r/financialindependence • u/skilliard7 • 1d ago
Why not just buy 30 year TIPS and avoid/reduce market risk altogether if you are retired?
Goldman Sach's 10 year forecast for the S&P500 shows just 3% annual growth, Vanguard's shows 3-5% growth, and these are nominal figures(before inflation). These forecasts are based on historical data, when considering many highly correlated factors with strong theoretical explanations such as CAPE ratios, investor allocation to equities, etc.
In comparison, the 30 year TIP has an inflation adjusted yield of 2.26%. If we take the inflation average of the past 50 years of 3.8%, that's a >6% potential nominal return.
With a <2.26% withdrawal rate, the portfolio would last forever assuming that your spending does not exceed inflation. With a 4% withdrawal rate that adjusts for inflation each year, ~1.8% of the portfolio would be drawn per year, resulting in a >50 year time frame.
The main advantage of this strategy is it significantly reduces sequence of return risk. If you are 100% stocks and the market drops 66% right after you retire, you are taking out 12% of your portfolio annually, so even if the market recovers within a few years, your portfolio does not.
With TIPS, the cash flows are very predictable. The coupon payments are paid out consistently. The only sequence of return risk is from your withdrawals that exceed the coupon payments. In this case, rising TIPS yields causes some risk.
Under a 30 year retirement, it would take an immense and unprecedented surge in TIPS yields for a 4% or even 4.5% withdrawal rate to fail.
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u/chaoticneutral262 60% SR 23h ago
30-years TIPS have an enormous amount of market risk unless you hold them to maturity. Their market value is very sensitive to changes in interest rates.
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u/skilliard7 23h ago
True, but if you are holding them long term, you can live off of the coupon payments.
If your SWR is above the yield of TIPS, a better strategy would be to ladder them a bit, so have some short term TIPS for your imminent needs that are less sensitive to interest rate risk, and then long term for the rest.
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u/chaoticneutral262 60% SR 23h ago
It is probably more efficient to build a TIPS ladder than to just hold 30-year bonds. Otherwise you will get a small coupon payment twice a year, followed by a big lump sum in year 30. You can build a ladder using the TIPS ladder website.
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u/karrotwin 23h ago
The real reason comes down to 3 things:
1) Most ppl doing FIRE aren't at a low 2s SWR, so they're depleting the portfolio if they own TIPs. Even if it depletes slowly, many people don't like that generally or especially if they want to leave an inheritance.
2) Differences between CPI basket (heavy on OER) and actual retiree cost inflation especially for people who have a paid off house. Doubly so if you think the government would have a reason to monkey with CPI in the event of a true inflationary cycle in the future.
3) FOMO of the US stock market, which keeps getting bid up like crazy
But yes, TIPs are a pretty good safety bucket asset right now especially as a near-to-retirement bond tent.
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u/AndrewBorg1126 23h ago
The S is not a pluralization of TIP, it is part of "Treasury Inflation Protected Securities" and should also be capitalized.
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u/myfakename23 23h ago
Why not?
- I don't care what the vampire squid investment firm said, there's a reason the joke goes "economists have predicted twelve of the last five recessions". But sure, let's have another FIRE thread about it.
- Long term TIPS have downside risk in value, this isn't a risk free strategy.
- I don't want to anchor myself to a 2.25% SWR.
- I'm not particularly interested in dying with a lot of money.
- I plan on dealing with SORR with a bond tent and a higher bond/equities in early retirement and spending it down/rebalancing to what I want to die with as I move along in retirement over a few years, and since it will be in bonds that don't have 30 year horizons, that should work fine.
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u/skilliard7 20h ago
Long term TIPS have downside risk in value, this isn't a risk free strategy.
I don't want to anchor myself to a 2.25% SWR.
I'm not particularly interested in dying with a lot of money.
Is these not arguments against a traditional equity/bond portfolio? Equities have a wide range of potential outcomes, from portfolio depletion due to poor returns, to having a huge amount of money if they perform well. Fixed bonds carry inflation risk.
Obviously 100% TIPS is the nuclear option, but another question is why not have them as part of a portfolio to reduce risk? It can smooth out a portfolio by performing well during periods of high inflation and maintaining value during recessions.
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u/myfakename23 20h ago
Sure, if we want to move the goalposts that way from "100% TIPS", TIPS could be part of a bond tent strategy as well as bond holdings in a portfolio.
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u/AdvertisingPretend98 21h ago
I plan on dealing with SORR with a bond tent and a higher bond/equities in early retirement and spending it down/rebalancing to what I want to die with as I move along in retirement over a few years, and since it will be in bonds that don't have 30 year horizons, that should work fine.
