the only securities that have no inflation risk, no deflation risk, no interest rate risk, no credit risk, full tax exemption from state and local taxation, and are tax-deferred with regards to federal taxation, 12 months of lack of liquidity is a minor price to pay. I-Bonds are actually a very good deal for a "safe" asset; they are such a good deal, in fact, that the US government limits the amount purchasable by any one investor in any one calendar year to $10,000 by cash (albeit there are various ways to get around this limitation) and another $5,000 via tax refund.
Last edited by D1984 on Sun Jul 18, 2021 8:03 am, edited 1 time in total.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Sat Jul 17, 2021 4:11 pm

This might be ok for deep cash, but I don’t think anyone holds t-bills for income now and really the whole point is to maintain liquidity, no?

The way I see it is that cash is a really bad deal right now and you have to have an unlevered position to even consider this and only a small part but the annual limits seem small enough that you might as well buy if you hold cash.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by D1984 » Sun Jul 18, 2021 8:17 am

vincent_c wrote:
Sat Jul 17, 2021 4:11 pm
This might be ok for deep cash, but I don’t think anyone holds t-bills for income now and really the whole point is to maintain liquidity, no?

The way I see it is that cash is a really bad deal right now and you have to have an unlevered position to even consider this and only a small part but the annual limits seem small enough that you might as well buy if you hold cash.
I would never recommend I-Bonds for all of a person's cash position but given that the title of the thread referenced negative real rates and the discussion focused on the effects of said negative real rates on "safe" portfolios that are heavy in fixed income (portfolios such as the PP, GB, Larry Portfolio, VWINX, VTINX, etc) I would say that there is nothing wrong with "getting around" the issue of negative real rates on Treasury Bills by putting some portion of one's cash allocation into I-Bonds (and/or into other safe assets that pay better than T-Bills currently do....savings accounts, CDs, RCAs, etc).

Two things to remember if one is doing the I-Bond strategy mentioned above:

One, do a crude backtest and see/estimate how much the maximum amount of T-Bills you ever would've rebalanced into the "risk assets" (stocks, bonds, gold, REITs, commodities, etc) of your chosen portfolio each year each year going back 50 or 60 years. Then pick a number that is a few percentage points less than the remaining amount of T-Bills derived from this exercise above and start converting that part of your T-Bill allocation into I-Bonds/savings accounts/CDs/etc. This way you will still have plenty of "quick cash" in the form of Treasury Bills to maintain liquidity but won't be hurt so much earning 0.1% on all of your cash while inflation is 2 or 3%.

Two, I-Bonds are partially liquid after a year and fully liquid after five years so it's not like you are stuck with an asset that is illiquid for the full thirty years (or effectively illiquid for 20 years like EE Bonds are if you want the guaranteed doubling on those). Plus, once you've started an I-Bond ladder eventually the oldest rung will start to mature (or go liquid if the ladder is a five year or ten year ladder rather than a full thirty year one) and at that point you'll be automatically having some I-Bonds turn into cash each year anyway to be either reinvested in other assets, put back into T-Bills, or used to buy more I-Bonds.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Sun Jul 18, 2021 10:59 am

This really got me thinking about the whole concept of a “deep” asset.

If one actually has a way to determine the amount of excess asset one has, it probably meets the infinite money concept where the unlevered PP no longer makes sense for that amount of money.

So I would argue that one should keep money that they cannot afford to lose completely liquid and any form of term deposit or locked up cash is no replacement for t-bills. Even among t-bills one could strive for the most pristine kind of collateral (I’ve seen on the run/off the run treasuries mentioned once or twice).

Once you are able to determine the amount of money you have in excess, that money should no longer be left unlevered.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by jalanlong » Tue Jul 27, 2021 1:18 pm

ahhrunforthehills wrote:
Sun Jun 06, 2021 11:16 am

If the psychological idea of having paper-losses scares you, I would recommend tracking multiple portfolios as benchmarks. For example, I don't invest in the PP, but I do track it "as if" I was invested in it. For example, my portfolio backtests higher drawdowns than a PP, but if I was in the PP I would have a lot less money anyways. A crash wouldn't be a big deal from a macro standpoint.
This is something that I never see talked about enough. So many people worry about drawdowns but I am not sure why they are such a worry unless you really may need your invested money at any moment. Of course it depends upon when you start the meter ticking but in most cases when you compare a 100% stock portfolio with a balanced risk-parity portfolio, after a few years the 100% stock portfolio is so far ahead that even with a 30% drawdown it still handily outpaces the "safer" portfolios. The only caveat is that you never know when you start investing if one of those 30% drawdowns is right around the corner.

I feel like banging the drum again for a (mostly) stock portfolio that may make it thru the coming years intact. Instead of one concentrated on Facebook and Google, however, I would choose a conservative group of stocks with healthy, growing dividends. Maybe stocks like Colgate, Thermo Scientific, Linde, Intercontinental Exchange for example. I feel like their drawdowns may be less than cap weighted index funds and their ability to handle both inflation and slower growth might be better than other assets.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Tortoise » Tue Jul 27, 2021 2:21 pm

jalanlong wrote:
Tue Jul 27, 2021 1:18 pm
So many people worry about drawdowns but I am not sure why they are such a worry unless you really may need your invested money at any moment.
Psychology.

The growth of a portfolio can be reduced quite a bit if the person investing in it panics and sells during a deep drawdown. So much so that a stock-heavy investor who jumps in and out of the market as his emotions get whiplashed might actually earn less in the long run than a boring PP investor who is able to remain fully invested at all times.

Over the years, quite a few people on this forum have told regretful stories about how much money they lost by emotionally jumping in and out of the stock market before they eventually found the PP.
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