TBills as "the best horse at the glue factory?"

Discussion of the Bond portion of the Permanent Portfolio

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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Tue Sep 27, 2022 10:02 pm

dualstow wrote:
Tue Sep 27, 2022 9:57 pm

I should split this to a Vanguard thread.

I have an assigned beneficiary. Vanguard made some changes and my listed beneficiary disappeared. I was able to re-add her, but what bothered me was that they didn’t even bother to tell me that they had caused this or that I needed to take action. These things supposedly supersede a will, so a heads up would have been nice.


I think that that was the exact same thing that so irritated Mathjak regarding Vanguard.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Tue Sep 27, 2022 10:04 pm

Yikes. Fidelity it is!

Thanks.

And an FYI, I opened 3 accounts, and already am able to navigate, and was able to add beneficiaries to our joint account.

And I can buy 3.45% 3 month CDs in my freaking IRA! If I was able to do that at Ally, it is completely convoluted.

Glad looking at bonds forced this change.
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Re: TBills as "the best horse at the glue factory?"

Post by barrett » Wed Sep 28, 2022 6:56 am

Cortopassi wrote:
Tue Sep 27, 2022 10:04 pm
Yikes. Fidelity it is!

Thanks.

And an FYI, I opened 3 accounts, and already am able to navigate, and was able to add beneficiaries to our joint account.

And I can buy 3.45% 3 month CDs in my freaking IRA! If I was able to do that at Ally, it is completely convoluted.

Glad looking at bonds forced this change.
There seems to be a consensus on Bogleheads that Vanguard's personal service is lacking. The only reason that we (wife and I) don't hold everything at Fidelity is because they don't allow the Roth side of a Solo 401k. Everything else has been good with them. Website is great. On the rare times that I have a question, I can get someone on the phone within a couple of minutes. With Etrade (where we've recently had to move the aforementioned Solo Roth 401k), we've had to wait up to an hour to get someone on the line.

I guess there are $ reasons for the poor service of some companies, but it's gotten so easy to just move millions of dollars that one would think competition should drive all providers a bit closer to the same level.

Anyway, I think you'll be happy with Fidelity.
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Re: TBills as "the best horse at the glue factory?"

Post by dualstow » Wed Sep 28, 2022 7:20 am

And of course Fidelity has physical branches. Not that I ever go, but I have one that’s walking distance.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Wed Sep 28, 2022 7:26 am

dualstow wrote:
Wed Sep 28, 2022 7:20 am
And of course Fidelity has physical branches. Not that I ever go, but I have one that’s walking distance.
I just saw that. That would be excellent for my in laws!
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Wed Sep 28, 2022 11:07 am

barrett wrote:
Wed Sep 28, 2022 6:56 am

Anyway, I think you'll be happy with Fidelity.
I sure am and it's only been like 12 hours.

I like that they have a cash management account that I can treat like a bank too.

And I am sure I will like their Full View which will let me view my other non-Fidelity accounts, vs. needing to use Mint.

All in one is definitely a big plus for me.
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Wed Sep 28, 2022 12:54 pm

Cortopassi wrote:
Wed Sep 28, 2022 11:07 am

barrett wrote:
Wed Sep 28, 2022 6:56 am


Anyway, I think you'll be happy with Fidelity.


I sure am and it's only been like 12 hours.

I like that they have a cash management account that I can treat like a bank too.

And I am sure I will like their Full View which will let me view my other non-Fidelity accounts, vs. needing to use Mint.

All in one is definitely a big plus for me.


I opened a Fidelity account a few years ago but have done zero with it. You are moving me closer to finally starting to use it.
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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Wed Sep 28, 2022 2:54 pm

Corto,

I buy Treasury bills, but only after I have completely maxed out my annual purchases of I-bonds. I hold short duration T-bills to maturity so I know their precise yield when I buy them. As you have discovered, investors cannot buy tax deferred T-bills through TreasuryDirect.