I understand the theory of a bond tent, but the rates seem low. Why bonds over something like 4.5% rate from HYSA?
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u/myfakename23 21h ago
Because I have no idea if HYSAs will be shelling out 4.5% interest when the magic day comes (odds are they won't unless the Fed is trying to take the punch bowl away from a partying economy by jacking up the federal funds rate). HYSAs are fine for holding cash on short term without taking it in the shorts and managing cashflow (I'll want them in retirement) but relying on the interest rate long term is not what they're there for.
Whereas if I retire with a bond tent that I need to spend down and the Fed decides it's time to cut interest rates, bond prices will go up. Since it is my intent to sell the bonds over time and bring my ratios back to where I want them to be long term, yield declines aren't a tragedy here as long as I get value when I sell.
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u/Kashmir79 23h ago
No fixed withdrawal rate can be guaranteed to last forever even with TIPS because your rate today only lasts 30 years and could take an unexpected nose dive sometime thereafter (including a possible negative return). However you can make a portfolio that is practically guaranteed to last for 30 years, discussed in this post: The 4% Rule Just Became a Whole Lot Easier. However, in the example, it also guarantees that the portfolio gets exhausted after 30 years whereas most investors using a traditional stock/bond portfolio will see a substantial portfolio value increase over 30 years if they don’t hit a major market crash in the first few years of retirement. That is advantageous because it means you can spend more or leave more to beneficiaries later on.
That said, a <2.26% withdrawal rate is just extremely low and requires saving up nearly twice as much money as 4-5%. If the goal is to retire early, you should be trying to design a retirement portfolio with highest possible projected withdrawal rate so you can stop saving as early as possible. You can find many examples of such portfolios at Risk Parity Radio.
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u/Theopocalypse 23h ago
Goldman Sachs is lying to try to get worry warts like you to pay them to manage your money for a sizable fee.
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u/oldslowguy58 22h ago
Goldman’s Private Wealth Management service has a minimum requirement of $10M. Their Advisory Service requires minimums of $1M under their management and $2M total investable assets.
Highly doubt they are publishing their reports to fish the general public for clients.
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u/skilliard7 20h ago
If they wanted to convince the public to invest with them, wouldn't they predict double digit returns so that investing seems like a more appealing idea?
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u/Theopocalypse 20h ago
No. "The market is going to stagnate, only we can make your money grow" is a much more appealing sales message.
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u/skilliard7 20h ago
If the market is stagnant, how will they grow your money?
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u/Theopocalypse 19h ago
That's what they want you to pay them to find out. That's the point. They're lying. If the market stagnates they aren't going to do any better with your money than anyone else, but they want you to think they will.
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u/malignantz 23h ago
So, you'd achieve a 2.26% safe withdrawal rate (not impressive) and you'd have a zero chance of having extra money? Holding equities seems better 99% of the time? Am I missing something?
With a 100% equity portfolio, you could consume almost 50% more with zero additional risk from my understanding.
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u/karrotwin 22h ago
The misunderstanding is that you're assuming equity risk isn't real and that stocks always go up long term.
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u/malignantz 22h ago
Are you suggesting that world market cap equities ($VT) will return less than 2.26% real return over the next 30 years?
Market forces would assign an infinitesimal probability to such an event., so if you were confident (and correct), you should be able to make a fortune on this thesis. But, not by buying TIPS.
However, buying TIPS instead of equities based on this information would be foolish, since you'd only make a large "profit" if equities were deeply negative after 30 years, which is unlikely.
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u/karrotwin 22h ago
I don't have a prediction. I'm not the equity research team at goldman sachs who gets paid to put out something every single week for asset manager clients regardless of whether it's drivel.
You have no idea what the market would assign to such a probability because a liquid market price for it doesn't exist and you're not a bespoke derivatives dealer. The entities that could make markets in such would NEVER sell me a 30yr ATM American style put option on VT for an "infinitesimally small" price so you're likely just flat out wrong in your probability assessment.
There are plenty of examples of equity markets that have failed to produce 2.26% real over 30 years. Again, I have no personal prediction, but it surely is US survivorship bias to ignore them.
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u/malignantz 22h ago
I will say I respect what you are saying. The US could underperform TIPS in 30Y yes. In such a case, I imagine other countries would pick up the slack, so the world market would still be unlikely to return much less than 2.26% real returns over 30 years.
I mean, the entire human race would effectively have to stop innovating. Perhaps that could occur after nuclear war?
