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My recently widowed 90 year old mother-in-law asked me to take a look at her investments, which she has zero interest in managing.

My initial impression is that her portfolio is much too aggressive, with about 85% in stocks. It is more of a "get-rich" portfolio than a "stay-rich" portfolio. Considering her age and the market being so richly valued, I'm not so sure that she needs much exposure to stocks.

So the question is what should a nonagenarian, whose main goal is preservation of capital, be invested in?

Roughly half her portfolio is in a traditional IRA, where capital gains aren't a factor. If it were my portfolio I might have the IRA in TIPS.

Opinions?

So the question is what should a nonagenarian, whose main goal is preservation of capital, be invested in?

In addition to TIPS, I'd look hard at 30-year bonds that were let 20-ish years ago when interest rates were above 5% and at preferred stocks with coupons (not yield) above 5%-6% and call dates at least 3 years away. The 10-ish years left to maturity of the bonds roughly match MIL's likely maximum life left, and an annual ladder of bonds maturing at one or two or three year intervals should be buildable. The preferreds will get called and need replacement, and that's some work, but the work tends to be bursty.

Also a heads up: MIL's IRA is no protection from being over-aggressive in her portfolio. The concern of a market deep downturn applies to IRAs as much as it does to taxable portfolios (and to Roth accounts, come to that), and at 90, your MIL has no time left to recover from a deep drop.

OT, but related: "recently widowed:" Has your MIL never been interested in her investments, or is she starting to check out?

Eric Hines

My initial impression is that her portfolio is much too aggressive, with about 85% in stocks. It is more of a "get-rich" portfolio than a "stay-rich" portfolio. Considering her age and the market being so richly valued, I'm not so sure that she needs much exposure to stocks.

1) Does she need money from the portfolio? Anything more than a small amount?
2) Is her portfolio invested for herself or for her heirs? I would submit that at any age above about 80, a person is basically investing for the people (and charities) who will inherit.

At 90 years old, she is not in the "stay-anything" category.
The life expectancy of a 90-year-old woman is approximately 4 to 5 more years.

You didn't even hint at the size of her portfolio. Reading between the lines, she doesn't need much of any ff the equities to live on, her SS, pension, etc. plus maybe the other 15% gives her all the income she needs.

How long would her portfolio last before it runs out if she withdrew her needed amount from the 15% that isn't in equities? I bet it's a lot more that 4-5 years. How long for withdrawals from the 100% if the equities lost 50% and stayed there?


When we were discussing retirement my wife said, "If we have a million dollars and put it all into a savings account, we could take out $50,000 a year for 20 years, right?" (Actually, wrong. At 3% APR it would last 30 years.)

Do that math and see where she stands.


Roughly half her portfolio is in a traditional IRA, where capital gains aren't a factor.

Which means that the other half is in a taxable account, right? Her heirs will get those equities at a stepped-up basis. chef's kiss.


If it were my portfolio I might have the IRA in TIPS.
Ugh. She is not going to be living through much inflation in 4-5 years, so what's the point?
TIPS rates today are approximately 1.80% for a 10-year TIPS
Putting a 90 year old in TIPS today is financial malpractice.
If you insist, put it in SGOV instead. 4.35% yield. Or SPAXX or FLRN etc.

An IRA should be invested in equities.

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So the question is what should a nonagenarian, whose main goal is preservation of capital, be invested in?

Hah! I learned a new word today. "nonagenarian" Cool.

Why is her main goal preservation of capital? What's the point?
I would think that a nonagenarian's investment goal should be preservation of income. She is not going to live long enough for the capital to go much of anywhere.

She really needs to consider the lifetime of the PORTFOLIO and not of the lifetime of HERSELF. The portfolo has a longer remaining lifetime than she does. The next few years in her hands, and possibly decades in the hand of her heirs.

I would do some mentally accounting. The cash/fixed-income portion (15%) of the account is for me. The equity portion (85%) is for my heirs....and for me if I'm still alive in 10 years.