I do not buy TIPS because I think that they have unfavorable tax treatment. Unlike I-bonds (which are tax deferred for 30 years) TIPS throw off periodic payouts that are taxed. If you are in or nearing retirement age, you should be aware that TIPS in a tax deferred account are subject to required minimum distributions. (RMDs). Also, TIPS can turn negative in value. TIPS take up valuable space in a tax deferred account and are effectively illiquid until they reach their maturity date. With the exception of new I-bonds less than 1 year old, all of my Cash holdings are completely liquid.

I buy Treasurys through Fidelity. They do not charge a commission, but instead have a small buy/sell spread. In an early thread, Gumby put together a series of screen shots for a tutorial in buying Treasurys. See:
viewtopic.php?f=3&t=1670
If you encounter any difficulties, Fidelity runs a bond desk during business hours over the telephone. If you can write covered calls, I am sure you can buy Treasurys
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: TBills as "the best horse at the glue factory?"

Post by whatchamacallit » Wed Sep 28, 2022 3:14 pm

Speaking of Fidelity.

I just transferred funds from a savings account to take advantage of these juicy bills. It showed up in fidelity and exited savings account the next day but for some reason there was a hold for a week.

I was a bit surprised. Maybe just a fluke.
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Wed Sep 28, 2022 3:52 pm

jhogue wrote:
Wed Sep 28, 2022 2:54 pm
Corto,

I buy Treasury bills, but only after I have completely maxed out my annual purchases of I-bonds. I hold short duration T-bills to maturity so I know their precise yield when I buy them. As you have discovered, investors cannot buy tax deferred T-bills through TreasuryDirect.

I do not buy TIPS because I think that they have unfavorable tax treatment. Unlike I-bonds (which are tax deferred for 30 years) TIPS throw off periodic payouts that are taxed. If you are in or nearing retirement age, you should be aware that TIPS in a tax deferred account are subject to required minimum distributions. (RMDs). Also, TIPS can turn negative in value. TIPS take up valuable space in a tax deferred account and are effectively illiquid until they reach their maturity date. With the exception of new I-bonds less than 1 year old, all of my Cash holdings are completely liquid.

I buy Treasurys through Fidelity. They do not charge a commission, but instead have a small buy/sell spread. In an early thread, Gumby put together a series of screen shots for a tutorial in buying Treasurys. See:
viewtopic.php?f=3&t=1670
If you encounter any difficulties, Fidelity runs a bond desk during business hours over the telephone. If you can write covered calls, I am sure you can buy Treasurys
Thanks. Waiting for accounts to transfer. I am also looking at just straight brokered 3 month CDs for my IRA, the rate currently seems to be ~0.2 to 0.3% higher than equivalent duration T-Bills (generally less than the 3.51% shown in this table), and since it would be in an IRA, taxes are not an issue.

Question, do you have both a cash management account and a brokerage account? I see some differences, but nothing major is jumping out at me. I opened both since it was easy enough.

As for TIPS, I have read explanations on them multiple times, and it doesn't work well in my brain, so I plan on staying away from things I don't easily understand!

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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Wed Sep 28, 2022 3:57 pm

whatchamacallit,

Call a Fidelity rep and ask. I am sure they will explain.

Possibly a hold on assets transfered into Fidelity from an outside bank?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: TBills as "the best horse at the glue factory?"

Post by jhogue » Wed Sep 28, 2022 5:05 pm

Corto,

I do not have a CMA with Fidelity. I have a Fidelity brokerage account linked to two bank accounts and my TreasuryDirect account.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: TBills as "the best horse at the glue factory?"

Post by barrett » Thu Sep 29, 2022 10:43 am

Desert also knows a ton about fixed income as it makes up a large percentage of his portfolio and he's quite sharp on this stuff.

I am with you on TIPS in that I don't understand them well enough. There seem to be too many variables which I think is what you are trying to get away from. But, damn, those Bogleheads really seem to love TIPS.
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 11:49 am

barrett wrote:
Thu Sep 29, 2022 10:43 am

Desert also knows a ton about fixed income as it makes up a large percentage of his portfolio and he's quite sharp on this stuff.

I am with you on TIPS in that I don't understand them well enough. There seem to be too many variables which I think is what you are trying to get away from. But, damn, those Bogleheads really seem to love TIPS.


