Safety-First Retirements Are Expensive with Low Interest Rates
I’ve made a table that pretty much speaks for itself. The table provides some idea about how expensive it can be to build a safe retirement portfolio with TIPS. But even this is not completely safe, since the TIPS ladder only lasts for 30 years.
I assume different constant TIPS yields. With no changes in TIPS yields and with TIPS yields the same for all different maturities, this is too simplifying. There is no reinvestment risk or interest rate risk. But it gives an idea. Those yields are shown horizontally.
Vertically, I show different desired withdrawal rates from one’s portfolio. Some relief is that Social Security and other income sources would be added on top. These withdrawal rates (providing inflation-adjusted withdrawal amounts) are only for the part coming from the portfolio.
What the table shows is the percentage of your portfolio assets you would need to dedicate to building your TIPS ladder for different yields and withdrawal rates. Red cells represent the impossible, you would need more than 100% of your portfolio to pull off that spending rate.
Also, you really should have some sort of emergency fund in case of unexpected necessary expenses. This could be at least 10% of your portfolio, making anything in the table above 90% infeasible.
So, for example, with a TIPS yield of 1%, even a 3.5% withdrawal rate is pushing the limits of feasibility, requiring 91% of the portfolio.
With a TIPS yield of 0%, a 3% withdrawal rate is about the best that can be hoped for.
The main message here, for whatever it is worth, is that building an inflation-protected spending floor in retirement can be incredibly expensive in a low interest rate environment!
Since this was a short blog post, for fun, here is the MATLAB code I used to make the table:
r=[-.02:.01:.05] % TIPS Yield
C=[.01:.005:.1] % Withdrawal Rate
N=30 % Ladder Length