Adjust the asset allocation accordingly. The equities shouldn't be in individual stocks, should be in a whole market fund like SPY or VTI.

1) Does she need money from the portfolio? Anything more than a small amount?

2) Is her portfolio invested for herself or for her heirs? I would submit that at any age above about 80, a person is basically investing for the people (and charities) who will inherit.

She doesn't need much from it today. She is still in independent living at her retirement community.

But one never knows if they will require expensive care and for how long. Her portfolio should be more than sufficient to cover whatever is needed for her care. But a 30% or more market correction might jeopardize that -- that's why I think her stocks allocation is too high.

I agree with Ray. She certainly doesn't need long-term growth. If she makes it another 10 years, she's well above average. Not trying to be a downer, just being realistic.

There are tax considerations, but I would consider moving most of it to CDs. Ladder them every few months. It's very safe, provides predictable access to funds, and doesn't have a 30 year time horizon (which would make her the longest-lived human ever if she saw that to maturity). And it's easy to manage.

The late husband probably invested like he always invested, even when he didn't need to "get more rich" anymore. I suspect I might do the same thing. I'm comfortable with my style, and would not likely change it much. I have a larger cash cushion than normal since I retired, but I still own the same equities (LTBH). Changing my style would involve taxable events that I'm trying to avoid (though some of those wouldn't be relevant to a nonagenarian, like ACA tax credits).

Without knowing specific details, my general thoughts would be to keep a large-ish cash cushion to cover unexpected immediate events, and ladder a bunch of CDs to provide predictable access to additional funds when needed (and if not needed, renew the maturing CD).

And, if she's able, spend some money on herself. Take a trip. Whatever. I encouraged my mom to do that, but she really didn't. And then the dementia set it, and it was too late. I didn't need the money she left me, and would rather she have used to for herself while she could.

The late husband probably invested like he always invested, even when he didn't need to "get more rich" anymore. I suspect I might do the same thing.

Several years ago I put a chunk of money with a private manager who had a good screen strategy. (Oh my! My records show that was in 2011.)

In interviewing him and going over our portolio & financial position with him (we retired in 2006), he said "You don't really need to be in any investments, you've got more than enough assets and income to live well for the rest of your life."

Our answer was "Yes we do have enough. I'm just running up the score."
Nothing wrong with that if you have a solid base.

This is related to what I said about at some point you are really investing for your heirs. Although my wife once said that she wasn't entirely comfortable with the idea that each of our kids could get $1 or $2 million when we sod off. That much money all at once has ruined a lot of people.

The equity portion (85%) is for my heirs....and for me if I'm still alive in 10 years.

And since much of it is in a TIRA, perhaps consider Roth Conversions to make it less painful for an heir to inherit, unless of course it's going to a charity that won't get taxed.

IP

So the question is what should a nonagenarian, whose main goal is preservation of capital, be invested in?

This is not the only question for a 90 year old. See below.

Roughly half her portfolio is in a traditional IRA, where capital gains aren't a factor.

Hmmm, immediate capital gains are not a factor, so anything within that account can be traded at will. However the IRA after death doesn't benefit from a step up in basis and whoever inherits it will take distributions over 10 years (I think, or maybe lifetime?) and pay taxes on those distributions.

If it were my portfolio I might have the IRA in TIPS.

This is indeed an option.

BUT, beware, do NOT sell the stuff in the taxable account and incur needless capital gains taxes. I had a distant relative, that at age 92 "changed brokers" and the new broker sold everything and incurred capital gains of several million, and then reinvested all the money in load funds where he received quite hefty fees ("kickbacks"). At the time, early 80s, the capital gains tax rate was 28%, so a huge tax bill was incurred. Add to that, the front-end loads of 5+%, and a lot of that money evaporated needlessly. Since I wasn't an heir, it didn't affect me at all, but she died less than a year after those transactions, and whoever inherited ended up receiving a lot less.

Perhaps the best thing to do is to convert part of the IRA to a Roth IRA each year to use up the lower brackets if possible.