As does William Bernstein, who is definitely on my Mount Rushmore of people of Personal Finance.
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Re: TBills as "the best horse at the glue factory?"

Post by Kbg » Thu Sep 29, 2022 2:48 pm

barrett wrote:
Thu Sep 29, 2022 10:43 am
Desert also knows a ton about fixed income as it makes up a large percentage of his portfolio and he's quite sharp on this stuff.

I am with you on TIPS in that I don't understand them well enough. There seem to be too many variables which I think is what you are trying to get away from. But, damn, those Bogleheads really seem to love TIPS.
TIPS aren't that difficult to understand, but they can be made to sound incredibly complex. Here's some rules of thumb/keypoints:

- If you hold to maturity, you get your initial investment back or more.
- Your initial investment will be added to or subtracted from each year based on the CPI
-- This can cause taxable events each year
- In addition to the above, you will get the stated interest rate

Where complexity comes in is when you buy TIPS on the secondary market
- Use your broker's yield to maturity calculation...that is in fact (assuming they did it right, which is a good assumption) the rate you will get over the life of the bond...to include the prior adjustments made to the original base of that bond . In other words, you are not likely dealing with a nice round $1000 number in these calculations and this base is going to go up or down based on inflation/deflation

My favorite analogy...think of TIPs as an ARM vs a fixed rate mortgage (sort of). The trade off is the same...variability vs. fixed. Sometimes that works for you and sometimes that works against you. And with TIPs they even give you an inflation number that tells you precisely where you are going have TIPS working for you or against you...this is the "breakeven rate." Let's say the BE is 2.5%. If inflation is over 2.5% during the life of the TIPS, you win. If below, you lose vs. a normal treasury. I do kind of agree with what Tyler mentioned/stated concerning TIPS being sort of an active bet on future inflation (and technically I also agree with vineviz's disagreement.)

The much maligned Treasury Direct is actually pretty good in many respects...to quote:

How TIPS Are Tied to Inflation
Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.

The relationship between TIPS and the Consumer Price Index affects both the sum you are paid when your TIPS matures and the amount of interest that a TIPS pays you every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. If inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater. This provision protects you against deflation.

Treasury provides TIPS Inflation Index Ratios to allow you to easily calculate the change to principal resulting from changes in the Consumer Price Index. To learn more about determining how inflation adjustments affect your security, please see TIPS: Rates and Terms.

https://www.treasurydirect.gov/indiv/re ... _rates.htm

End quote

Go read the rates and terms link for more.

Side note: When TIPS are offering real above 0 interest rates of return they become superior to an I-bond (but this is complicated by tax impacts...in a tax deferred account TIPS are the no-brainer better asset.) (See update after original post.)

Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.
Last edited by Kbg on Thu Sep 29, 2022 6:29 pm, edited 1 time in total.
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Re: TBills as "the best horse at the glue factory?"

Post by Dieter » Thu Sep 29, 2022 4:49 pm

Thanks to all for sharing great TIPS info
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Re: TBills as "the best horse at the glue factory?"

Post by barrett » Thu Sep 29, 2022 5:31 pm

Kbg wrote:
Thu Sep 29, 2022 2:48 pm
Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.
And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 5:36 pm

barrett wrote:
Thu Sep 29, 2022 5:31 pm

Kbg wrote:
Thu Sep 29, 2022 2:48 pm

Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.


And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.


Because they ARE two different investments:

1) TIPS bought and held to maturity

2) A TIPS bond fund
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Re: TBills as "the best horse at the glue factory?"

Post by Kevin K. » Thu Sep 29, 2022 5:44 pm

jhogue wrote:
Wed Sep 28, 2022 2:54 pm
Corto,

I buy Treasury bills, but only after I have completely maxed out my annual purchases of I-bonds. I hold short duration T-bills to maturity so I know their precise yield when I buy them. As you have discovered, investors cannot buy tax deferred T-bills through TreasuryDirect.