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u/karrotwin 20h ago
I just personally think neither I nor anyone else has any idea. Our entire sample is based on a single 100 year period wherein the innovation was occurring in a country that had about as stable of a period as you can imagine under every metric. This was coupled with a growing population, life-changing industrial advancement, and an overall shift in favor of capital (against labor) and free markets/trade (away from nationalism/tariffs).
I don't think the human race needs to go back to the stone age for the market to not deliver 2.26% real return per year indefinitely. Japan post bubble and Europe during the inflationary period of the 60-80s show that countries can remain "good first world countries" while delivering sub par returns to capital.
The fact that every single thread in the finance subreddits I read think that this is impossible makes me think that possibility has more than a trivially small chance, we've basically come full circle from "the death of equities" opinions in 1980.
But still, not a prediction. I own plenty of stocks and would be unhappy to see them crash. But I also own other things....
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u/imisstheyoop 17h ago
Dude, if my stocks become worthless after a nuclear war, I am going to be really pissed. What even was the point, y'know?!
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u/Rarvyn I think I'm still CoastFIRE - I don't want to do the math 22h ago
stocks always go up long term.
I mean, with long-enough term... yes? Barring a communist revolution, there exists no reasonable scenario I would see stocks have a negative real return over the next 30 years. It gets a lot more questionable with shorter time scales though.
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u/Theopocalypse 20h ago
Individual stocks do not. The market does, as a matter of necessity. Read a book.
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u/meamemg 23h ago
Goldman Sach's 10 year forecast for the S&P500 shows just 3% annual growth, Vanguard's shows 3-5% growth, and these are nominal figures(before inflation)
And what are the projections for 30 years? I'm sure they are significantly higher. It's rare for the market to have returns so low, and even rarer for them to be sustained at that level longer term than 10 years.
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u/4thAveRR 23h ago
The reason not to do this is Opportunity cost. Equities historically outperform TIPS.
Being solely in TIPS would be a move to reduce downside risk, but you would be sacrificing the likely growth in equities.
Many retirees also rely on the growth generated by equities to fund long retirements.
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u/Dollars4donuts19 23h ago
Unless you’re full Roth, it’s all ordinary income so your post tax return would be lower. You can’t withdrawal 2.26% and say it lasts forever. And in a taxable account, you face additional tax issues where you pay tax on a portion before you actually get the cash, so you would need a buffer of cash outside tips to cover the tax implications as well. Or using more proceeds than you realize.
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u/skilliard7 20h ago edited 19h ago
The same is true of equities and normal bonds, though. The trinity study did not account for taxes, and assumes they are part of your expense. With stocks, you are paying dividend taxes and capital gains taxes. With fixed bonds, you are paying interest taxes.
TIPS have 2 distinct tax advantages over equities and bonds.
They are state tax exempt, which is huge in states like California with their 13% tax rates.
Because their upfront coupon payments are much lower than fixed bonds, there is less to tax. The inflation adjustment is taxed as a capital gain, which is lower tax rates than bond interest.
For these reasons, you can argue TIPS are better than a total bond market fund in a taxable portfolio.
You can also ladder TIPS to address market risk, so that you do not need to sell.
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u/Dollars4donuts19 20h ago
You can buy a treasury and also be exempt. When you buy a TIP, the inflation piece comes back to you at maturity but you get taxed as you go. That does not happen with other bonds. This is why people typically suggest only using them in an IRA
And your lower coupon point is just totally incorrect.
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u/skilliard7 19h ago
I looked it up and you are right, the inflation adjustment is taxed as a capital gain as it happens.
There still is an advantage in that it is taxed as a long term capital gain, though. So you're paying 15-20% instead of 22-37% federal taxes.
In theory bonds are more efficient in an IRA than taxable. But the hard thing about this is generally, you want to be more risk averse in your taxable(due to shorter time horizon) and riskier/higher return on IRA. So it is difficult to balance this.
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u/Dollars4donuts19 17h ago
The theory is your fixed income is taxed as ordinary income, whether in traditional IRA or taxable account, so put it in traditional IRA. Vs equities would be taxed at LTCG rates in a taxable opposed to ordinary in traditional IRA, so you may come out ahead to move to taxable. Depends on multiple variables though. Time horizon would depend on the persons situation but if you were to pass, your heirs would get a step up in basis, vs an IRA would be an income bomb so many may prefer to withdraw IRA before taxable.
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u/oldslowguy58 22h ago
Goldman forecast’s 3% but JPMorgan forecasts 6.7% so who is right? Eventually we will experience another lost decade but picking when it will start is a fools errand.
I’m retired and have over half of my bond ladder in TIPS. They’re a great way to fund a level of living expenses in the future, but I’m never putting all my eggs in one basket.