Regarding taxes on IRA money I guess there are different ways to view it. Anyone who inherits it will have to move it out of the IRA over 10 years and it will be treated as income. If an elderly person wanted to and can afford to do so, they could pull it out and pay taxes on it. Essentially doing the beneficiary a favor and if invested in stocks then you get the step up basis.

Personally I always view any inheritance as a very generous gift and don't mind paying taxes on it but I know parents and grandparents who can afford it, and unfortunately some who maybe can't, will go out of their way to be generous. And sadly some will take advantage of seniors.

I don't expect to be around at 90 so this will end up being an issue for my wife and she is overly generous.


Rich

But one never knows if they will require expensive care and for how long.

Jim has posted some interesting suggestions regarding using annuities late in life. Here are couple of recent examples that have made me think more about their usefulness in certain situations.

Post #6682 by mungofitch on the Berkshire Hathaway board

Post #696 by mungofitch on the Retirement Investing board

I like to use questions like yours to force myself to think about what I might do, or want my spouse to do, in a similar situation. Please don't take any of this as advice. This is just my selfish rambling as we are barely halfway towards 90.

If me or my spouse are 90, I will certainly feel like we have won the game of life. My spouse, like your mother-in-law, would have zero interest in managing the funds. I think my advice to my spouse, if she were to reach 90 without me, would be to take as much risk off the table as she can and just enjoy her time. I looked at annuity payout estimates for a 90yr old female and they are currently 18.75% of the purchase amount based on the calculator I found. For every $100k annuitized she would receive $18,750 a year for the rest of her life. If the portfolio at age 90 were large enough that my wife could take a portion and earn 18.75% to cover all potential expenses, and leave the rest to do what it may for heirs, it seems that would feel like a wonderful win.

So the next question would likely be, how much should be annuitized? I have a feeling my spouse's spending habits, even at 90, might be greater than your MIL :) . I might tell her to annuitize enough to cover her current spending needs plus maybe 10-15% to cover future inflation for the next 5 years.
For round numbers let's say she needs $10k a month at age 90 (yes that probably seems like a lot but who knows). Increase that 10% to offset about 5yrs of inflation for life expectancy (getting a little morbid) and we have $11k a month needed from an annuity, which the calculator says would require $704,000 for a 90yr old female. AI says long term nursing home care currently runs about $120k/yr (i have no idea if that's accurate) but it would seem that amount should take a lot of risk off for any long term care needs too. It could require selling up to $1M or more of assets to yield an after tax $700k to fund the annuity.

Of course there are social security and pensions one should consider as well but i think the above is at least some reference for what may be possible. I realize this is quite late as a response. I draft my posts outside of shrewdm and when I went to respond to something else today I realized I never posted this. I guess life got in the way.

Jeff

I think my advice to my spouse, if she were to reach 90 without me, would be to take as much risk off the table as she can and just enjoy her time.

Unfortunately it isn't so simple in most cases. First off, I think you are referring to "risk" here as "possibility of loss due to investments declining". If that's the case, when you are 90, the decisions are difficult. Because then you are 90, you are usually close to death, maybe a year, maybe 5 years, maybe even 10+ years, but not much more than that. That means that you are close to the point of "capital gains step up" (which occurs AT death, in the USA). So getting back to "risk" ....

It could require selling up to $1M or more of assets to yield an after tax $700k to fund the annuity.

What was the risk before selling? Perhaps that the investments decline by 30% or so? And sure it is possible that it would happen, but it is also possible that those investments recover some of the lost 30%, even if you only have 1, 5, or 10 years left for them to do so. BUT, when you sell that $1M, and pay the $300k in taxes, that money, that 30% is lost forever ... it is never coming back. So in essence you trade a potential risk (investment decline) for a definitely realized risk (taxes). As far as managing investments, in general, it's probably best to have arranged (from age 50, 60, 70, etc) at least the bulk of your investments to require little management. That's very important because as we get older, we definitely decline, our brains decline somewhat in most cases, and managing investments gets more and more difficult with time.