I do not buy TIPS because I think that they have unfavorable tax treatment. Unlike I-bonds (which are tax deferred for 30 years) TIPS throw off periodic payouts that are taxed. If you are in or nearing retirement age, you should be aware that TIPS in a tax deferred account are subject to required minimum distributions. (RMDs). Also, TIPS can turn negative in value. TIPS take up valuable space in a tax deferred account and are effectively illiquid until they reach their maturity date. With the exception of new I-bonds less than 1 year old, all of my Cash holdings are completely liquid.

I buy Treasurys through Fidelity. They do not charge a commission, but instead have a small buy/sell spread. In an early thread, Gumby put together a series of screen shots for a tutorial in buying Treasurys. See:
viewtopic.php?f=3&t=1670
If you encounter any difficulties, Fidelity runs a bond desk during business hours over the telephone. If you can write covered calls, I am sure you can buy Treasurys
Thanks jhogue for sharing your approach and insights.

I have a modest stash of iBonds that I'm treating as "deep cash" for PP/GB purposes but don't plan on adding to it. I'm comfortable holding VTIP in our IRA's and for Treasuries I'm following David Enna's suggestion and implementing it at Schwab: buying 13 and 26 week TBills at auction and setting them up on auto-rollover. I'll revert to ITT's (in the form of VGIT) when the Fed takes its foot off the gas. We're living through times where having a modest part of one's portfolio only losing the current rate of inflation feels like a win. Sheesh.
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Re: TBills as "the best horse at the glue factory?"

Post by Dieter » Thu Sep 29, 2022 6:08 pm

barrett wrote:
Thu Sep 29, 2022 5:31 pm
Kbg wrote:
Thu Sep 29, 2022 2:48 pm
Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.
And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.
Yeah, rising rates have been a killer

And I don’t understand how TIPS in funds have their principle adjusted for inflation — every six months as interest is paid, or when the individual TIPS mature

They do seem to be doing better than nominal funds of the same duration, but not as much better as I’d expect

Using short duration TIPS reduces interest rate risk — and currently yield over 1% above inflation in VGs short term TIPS fund
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 6:30 pm

Dieter wrote:
Thu Sep 29, 2022 6:08 pm

barrett wrote:
Thu Sep 29, 2022 5:31 pm

Kbg wrote:
Thu Sep 29, 2022 2:48 pm

Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.


And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.


Yeah, rising rates have been a killer

And I don’t understand how TIPS in funds have their principle adjusted for inflation — every six months as interest is paid, or when the individual TIPS mature

They do seem to be doing better than nominal funds of the same duration, but not as much better as I’d expect

Using short duration TIPS reduces interest rate risk — and currently yield over 1% above inflation in VGs short term TIPS fund


Earlier I'd stated that William Bernstein would be on my Mount Rushmore of Personal Finance.

Here are the "notes" I took from one of his books (2011?) regarding what he had to say about TIPS. I'm sure what he said then still applies as that is what you get from classic / timeless advice.



If the Social Security “annuity” does not provide enough coverage and you don’t want to purchase a conventional annuity, a Treasury Inflation Protected Securities (TIPS) ladder can serve much—but not totally—the same purpose as the commercial inflation-indexed annuity and allow the retiree to keep control of most of his or her nest egg in an investment vehicle that is almost perfectly safe.
A word or two about TIPS. They are surely one of the most peculiar assets in the investment world. They are a marvelous way of protecting one’s cash flow against inflation, but they do so only when held to maturity. Before then, they can prove quite risky, in large part because their secondary market is thin.

The message here is clear: When using TIPS to fund your retirement, do so with a ladder whose maturities at least approximately match your projected needs; do not do so with a TIPS mutual fund, which may suffer capital loss just when you need the funds the most. In addition, the costs of owning a ladder of individual TIPS purchased at auction is near zero (and actually is zero for some brokerage accounts), far cheaper than even the thriftiest mutual fund or ETF.

Each of the three vehicles/strategies mentioned—fixed annuities, deferring Social Security, and a TIPS ladder—has pros and cons.

