A viable alternative to the PP - or any other conservative portfolio?

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Kevin K.
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A viable alternative to the PP - or any other conservative portfolio?

Post by Kevin K. » Tue Oct 25, 2022 10:14 am

From the article:

"I built a 4.36% real (inflation-adjusted) systematic withdrawal portfolio using a 30-Year TIPS ladder.

In June, I wrote about safe spend rates and concluded that a balanced portfolio could only support a 3.3% real withdrawal rate for a 30 year period with a 90% chance of success. There are differing opinions on what a safe spend rate should be. For instance, Mark Hulbert recently wrote in Barron’s that a 1.9% withdrawal is more appropriate.

At the suggestion of Bob Huebscher, the editor of this publication, I decided to try something different. I built a strategy backed by the U.S. government with Treasury Inflation Protected Securities (TIPS) that supports a reasonably level real 4.3% withdrawal rate for 30 years. It’s not perfect, but it was good enough for me to put my money behind it. I implemented such a portfolio with just under $100,000 of my own family’s nest egg."

https://www.advisorperspectives.com/art ... 6692148692
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Kbg » Tue Oct 25, 2022 11:04 am

It indeed is now. There's some discussion over at BH on implementation details if you want to dig deeper.
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Cortopassi
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Cortopassi » Tue Oct 25, 2022 3:54 pm

I looked at this, excited...then I see that the 4.36% withdrawal rate includes principal, so the end result after 30 years is you have nothing left.

If that's the basis, then I'd rather do an immediate annuity. For the same 100k, where he pulls out $4300 a year for 30 years, an SPIA will allow me to pull out $5568 a year, for life, for both me and my wife's lifetimes.

It is not inflation adjusted, so it is not apples to apples, but if I am looking to do something like this, I don't want to be 85, going, oh, crap, I ran out of money.
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Mark Leavy » Tue Oct 25, 2022 4:06 pm

If I read the article correctly, his example generates 4.36% real cash flow for 30 years and then his principal (upon bond maturity) also increases by almost 30%. Effectively adding an additional 1.83% to the 4.36%, yielding close to 6% real return over the 30 year period.

To the extent that you trust TIPS to work as advertised, these returns are locked in and guaranteed. Both the cash flow and the return of principal. Immune to the vagaries of the markets, inflation and the strength of the dollar.

Seems worth taking a closer look at - at least to figure out where the systemic risks actually are.

This is the paragraph that made me think the cash flow returns did not include drawing down the principal.
I spent $98,549 to produce an average cash flow of $4,296 annually, which equates to a 4.36% real average annual withdrawal rate. I’ll get back a total of $128,882 in today’s dollars or a real annualized return of 1.83%.
The article was a bit ambiguous though, and I haven't done my own math yet. So who knows?

EDIT: On closer reading, I believe that this strategy includes drawing down the principal to zero.
Last edited by Mark Leavy on Tue Oct 25, 2022 5:33 pm, edited 1 time in total.
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Kevin K. » Tue Oct 25, 2022 4:32 pm

Cortopassi wrote:
Tue Oct 25, 2022 3:54 pm
I looked at this, excited...then I see that the 4.36% withdrawal rate includes principal, so the end result after 30 years is you have nothing left.

If that's the basis, then I'd rather do an immediate annuity. For the same 100k, where he pulls out $4300 a year for 30 years, an SPIA will allow me to pull out $5568 a year, for life, for both me and my wife's lifetimes.

It is not inflation adjusted, so it is not apples to apples, but if I am looking to do something like this, I don't want to be 85, going, oh, crap, I ran out of money.
The thing is, Mr. Roth is getting 4.36 REAL return for 30 years, guaranteed by the full faith and credit of the U.S. government. As he says at the beginning, many savvy folks are saying it's quite possible that a typical balanced (60/40) stock:bond portfolio won't equal those returns over the next decade or two, given still-high valuations for both equities and bonds, raging inflation and so on. According to Portfolio Charts the real return of the PP has averaged 4.9% since 1970, but that includes a ~40 year period of tailwinds for bonds in particular as well as equities that may never happen again, and certainly seems unlikely in the near term.

It seems to me a defensive-minded investor could do a lot worse than to use a 30 year TIPS ladder like Roth constructed, in conjunction with actual or anticipated Social Security and/or pension payments, to create an income stream sufficient to cover essential expenses. Ideally of course all of the TIPS are held in tax-deferred accounts. The remainder of one's portfolio could then be invested in whatever amount of working cash is needed (in, say, a 13-26 week TBill ladder) and the rest in something dead simple like VT or a blend (anywhere from 75:25 to 60:40) of VTI and VXUS.
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Cortopassi » Tue Oct 25, 2022 5:17 pm

I am not at all saying it is a bad idea, I just read it (and downloaded and played with the spreadsheet a bit) and it is still not 100% clear to me if there is any value left after 30 years, or he will be spending down principal as well?