That said, I think annuitization of some money is often a useful tool for people with longevity in their family. And if you do indeed have a good longevity probability then the planning for annuitization should begin long before age 90. I wonder if there are insurance instruments out there that have a smaller principal payment up front, and begin their annuitization at age 80 or even 90? I just checked one of those online calculators (https://www.schwab.com/annuities/fixed-income-annu...) and it says that if you are 60 today and invest a one-time $100,000 in an annuity, you will receive about $3600 a month beginning at age 80. So $11k a month would cost about $305,000 at age 60. And now I plugged in 90, and $100,000 at age 60 turns into about $10,400
a month beginning at age 90. That's pretty good longevity insurance!

Keep in mind the devaluation resulting from 30 years of inflation (from age 60 to age 90). Assuming an average inflation rate of 3% a year, that future payment of $10,400 is worth $4285 in today’s dollars.

Conversely, if you kept the $100,000 in an investment that only earned 3% a year, it’d be worth $243,000 30 years later.

That said, I think annuitization of some money is often a useful tool for people with longevity in their family. And if you do indeed have a good longevity probability then the planning for annuitization should begin long before age 90. I wonder if there are insurance instruments out there that have a smaller principal payment up front, and begin their annuitization at age 80 or even 90? I just checked one of those online calculators (https://www.schwab.com/annuities/fixed-income-annu...) and it says that if you are 60 today and invest a one-time $100,000 in an annuity, you will receive about $3600 a month beginning at age 80.

On the first comment, a likely better observation is that annuity makes a lot of sense if you're already old. The internal rate of return is effectively negative for most annuities. If you're going to have one for a long time, the rate of return within one's investment matters. If you're already 90, or even 85, the advantages of the "payments for life" portion of the deal likely far outweigh whether the annuity is 20% overvalued relative to an actuarially fair one. In short, you won't live long enough for the difference between a good investment rate and a bad investment rate to matter.

The corollary is that buying an annuity when you *aren't* pretty old (say 85+??) is a really bad deal, financially. It might make very good sense for other reasons, but annuities are spectacularly bad investments in terms of a chance of getting more than you put in. You'd typically have to outlive your life expectancy by 10-20 years to merely break even in real terms, let alone having had any return on your capital.

But as a result of that, to your second point, buying a deferred annuity isn't usually a good idea. Much better is to buy TIPS with a term ending when you want the annuity payments to start, then use the capital when the TIPS mature to buy an immediate annuity. The advantages are many: you get very much more income per month, as you've had a positive real return rather than a negative one during those years. You are inflation protected for the intervening years, and fully inflation protected annuities basically don't exist. If you die before that target date, the TIPS are in the hands of your estate instead of the insurance company. You can change your mind and switch to annuity sooner (or later) if you like. Or you could do something else with the money. Or half and half. If you get a "one year to live" diagnosis, you likely want to spend it or give it away.

For the original poster, an immediate annuity would seem to make the most sense. It is unlikely they will live long enough for inflation to be a main concern, with a life expectancy if healthy of under 5 years. But if it's a concern, I'd put great majority of the money in an immediate annuity and the rest in a TIPS-for-a-few-years-then-immediate-annuity strategy above, so the monthly income jumps upwards after a few years. This might be useful less for inflation protection than in the case of concern of a big step-up in expenses when moving into full care situation; simply switch the held back portion from TIPS to annuity on that date. They are liquid.

Jim

But as a result of that, to your second point, buying a deferred annuity isn't usually a good ida couple ea. Much better is to buy TIPS with a term ending when you want the annuity payments to start, then use the capital when the TIPS mature to buy an immediate annuity. The advantages are many: you get very much more income per month, as you've had a positive real return rather than a negative one during those years. You are inflation protected for the intervening years, and fully inflation protected annuities basically don't exist. If you die before that target date, the TIPS are in the hands of your estate instead of the insurance company. You can change your mind and switch to annuity sooner (or later) if you like. Or you could do something else with the money. Or half and half. If you get a "one year to live" diagnosis, you likely want to spend it or g
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JIm, do you mean better to buy tips Ladder or just tips a certain year out.
We are a couple 85 years old no kids.