Commercial inflation-indexed annuities can at least theoretically provide a safe lifetime flow of real income, but they are vulnerable to crisis-related and company-specific default. Purchasing annuities from several different companies mitigates the latter problem, but not the former. In addition, these annuities are not “actuarially fair.” That is, the companies that market them need to make a profit, and so they do not pay out the full actuarial amount to the beneficiaries. As we shall soon see, this actuarial unfairness comes at a high cost.

Deferring Social Security does provide a payout that is more than actuarially fair, and it is highly secure. But, unfortunately, it allows the “purchase” of only a relatively small amount of income stream, whose actual amount is dependent on a retiree’s work history.

A TIPS ladder, in contrast, is also highly secure and inflation protected, but it does not allow for risk pooling. Ideally, the retiree does not need the stream from the TIPS ladder until age 70 or so and still has enough assets to buy a full 30-year ladder sufficient to pay for retirement needs in each year. Left-over assets can be invested in the “risk portfolio” (RP). Few investors, however, will be able to completely take care of their living expenses to the outer limits of their potential survival, say, age 100 or so. Table 5 summarizes the advantages and disadvantages of these three different approaches to a secure retirement LMP.

The message here is clear: When using TIPS to fund your retirement, do so with a ladder whose maturities at least approximately match your projected needs; do not do so with a TIPS mutual fund, which may suffer capital loss just when you need the funds the most. In addition, the costs of owning a ladder of individual TIPS purchased at auction is near zero (and actually is zero for some brokerage accounts), far cheaper than even the thriftiest mutual fund or ETF.

Table 5.
Pros and Cons of Major Liability Matching Portfolio Strategies

Buy inflation-adjusted fixed annuity
Pros: Inflation-protected income stream for duration of one or joint lives

Cons: Default/failure, particularly in the event of systemic financial crisis. Adverse “adjustment” of inflation formula. Company profit motive detracts from actuarial fairness

Defer Social Security to age 70
Pros: Secure, inflation-protected income stream for duration of joint lives

Cons: Adverse “adjustment” of inflation formula. Benefit available to each retiree limited by work history

Buy TIPS ladder
Pros: Secure, inflation-protected income stream

Cons: Absence of risk pooling requires either a very long ladder or purchase of “longevity insurance.” Adverse “adjustment” of inflation formula

A TIPS ladder protects the retiree from a severe financial crisis in a way that commercial annuities cannot, and it comes fairly close to providing a lifetime income. Table 6 sets out the tradeoff between the risks of a commercial annuity and a TIPS ladder.

Which is worse, the risk of running out of money with TIPS at age 95 or the risk of a severe financial crisis or company failure that would crater the annuity income stream? Your guess is as good as mine. A reasonable person has at least three options in this situation: the TIPS ladder, the commercial annuity, or some combination of the two. Best of all would be to completely avoid this dilemma by being able to purchase at age 75 a supplementary 30-year rung that would take them to age 105 or to have the equivalent in risk-free assets to do so.

My opinion is that the first course, a simple 20-year TIPS ladder, is the best choice. It eliminates default risk, which I think is the most important consideration. The financial crisis of 2007–2009 occurred, in no small part, because of the systemic risk inherent in a financial market that is dominated by a few huge banks. Now, several years later, there are fewer still, and the resultant Dodd-Frank reform has been so watered down that it does little to diminish the likelihood or severity of the next financial crisis.

While we may well avoid another crisis, particularly one that might devastate the insurance industry, I would not want to bet my retirement on it with either an immediate annuity or a deferred annuity. The possibility of running out of money with my preferred choice, the TIPS ladder, should also concentrate Frank and his wife’s thinking on making some minor adjustments to their living standard. Were they to reduce their expenses by just $2,000 per year—from $56,000 to $54,000, they would have $418,000 left in their IRA at age 70. At TIPS yield and reinvestment rates of 0%, 1%, and 2%, an $18,000 burn rate would last them to ages 93.2, 96.4, and 101.3, respectively.

And just to reiterate, the success of all of these strategies hinges on deferring Social Security until 70. The only reason not to do so would be ill health and shortened life expectancy for both spouses.

