The Investment TIPS You Should Care About
The U.S. began issuing Treasury Inflation-Protected Securities (TIPS) in 1997. Backed by the full faith and credit of the U.S. government and assurances that inflation cannot eat away at their value, TIPS provide a risk-free asset for U.S.-based investors.
What Is The Bond Yield Curve?
Understanding the relationship between bond risk and time to maturity and duration of a bond provides the basis for understanding the bond yield curve. The yield curve shows the yields to maturity for a series of bonds — typically U.S. Treasury bonds — with the same credit quality but different maturity dates, along with the term structure for interest rates.
What Bond Liability Means For Your Retirement Plan
Bond prices are sensitive to interest rate changes, and bond duration is a measure of just how sensitive. For instance, if a increase in interest rates from 2% to 3% caused a bond’s price to fall by 8.5%, the bond would have a duration of 8.5, meaning that a 1% rise in interest rates leads to an 8.5% drop in price.
Do You Understand How Bonds Work?
Before we can discuss bonds in depth, it is important that we establish a common understanding of what bonds are and how they work. As a starting point, a bond is a contractual obligation to make a series of specific payments on specific dates.
3 Ways To Incorporate Bonds Into Your Retirement Strategy
Bonds can be incorporated directly into a retirement strategy in three broad ways:
1. An assets-only approach to build a total returns investment portfolio,
2. Matching the duration of bond funds to the duration of the retirement liability, and
3. Holding individual bonds to maturity to generate the desired cash flows to fund expenses on an ongoing basis throughout retirement.
Dynamic Programming Methods For Retirement Income
In addition to other methods we’ve discussed, a third type of variable spending model uses dynamic programming methods. These methods rely on complex computing power and mathematical equations to integrate spending and asset allocation decisions more completely over the life cycle.
Dynamic programming provides a road map at each point in time for optimal spending and asset allocation, which have been determined by first considering optimal future behavior stemming from today’s decisions.
Comparing Retirement Spending Rules Using Historical Data & The PAY Rule™
Thus far, we have looked at applying a 4% initial withdrawal rate to the different retirement spending strategies. In such cases, we did not use an XYZ rule to calibrate the level of downside risk as the initial spending rate was always the same.
How Much Wealth Will You Have 30 Years Into Retirement?
Thus far, we have compared the historical performance of various spending strategies when the initial spending rate is 4%. Over the next couple weeks, we will apply an XYZ rule and consider how spending may be impacted by the low-interest-rate environment facing retirees.
Which Retirement Spending Strategy Is Right For You?
Deciding on the right retirement spending strategy for your particular situation is both incredibly difficult, and incredibly important. There are huge numbers of reasonable options, but how do you know which is right for you? The answer depends on several factors.
Retirement Spending And Required Minimum Distributions
One final spending rule serves as a reasonably easy way to implement an actuarial method for retirement spending. Actuarial methods generally have retirees recalculate their sustainable spending annually based on the remaining portfolio balance, remaining longevity, and expected portfolio returns.