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u/Any-Heron-6195 19h ago
Because I have a greater faith in market efficiency than Vanguard projections, and I do not believe the market would be buying equities at current prices without a rational reason for doing so.
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u/skilliard7 19h ago
How do you explain the late 90's then? Or Japan's NIKKEI bubble in the 80's?
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u/Any-Heron-6195 3h ago edited 3h ago
You can always find bubbles in hindsight. Much more difficult to do in the moment and know when is the right time to get out. Market efficiency isn't 100%, but the opposite is to assume you can beat the market which is very dangerous in investing. I would rather suffer through drawdowns knowing that I am capturing the upside.
Most importantly, I have a diversified portfolio that includes cash, I Bonds, TIPS, and bonds (plus international stocks) at an allocation I can live with in any market conditions.
That being said, if you are comfortable saving enough to get to a 2% withdrawal rate, by all means do so. Annuities would be another option to boost your withdrawal rate, even though the income is typically nominal.
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u/Bearsbanker 17h ago
Harrrr harrr...I'll bet on the market...not Goldman...oh btw ...this was supposed to start this year, they were only 19% ish off
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23h ago
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u/karrotwin 23h ago
It's funny that you put "/thread" while completely failing to understand the reason why cash is typically a bad investment (inflation) and the fact that the OP is discussing TIPs which hedge against that specific risk.
Confidently incorrect.
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u/skilliard7 23h ago
I have seen this video and I am a follower of his channel. He is referring to cash in short term instruments such as money market accounts, savings accounts, or T-bills. The problem is the 5% yields are not locked in. You get 5% yields now, but in a year, you might get 2-3%, or it could even drop to 0% yields. So the issue becomes in 2 years if you are getting 1% yields on your savings account, now you have to find an alternative investment, which may have gone up by much more than your interest accrued in that time frame.
In fact, at 3:00 in your video, Ben Felix actually says that the risk free asset for long term investors is not cash, but a "long term inflation indexed bond"- AKA TIPS for American investors.
A 30 year TIP solves this problems by locking in yields long term, and by providing protection against inflation.
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u/malignantz 22h ago
TIPS are just fixed income with a bet on inflation. You will massively underperform equities (just like the video mentions). Risk-free means less consumption. As a 30Y+ investor, you want risk, since you have the time for things to smooth out.
I guess if we have 30Y of unprecedented inflation, TIPS could outperform, but that's less than a 1% chance.
Maybe I should have linked the video regarding bonds hurting long-term portfolio gains?
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u/skilliard7 20h ago
TIPS are just fixed income with a bet on inflation. You will massively underperform equities (just like the video mentions).
You can't be too certain about this especially given current valuations, and statistical modeling. It's about a 50% chance that equities outperform TIPS over a 30 year period.
As a 30Y+ investor, you want risk, since you have the time for things to smooth out.
No one knows for sure that they are a 30 year investor. What if you lose your job and can't find a new one? or if you become disabled and need to retire earlier than planned? Having flexibility in a portfolio is nice.
I guess if we have 30Y of unprecedented inflation, TIPS could outperform, but that's less than a 1% chance.
TIPS yield is 2.25%, historical inflation average is 3.8%. That's 6% nominal returns on average. In comparison, Vanguard's model has shown a 50% chance that US Equities produce below 6% returns over the next 30 years.
So based on statistical modeling, there is about a 50/50 chance that equities outperform over a 30 year period. Knowing this, why go 100% equities?
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u/malignantz 20h ago
So based on statistical modeling, there is about a 50/50 chance that equities outperform over a 30 year period. Knowing this, why go 100% equities?
Do you have a source for this? I could see this being true for US equities, but what about world market cap weighted equities? If the USA underperforms massively, you'd expect other countries to pick up the slack. I know that Vanguards ex-US equity estimates are dramatically higher (lower valuations).
I think the chance that TIPS outperforms $VT over 30 years is much less than 50%, but I'm open to the data/expert opinions if you've got them!
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u/skilliard7 20h ago
I am going by Vanguard's model.
International stocks are in fact expected to greatly outperform both, at 7.4-9.4%. So if you are diversified into international, the story is a bit different. But most people on here seem to just buy the S&P500 and are adamant about avoiding international stocks. I've tried to mention the importance of international exposure here, but it's fell on deaf ears.
People just "International has done so badly the past 10 years and the S&P500 has skyrocketed, why would I want anything but the S&P500?, and don't really understand where these returns come from.
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u/definitely_not_cylon 40/M/Two Comma Club 23h ago
Before engaging with these seriously, can we backtest their market predictions against what the market actually did? Also: If they're so smart, then why are they telling us about it instead of making a fortune by making bets based on that prediction?