"While this strategy isn’t perfect, it produced a safe 4.3% annualized real withdrawal rate for 30 years with no risk (except for the bonds between 2033 and 2039). Think of it as a 30-year period-certain inflation-adjusted portfolio. One large difference between this strategy and the 3.3% real withdrawal rate from a balanced portfolio is that there is a 90% probability that the latter will leave money after 30 years. I wouldn’t rely entirely on a TIPS ladder even though it’s inflation protected and backed by the U.S. government."

The bolded sentence makes it seem like this TIPs strategy leaves nothing after 30 years?
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Mark Leavy » Tue Oct 25, 2022 5:28 pm

I'm starting to think Corto's interpretation is correct. Primarily because the author refers to real withdrawal rate instead of real returns.

Also...
At the time, 30-year TIPS had a real 1.73% yield. I plugged it into a spreadsheet and got a 4.23% real safe withdrawal rate for 30 years before it was exhausted.
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Kevin K. » Tue Oct 25, 2022 5:43 pm

Cortopassi wrote:
Tue Oct 25, 2022 5:17 pm
I am not at all saying it is a bad idea, I just read it (and downloaded and played with the spreadsheet a bit) and it is still not 100% clear to me if there is any value left after 30 years, or he will be spending down principal as well?

"While this strategy isn’t perfect, it produced a safe 4.3% annualized real withdrawal rate for 30 years with no risk (except for the bonds between 2033 and 2039). Think of it as a 30-year period-certain inflation-adjusted portfolio. One large difference between this strategy and the 3.3% real withdrawal rate from a balanced portfolio is that there is a 90% probability that the latter will leave money after 30 years. I wouldn’t rely entirely on a TIPS ladder even though it’s inflation protected and backed by the U.S. government."

The bolded sentence makes it seem like this TIPs strategy leaves nothing after 30 years?
Yes I think you're right:nothing left after 30 years with the TIPS. As he says, excellent chance that there's money leftover from the 60:40 - but also an excellent chance that you'd run out of money entirely well before 30 years are up if taking an inflation-adjusted ~4% a year from the latter. That's why Roth isn't going all-in, and why I wondered if a sort of modified Bogleheads Three-Fund strategy with the 30 year TIPS ladder taking the place of total bond market or IT Treasuries with globally-diversified equities for long-term growth might not be a really good variable portfolio.

Just as a hypothetical example: a couple at or near retirement age with $1M in assets, half in IRA(s), half in taxable. Put the entire 500K IRA balance in the TIPS ladder, giving one 21K a year in guaranteed baseline income to supplement Social Security income of 30K - and say that conveniently this couple lives in a paid-off house with modest tastes and can live comfortably on 50K a year to cover all essential expenses. Put 100K in the taxable account in some combination of short-term TBills and a Treasury MM fund, put the remaining 400K in either all VT or a blend of VTI and VXUS. Guaranteed income for essentials, cash cushion, equities for long term growth providing some mixture of play money and legacy. Just thinking out loud here. Chances I've missed something crucial are as always quite good.

A recent comment on the Roth article on Bogleheads sums things up better than I could ever hope to:

“The point of Allan's article, as I read it: when TIPS yields are high enough, you can get a government guaranteed real SWR of 4.0% or more. Whenever you read of a lower SWR, using a balanced portfolio and based on an extended historical inquiry, there is no rational reason to prefer that portfolio to a TIPS ladder ... unless you are willing to risk running out of money in the worst case in order to leave a legacy for your heirs in the best case.”
Last edited by Kevin K. on Tue Oct 25, 2022 10:50 pm, edited 1 time in total.
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Re: A viable alternative to the PP - or any other conservative portfolio?

Post by Cortopassi » Tue Oct 25, 2022 6:31 pm

I am 55, want to be done working, at least having to work, by 60.

Plan on SS at 70, wife starting it at 65, then at 70 she takes the spousal benefit, that's the optimum arrangement according to a couple calculator websites.

I plan on that being most of my "inflation" protected income.

Between 60 and 70, my thoughts have been:

--30 to 50% of our net worth into a SPIA annuity. No inflation adjustment. But this would easily cover our normal living expenses, and continues until both of us die (knock on wood, this part is important, both of us come from long lived families).
--50 to 70% is now "freed" up to be more risky than I would normally ever want to be as I get older, because we will have a floor from the annuity and eventually SS.

I don't know if this is right for everyone, but it feels right for me right now.

In the meantime, if 30 year bonds get to the 5-6% range over the next 6 months, I plan on taking advantage of that and making my own annuity.

Right now, I have been nearly 100% out of LT bonds and stocks since Jan 2022. I am mainly in cash, i-bonds, 3 month T-bills, an inflation protected fund (which I wish I would have looked at harder...great quarterly dividend, but the NAV has gotten crushed), and physical gold.

I have dipped very, very slightly back into some dividend paying ETFs when the market drops, but my stock % is still only 2.5%.
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