The major remaining issue might be the potential need for high out-of-pocket medical expenses or long-term care, which is a major risk for both twins. Long-term care insurance, in particular, is expensive (up to several thousand dollars per year), is often unreliable, and carries very high deductibles. Faced with unexpectedly high losses from this line of coverage, insurance companies are bailing out of the field, and those that are left are rapidly raising their rates. We are likely not far from the day when, if you can afford long-term care insurance, you can probably afford to pay for long-term care on your own. Such is life in a country with a dysfunctional health-care system and an inadequate safety net.

This discussion, then, in no way mandates that all investors should immunize their retirement income with annuities, TIPS, or even a delay in Social Security draw until age 70. As we’ve already seen, health status, the absolute level of assets, personal preference, and the tax status of the nest egg all enter into the analysis. But this exercise does provide a rough rule of thumb. By age 70, the investor should have accumulated enough safe assets, including Treasury bills and notes and CDs, to fund, at a bare minimum, 20 years of the cash-flow needs remaining after Social Security and pension payments. An LMP of 25 years of living expenses would be even better. Further, with today’s historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: TBills as "the best horse at the glue factory?"

Post by Kbg » Thu Sep 29, 2022 6:44 pm

Dieter wrote:
Thu Sep 29, 2022 6:08 pm
barrett wrote:
Thu Sep 29, 2022 5:31 pm
Kbg wrote:
Thu Sep 29, 2022 2:48 pm
Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.
And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.
Yeah, rising rates have been a killer

And I don’t understand how TIPS in funds have their principle adjusted for inflation — every six months as interest is paid, or when the individual TIPS mature

They do seem to be doing better than nominal funds of the same duration, but not as much better as I’d expect

Using short duration TIPS reduces interest rate risk — and currently yield over 1% above inflation in VGs short term TIPS fund
Don't assume inflation = a change in the TIPS base interest rate. It does not not as is clearly stated. I'll try to be very precise with my words.

1. CPI changes the bond's base amount only. To keep the math simple, 10% inflation means the base will be increased from 1000 to 1100 and you will get the specific TIPS bond interest rate on the base amount. An example, keeping the math simple. Let's say in year 1 the TIPS interest rate was 1% and inflation was 0% you get $10 in interest. Year 2 10% inflation means base is now $1100 and you get $11 dollars in interest...the interest rate did not change, only the base which the 1% is applied to calculate the interest you receive. This is the impact of inflation.

2. I won't explain bond basics again here...but when bonds reprice TIPS also reprice to be competitive. So using #1 above our coupon rate is 1% but the market can reprice its bid/ask price to make the effective yield higher or lower.

So in year one or year two the market will price whatever the TIPS happens to be to reflect a changed interest rate environment. Again to keep math simple...you may be able to buy $1000 dollars worth of base for $900 which means your effective yield is now higher by $100 spread over the remaining bond life.

In short...don't confuse the TIPS bond which doesn't change (except for CPI adjustments) and what the market is pricing that TIPS bond for.
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Re: TBills as "the best horse at the glue factory?"

Post by Kevin K. » Thu Sep 29, 2022 7:26 pm

vnatale wrote:
Thu Sep 29, 2022 6:30 pm
Dieter wrote:
Thu Sep 29, 2022 6:08 pm
barrett wrote:
Thu Sep 29, 2022 5:31 pm
Kbg wrote:
Thu Sep 29, 2022 2:48 pm
Why do BHs love them...they eliminate inflation risk which is a HUGE benefit.
And yet I see that iShares TIPS Bond ETF is down 17.78% YTD. And yes, I get that the performance of a fund is different than buying a bond and holding it to maturity. Still, that just looks to me like another asset that is getting creamed in the current environment.

I do appreciate you trying to explain TIPS, Kbg. I always get irked when I hear people say "I'm no good with names" or something similar and I always say to myself that they are just not trying. But, damn, I am that person when it comes to TIPS.
Yeah, rising rates have been a killer

And I don’t understand how TIPS in funds have their principle adjusted for inflation — every six months as interest is paid, or when the individual TIPS mature

They do seem to be doing better than nominal funds of the same duration, but not as much better as I’d expect

Using short duration TIPS reduces interest rate risk — and currently yield over 1% above inflation in VGs short term TIPS fund
Earlier I'd stated that William Bernstein would be on my Mount Rushmore of Personal Finance.