JIm, do you mean better to buy tips Ladder or just tips a certain year out.
We are a couple 85 years old no kids.

A TIPS ladder is a fine way to turn capital into income with no inflation risk. But it doesn't by itself address the issue of longevity risk: you might live 2 years, or 20+ years. What length ladder do you choose?

My suggestion was in the context of how to make an annuity work better, with a focus on longevity risk. i.e., avoiding being both unusually old and unusually broke at the same time.

If you don't need income from a given block of capital till (say) 5 years from now, you have several choices. One of them is to buy a deferred annuity. Another would be to buy 5 year TIPS, and buy an immediate annuity when it matures. My contention is that the second one is a very much better choice.

Now, this could be chopped into chunks. Maybe you want some income to kick in 3 years from now, and some 6 years from now, and some 10 years from now, for some reason*. In that case you might use that strategy in three chunks, with 3- 5- and 10-year TIPS, each one going into an annuity as it matures. In that case it would look a lot like a TIPS ladder, but only sort of by coincidence in this situation.

* the reason I mention this "some other reason" is that my main recommendation for younger retirees, say 60-65, goes like this:
- Put a fraction of your money, say 10-20%, into the strategy above: TIPS-then-annuity-at-old-age, maybe 85, whatever.
- Spend the rest of your portfolio in a more or less straight line so it runs out just as the first smaller chunk starts creating income. The two can be balanced to give about the same real income, no matter how long you live. The portfolio can remain invested, and you probably need only fairly small adjustments to your withdrawals since the end date is known.

The reason for this suggestion is that it is almost impossible to plan a portfolio withdrawal scheme that won't leave you broke if you live an unusually long time, but still allows you to benefit from most or all of the value in your portfolio. The scheme above is easy to do, and meets both goals. Only pooled schemes handle longevity risk at a sane cost. Since you are already in step two, the suggestion in this direction (which may or may not be best for you, it's just a suggestion) would be maybe two chunks. Some immediate annuity--the payouts aren't bad for 85 years olds--and optionally some in TIPS to turn into an annuity in a few years. The second chunk gives an income boost when inflation starts to erode the real income from the first chunk, and gives you a boost if perhaps you need extra care.

Jim

Much better is to buy TIPS with a term ending when you want the annuity payments to start ...

This is an interesting concept. You get to keep up with inflation plus a bit over the term. The only issue I can think of is that TIPS throw off some phantom income each year until you dispose of them and begin some sort of immediate annuity. That means there will be a tax expense each year that has to be accounted for.

Another issue may be if the end date happens to coincide with an artificial zero interest rate period. In that case, an immediate annuity may pay less than expected, while inflation is still higher than the interest rate.

The only issue I can think of is that TIPS throw off some phantom income each year until you dispose of them and begin some sort of immediate annuity. That means there will be a tax expense each year that has to be accounted for.
Another issue may be if the end date happens to coincide with an artificial zero interest rate period. In that case, an immediate annuity may pay less than expected, while inflation is still higher than the interest rate.

For the first problem, maybe you need some income during the intervening years anyway, so you might just include the TIPS coupon income when calculating how much that would be. If you want to defer it all, you could buy TIPS STRIPS. Same yield to maturity but no coupons along the way. I've heard they aren't too hard to buy.

For the second problem, that the future date that you buy your immediate annuity might not be a good one for the implied rates, that's true. The variation is normally within a range, so it's not an infinite risk. Best way to mitigate that is either pick multiple expiry dates and buy multiple annuities over time. (you probably want more than one to reduce counterparty risk anyway). It's less likely that the returns on offer will be abnormally low on all of those future dates. Another possible mitigation is to keep a bit of an eye on things and earlier if a good opportunity arises. Sell the TIPS rather than waiting for maturity on them. Not perfect solutions, but better than nothing. And probably still much better than taking full inflation risk with full lock-in on a deferred annuity.

Jim

If you want to defer it all, you could buy TIPS STRIPS. Same yield to maturity but no coupons along the way. I've heard they aren't too hard to buy.

