Especially in light of the enormous amount of interest in TIPS ladders of late I thought this new post by Karsten would be worth sharing:
https://earlyretirementnow.com/2024/05/ ... s-part-61/
Lots of great analysis as usual, leading to this conclusion:
"Safety First has gained popularity in the personal finance world thanks to the rise in interest rates over the past two years. It’s an attractive approach for traditional retirees who do not plan for any (or at least no sizable) bequest and would instead maximize their guaranteed cash flow. Or maybe folks have already given their excess nest egg to their loved ones and charitable causes and now like to maximize their steady retirement cash flow and then literally “Die With Zero.”
But Safety First is no panacea, especially not for early retirees. Hedging expenses over a 50+-year retirement horizon is too expensive, even with today’s higher rates. Moreover, Safety First faces inflation risk when we use SPIAs, and even a TIPS ladder currently only hedges inflation for a maximum of 30 years.
But not all is lost. A partial shift to safe assets like TIPS and annuities can be worthwhile for most retirees. But it’s nothing new. It has the same flavor as a glidepath, i.e., start with a large bond allocation and liquidate those safe assets to avoid selling equities too early in case of an adverse Sequence Risk event. But I find the glidepath approach preferable: First, you don’t have to permanently give up control of your assets like in the case of an annuity. Second, you need less portfolio turnover; there is no tax headache when selling half of your portfolio to purchase an annuity or TIPS ladder. Third, the example of the 1929 cohort seems to indicate that the glidepath performed a bit better than the Safety First methodology.
So, my takeaway is that Safety First is a marketing gimmick by financial advisers to sell higher-commission products. Sophisticated investors can achieve the same or better results with a glidepath."
https://earlyretirementnow.com/2024/05/ ... s-part-61/
Lots of great analysis as usual, leading to this conclusion:
"Safety First has gained popularity in the personal finance world thanks to the rise in interest rates over the past two years. It’s an attractive approach for traditional retirees who do not plan for any (or at least no sizable) bequest and would instead maximize their guaranteed cash flow. Or maybe folks have already given their excess nest egg to their loved ones and charitable causes and now like to maximize their steady retirement cash flow and then literally “Die With Zero.”
But Safety First is no panacea, especially not for early retirees. Hedging expenses over a 50+-year retirement horizon is too expensive, even with today’s higher rates. Moreover, Safety First faces inflation risk when we use SPIAs, and even a TIPS ladder currently only hedges inflation for a maximum of 30 years.
But not all is lost. A partial shift to safe assets like TIPS and annuities can be worthwhile for most retirees. But it’s nothing new. It has the same flavor as a glidepath, i.e., start with a large bond allocation and liquidate those safe assets to avoid selling equities too early in case of an adverse Sequence Risk event. But I find the glidepath approach preferable: First, you don’t have to permanently give up control of your assets like in the case of an annuity. Second, you need less portfolio turnover; there is no tax headache when selling half of your portfolio to purchase an annuity or TIPS ladder. Third, the example of the 1929 cohort seems to indicate that the glidepath performed a bit better than the Safety First methodology.
So, my takeaway is that Safety First is a marketing gimmick by financial advisers to sell higher-commission products. Sophisticated investors can achieve the same or better results with a glidepath."
Statistics: Posted by Kevin K — Fri May 17, 2024 9:02 am — Replies 1 — Views 358