Here are the "notes" I took from one of his books (2011?) regarding what he had to say about TIPS. I'm sure what he said then still applies as that is what you get from classic / timeless advice.



If the Social Security “annuity” does not provide enough coverage and you don’t want to purchase a conventional annuity, a Treasury Inflation Protected Securities (TIPS) ladder can serve much—but not totally—the same purpose as the commercial inflation-indexed annuity and allow the retiree to keep control of most of his or her nest egg in an investment vehicle that is almost perfectly safe.
A word or two about TIPS. They are surely one of the most peculiar assets in the investment world. They are a marvelous way of protecting one’s cash flow against inflation, but they do so only when held to maturity. Before then, they can prove quite risky, in large part because their secondary market is thin.

The message here is clear: When using TIPS to fund your retirement, do so with a ladder whose maturities at least approximately match your projected needs; do not do so with a TIPS mutual fund, which may suffer capital loss just when you need the funds the most. In addition, the costs of owning a ladder of individual TIPS purchased at auction is near zero (and actually is zero for some brokerage accounts), far cheaper than even the thriftiest mutual fund or ETF.

Each of the three vehicles/strategies mentioned—fixed annuities, deferring Social Security, and a TIPS ladder—has pros and cons.

Commercial inflation-indexed annuities can at least theoretically provide a safe lifetime flow of real income, but they are vulnerable to crisis-related and company-specific default. Purchasing annuities from several different companies mitigates the latter problem, but not the former. In addition, these annuities are not “actuarially fair.” That is, the companies that market them need to make a profit, and so they do not pay out the full actuarial amount to the beneficiaries. As we shall soon see, this actuarial unfairness comes at a high cost.

Deferring Social Security does provide a payout that is more than actuarially fair, and it is highly secure. But, unfortunately, it allows the “purchase” of only a relatively small amount of income stream, whose actual amount is dependent on a retiree’s work history.

A TIPS ladder, in contrast, is also highly secure and inflation protected, but it does not allow for risk pooling. Ideally, the retiree does not need the stream from the TIPS ladder until age 70 or so and still has enough assets to buy a full 30-year ladder sufficient to pay for retirement needs in each year. Left-over assets can be invested in the “risk portfolio” (RP). Few investors, however, will be able to completely take care of their living expenses to the outer limits of their potential survival, say, age 100 or so. Table 5 summarizes the advantages and disadvantages of these three different approaches to a secure retirement LMP.

The message here is clear: When using TIPS to fund your retirement, do so with a ladder whose maturities at least approximately match your projected needs; do not do so with a TIPS mutual fund, which may suffer capital loss just when you need the funds the most. In addition, the costs of owning a ladder of individual TIPS purchased at auction is near zero (and actually is zero for some brokerage accounts), far cheaper than even the thriftiest mutual fund or ETF.

Table 5.
Pros and Cons of Major Liability Matching Portfolio Strategies

Buy inflation-adjusted fixed annuity
Pros: Inflation-protected income stream for duration of one or joint lives

Cons: Default/failure, particularly in the event of systemic financial crisis. Adverse “adjustment” of inflation formula. Company profit motive detracts from actuarial fairness

Defer Social Security to age 70
Pros: Secure, inflation-protected income stream for duration of joint lives

Cons: Adverse “adjustment” of inflation formula. Benefit available to each retiree limited by work history

Buy TIPS ladder
Pros: Secure, inflation-protected income stream

Cons: Absence of risk pooling requires either a very long ladder or purchase of “longevity insurance.” Adverse “adjustment” of inflation formula

A TIPS ladder protects the retiree from a severe financial crisis in a way that commercial annuities cannot, and it comes fairly close to providing a lifetime income. Table 6 sets out the tradeoff between the risks of a commercial annuity and a TIPS ladder.