True, there are no coupons but there is imputed interest annually.

I'm not sure who benefits from STRIPS. They are based on other Treasury securities, so wouldn't they have lower yield after the financial institution takes its cut?

The only small benefit I see is not having the annoyance of investing the coupons. What have I missed?

True, there are no coupons but there is imputed interest annually.
I'm not sure who benefits from STRIPS. They are based on other Treasury securities, so wouldn't they have lower yield after the financial institution takes its cut?

As for the cut, I think it's one of those businesses with flows so large that the cut is likely pretty microscopic as a percentage. Like the repo market.

I didn't know they hit individuals with imputed interest...seems a bit harsh to pay tax on money you didn't get! But it's still useful for lots of pension funds and the like since so many of those portfolios are not taxed annually. And there might be a lot of the demand for the coupon streams, so for all I know one half (the principal or the coupon stream) is sold at a mild loss to get the mild profit on the other half.

The analogy is the dividend futures market in Europe. You can make a multi-year bet on what the European stock index aggregate dividends will be several years in the future. These tend to be perennially underpriced, since there is a much larger population of big money players that wants to hedge their dividend streams than there are people willing to take the other side of the trade and bet that dividends will be normal in future. Remarkably close to a free lunch, if bought at the right moment. Not every year, of course, but on average.

Jim

Perhaps someone can explain the advantage of TIPS over boring 4-week T-Bills? I suspect it is a fault in my mental model but I see short-term T-bills as being just as responsive to actual inflation as the TIPS would be without any of the messiness of resetting the principal. Tbills are earning close to 4% whereas recently even the 30yr TIPS are yielding 2.375% and the 5yr are only yielding 1.125%. I get that you pay taxes on the interest on TBills but you do that as well with TIPS and you also pay taxes on the imputed increase in the principal, so that would also seem to be a wash?

What am I missing?

Thanks,
HH/Sean

I suspect it is a fault in my mental model but I see short-term T-bills as being just as responsive to actual inflation as the TIPS would be without any of the messiness of resetting the principal.

Short term rates DO NOT track inflation. TIPS increase in principle monthly based on CPI-U thus roughly tracking inflation and their coupon is paid on that principle. Let's take a look at a person turning 85 soon.

Let's say in September 2008 a person was 65 years old (i think that was full SS retirement age at that time?) and considering taking $100k and holding 4wk Tbills for ~20yrs and then converting to an annuity around age 85. Here we are 17 years later and that person would have about $120k to put towards their annuity in a few years (ignoring all taxes). After inflation they have lost nearly 30% of their purchasing power. Ouch, years of zero interest monetary policy stings and doesn't care about that person's exposure to inflation.

Same person put $100k into TIPS with a 1.5% coupon in that same September. Yes things were extremely volatile for 18-24mo around that time, but it's a fun date to think about maximum anxiety were a person entering retirement. That person would now have a total of about $169k (~$150k of inflation adjusted principle and ~$19k of coupons) to put towards their annuity in 3 years, again ignoring taxes. Purchasing power actually up about 12% due to luck at time of purchase.

The latest CPI-U was 3% so both the 30yr TIPS coupon of 2.37% and the 5yr TIPS coupon of 1.125% are out performing the 1mo treasuries at 4%. I think the key take away is TIPS seems to be the best instrument to alleviate the unknown of inflation. Yes it relies on the government not manipulating CPI and no one knows what future monetary policy will be, but you at least have some confidence you have accounted for the inflation variable as best you can. Buying any other non-inflation protected fixed yield instrument is completely relying upon your ability to accurately predict inflation over the term of the instrument. People at work like to ask me where i think rates or inflation are going and my canned response is, "if i could do that with any level of accuracy, I wouldn't be working here".

None of that is to say one should ALWAYS buy TIPS when considering this type of strategy. TIPS yields were negative for a period during COVID and it certainly would have paid to be patient.