Which is worse, the risk of running out of money with TIPS at age 95 or the risk of a severe financial crisis or company failure that would crater the annuity income stream? Your guess is as good as mine. A reasonable person has at least three options in this situation: the TIPS ladder, the commercial annuity, or some combination of the two. Best of all would be to completely avoid this dilemma by being able to purchase at age 75 a supplementary 30-year rung that would take them to age 105 or to have the equivalent in risk-free assets to do so.

My opinion is that the first course, a simple 20-year TIPS ladder, is the best choice. It eliminates default risk, which I think is the most important consideration. The financial crisis of 2007–2009 occurred, in no small part, because of the systemic risk inherent in a financial market that is dominated by a few huge banks. Now, several years later, there are fewer still, and the resultant Dodd-Frank reform has been so watered down that it does little to diminish the likelihood or severity of the next financial crisis.

While we may well avoid another crisis, particularly one that might devastate the insurance industry, I would not want to bet my retirement on it with either an immediate annuity or a deferred annuity. The possibility of running out of money with my preferred choice, the TIPS ladder, should also concentrate Frank and his wife’s thinking on making some minor adjustments to their living standard. Were they to reduce their expenses by just $2,000 per year—from $56,000 to $54,000, they would have $418,000 left in their IRA at age 70. At TIPS yield and reinvestment rates of 0%, 1%, and 2%, an $18,000 burn rate would last them to ages 93.2, 96.4, and 101.3, respectively.

And just to reiterate, the success of all of these strategies hinges on deferring Social Security until 70. The only reason not to do so would be ill health and shortened life expectancy for both spouses.

The major remaining issue might be the potential need for high out-of-pocket medical expenses or long-term care, which is a major risk for both twins. Long-term care insurance, in particular, is expensive (up to several thousand dollars per year), is often unreliable, and carries very high deductibles. Faced with unexpectedly high losses from this line of coverage, insurance companies are bailing out of the field, and those that are left are rapidly raising their rates. We are likely not far from the day when, if you can afford long-term care insurance, you can probably afford to pay for long-term care on your own. Such is life in a country with a dysfunctional health-care system and an inadequate safety net.

This discussion, then, in no way mandates that all investors should immunize their retirement income with annuities, TIPS, or even a delay in Social Security draw until age 70. As we’ve already seen, health status, the absolute level of assets, personal preference, and the tax status of the nest egg all enter into the analysis. But this exercise does provide a rough rule of thumb. By age 70, the investor should have accumulated enough safe assets, including Treasury bills and notes and CDs, to fund, at a bare minimum, 20 years of the cash-flow needs remaining after Social Security and pension payments. An LMP of 25 years of living expenses would be even better. Further, with today’s historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.
Bernstein is one of the very best writers in the field, without a doubt. But as this piece demonstrates his clientele and target audience are the über rich-those who have in his famous phrase “ won the game and can stop playing.” Funding 25 years of living expenses with TIPS offering a 1.71% real return works fine if you have a few million to invest but for the rest of us……
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Re: TBills as "the best horse at the glue factory?"

Post by Cortopassi » Thu Sep 29, 2022 7:47 pm

That last comment by Kevin is where I am at too.

So I buy, say, 10 year Tips. With a sub 2% base rate. And inflation is non existent.

Is that not like having my money in a savings account paying 2% or so interest nowadays?
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Re: TBills as "the best horse at the glue factory?"

Post by vnatale » Thu Sep 29, 2022 8:25 pm

Kevin K. wrote:
Thu Sep 29, 2022 7:26 pm

vnatale wrote:
Thu Sep 29, 2022 6:30 pm

Further, with today’s historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.


Bernstein is one of the very best writers in the field, without a doubt. But as this piece demonstrates his clientele and target audience are the über rich-those who have in his famous phrase “ won the game and can stop playing.” Funding 25 years of living expenses with TIPS offering a 1.71% real return works fine if you have a few million to invest but for the rest of us……


He did say the above which applied then and which also applies now. Plus, he did say to buy a 20 to 25 year ladder of them. But, yes, he's speaking to those who have "won the game" and should no longer be taking needless risk (unless investing for heirs).
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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