Disclaimer: I did prompt AI on the total return calculations, but I did a high level check against FRED data I keep up to date and I believe it to be accurate. None of the above was written with AI. Grok has been my go to for calculations like this but Gemini seems to be on par these days after the latest update. We have M365 at work with full Copilot integration and I find it lacking in computation ability but very good at prompts against email and corporate documents for topical summaries.

Jeff

Jeff,
Very helpful. I had forgotten that long era when inflation was greater than zero and short-term rates were being held down by the Fed. I'm bothered about being taxed on both changes in principal and coupon interest but I suspect one still wins compared to the Tbill. You mention TIPS yields being negative during the COVID era. As I read the Treasury page they say if held to maturity you never get less than your starting principal but I wonder what happens if you sell your TIPS before full maturity? Do you have the potential of losing principal?

Rgds,
HH/Sean

I had forgotten that long era when inflation was greater than zero and short-term rates were being held down by the Fed.

That's far from the only instance. Since 1950, assuming a fairly arbitrary 1/3 income tax on nominal interest, you'd have had a 59.4% chance of losing purchasing power holding a 90-day T-bills after tax and inflation. Real rate of return after tax annualized, averaged across all start dates, -0.777%.

Part of the reason that seems dire is that during periods of high inflation you pay tax on the nominal gain, not the real gain. The real after tax return has been positive most of the last couple of years, but that's not the general rule.

Speaking of inflation, here's a fun tidbit not a lot of people know. The average non-supervisory US worker's after-tax pay has gone up more since 2019 than inflation or groceries or average rent. At the moment annual grocery inflation and rental inflation rates (2.5% and 3.5%) are both below long-term averages. So why all the inflation angst? The number on the average food price sticker has gone up a lot, which people REALLY notice, and really hate. But the number on the average pay slip has gone up more, so less of the income is going to food, not more. Same for rent, or CPI overall: incomes have risen more than general inflation.

Jim

You mention TIPS yields being negative during the COVID era. As I read the Treasury page they say if held to maturity you never get less than your starting principal but I wonder what happens if you sell your TIPS before full maturity? Do you have the potential of losing principal?


Disclosure: I don't own TIPS, have never owned TIPS, but might want to in the future and doing my best to understand them though conversations like this one. I even let "principle" instead of "principal" slip through previously which certainly shows my likelihood for error.

The negative rate comment was confusing so let's address that. When treasury sells TIPS at a par value of $100k, they are guaranteeing the $100k nominal value will be returned to the purchaser at maturity. The inflation adjusted principal will fluctuate and the fixed % coupon will be paid on the fluctuating inflation adjusted principal amount.

My comment about negative rates was referencing the secondary market during that time. This really gets to the point of your question "Do you have the potential of losing principal". You really only know with certainty what you will receive AT MATURITY. If you must sell the asset at any point in between then you are at the whims of the market. Someone looking at a 10yr TIPS from 2015 with a fixed 0.70% coupon and only 5yrs remaining is going to compare it against a current 5yr TIPS with the 1.125% rate and want a discount to increase the overall yield. This brings to mind the visual of the 2023 Berkshire annual meeting with an "Available For Sale" sign in front of Warren and a "Held-To-Maturity" for Charlie.

So what do we do with all this "knowledge"? I would be interested in hearing thoughts from others. Going back to our 65yr old in 2008, maybe they should have done a ladder of say 5/10/20yr terms? Maybe not a bad plan and they would be feeling ok about the 2023 renewals due to the higher rates then. AI says the portfolio would be worth about $154K today at market so lower than what we saw earlier with the drag of the low rate renewals. With the average 20yr TIPS rate being 1.23% over the last 20yrs, now might seem to be a better than average time with rates above 2.2%? It's not something I'm currently in need of but interesting to think about for future planning.

Jeff

With the average 20yr TIPS rate being 1.23% over the last 20yrs, now might seem to be a better than average time with rates above 2.2%?

Not bad reasoning, but are they? Over 2.2%?
I'm seeing quotes like 5-year at 1.36% and 10-year at 1.85%. Still a very respectable choice depending on what you need the portfolio to do.

Subtract however much value you think the US dollar might sink.

Fun number: the average S&P 500 firm is up 11.0% year to date counting dividends, measured in US dollars, before tax on dividends and suchlike. But a 100-euro banknote in your sock drawer would have beat that by 0.85%, no matter where you live, because the US dollar lost so much value relative to almost anything else around February-April. Pretty flat since then.

Jim

Subtract however much value you think the US dollar might sink.


Isn't this just going to show up in the inflation number (assuming you want USD to spend at the end)? A shrinking USD makes imports more expensive - this hitting the inflation rate.

tecmo
...

Not bad reasoning, but are they? Over 2.2%?

Maybe? I'm here to learn anyway. :)

I looked on my broker site and found 2015 and 2016 30yr issuances with yield to maturity listed around 2.47%. The actual coupon on those is only around 1% so the buyer would be waiting until maturity for the full yield.

Having thought about it more, I think using the shorter terms to ladder may make more sense in the event of an emergency. The original buyers of those 30yr bonds listed above would currently be getting virtually zero inflation protection (a greater than 25% erosion of purchasing power?) by liquidating today and their 0.75% to 1.0% coupons they received are little consolation. But rolling during covid times would have been a bit stressful. There really is no free lunch.

Jeff

I think using the shorter terms to ladder may make more sense in the event of an emergency.

I was thinking something similar. Say at age 70 you buy a quarter with a 20 yr maturity, another quarter with a 10 year maturity, and the rest as 5yr. I think(?) that you can fake a 20yr by getting a 30 yr that was issued 10 years ago? But I'm still wrapping my head around it. The coupon rate would be pretty low for the 5yr but you would get the larger of your initial value or the inflated value, which is the real goal. Unlike with a deferred annuity you can sell at any time (with some loss), so it still feels like a win.

Rgds,
HH/Sean

The thought that keeps buzzing around my head is something my father once said to me.
"If it's not worth doing, it's not worth doing well."


Seems to me that the attempts here are basically trying to optimize a not-so-good (arguably bad) situation. If you don't have enough money, you don't have enough money. Rearranging it does not change that.
Only about 25% of 70 year old men make it to 90.
Only about 3% of 90 year old men make it to 100.

Buy a BAC or WFC preferred. Paying 6% yield. Done and done.

Buy a BAC or WFC preferred. Paying 6% yield. Done and done.

6% yield, or 6% coupon? Yield isn't what goes into your pocket; coupon is.

Eric Hines

Buy a BAC or WFC preferred. Paying 6% yield. Done and done.

A fine choice for the bond(ish) subset of your port. But I see this as part of the "life insurance" subset of the port. Insurance companies are really good at actuarial tables so getting an immediate annuity at age 90 is a good use of your money. They are pretty sure you won't live to 100 and you really don't want to be 100 and broke.

Nobody says life insurance is a great way to build wealth. The goal here is to arrive at 90, say "What have I done?!" and figure out how to keep from going broke if life continues.

If your goal is to leave money for your kids then safe withdrawal rates are what you should focus on. If you don't have kids the goal is to spend that last dollar on the funeral. The original question was whether you can do better than a deferred annuity and TIPS are one of the choices. They have the distinct advantage that if you don't get to 90 the money goes to your favorite charity rather than the insurance company.

Rgds,
HH/Sean

"Buy a BAC or WFC preferred. Paying 6% yield. Done and done."

6% yield, or 6% coupon? Yield isn't what goes into your pocket; coupon is.

Coupon is what goes into your pocket. Yield is coupon divided by the price.

WFC-PL, coupon $75/yr. price 1,219.62. Yield 75/1,219.62 = 6.14945639%
52 wk low: 1133.00, yield 6.619594%

BAC-PB, coupon $1.50/yr. Price 25.07. Yield 5.98324691


Yeah, yield is weird. I go over this all the time in talking to "Dividend Champions" people when they talk about "yield on cost".
Stocks and bonds don't pay a yield. They pay a dividend or coupon.
Yield is just a number we calculate to use in making comparisons.

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