Investing - Theory, News & General • Total Portfolio Allocation and Withdrawal (TPAW)

I think the big advantage of modeling the LMP TIPS as a pension is that they are no longer subject to bond volatility [...]

Yes, that's why I'd recommend entering a TIPS ladder funding an LMP (guaranteed spending floor) as an income flow. It produces a more accurate "spending during retirement" graph.

Unfortunately, when the rungs are not uniform, this gets messy. My list of what I think is needed:

- A ladder with 30 different rungs will need 30 different “pensions”.
- On initial “pension” setup, the principal maturity for each rung as well as all the interest payments for each rung year need to be adjusted for the CPI-U change from the date of TIPS purchase to “now”, and this needs to be done every year.
- The current market value of the ladder needs to always be subtracted from the total portfolio value.

My 30-rung ladder has different real rung maturity/interest totals each year, because I created it to compensate for other uneven investment streams as well as 3 different SS start years so the total of everything yields a smooth real LMP throughout the years. I understand that if the ladder rungs are equal (real dollars), then Ben's example using a single "pension" is simple, but the purpose of my post was to discuss the uneven yearly stream case.

Thanks for sharing your use case and the challenges it presents.

If individual streams are lumpy but the total isn't, one option is to enter the total constant income stream instead of the lumpy components. e.g. Social Security + pension A + pension B + TIPS ladder = $5,000 per month.

But in cases where the total is also lumpy (maybe to match lumpy expenses), or some components happen to be nominal while others are real, or you just prefer to model individual components to get a more detailed picture, we have to deal with lumpy income streams. To help with entering and managing a lumpy income stream, we can add the following features:

(1) Non-constant entries for income and expense streams: Currently, you're limited to constant real or constant nominal income and expense streams. Adding fixed growth rates was already on the list of things to do (to help model things like nominal annuities that grow at a predetermined constant rate). We'll try to expand that to allow for lumpy income and expense streams.

(2) Make it easier to update real quantities for inflation: Auto-updating for inflation had been discussed earlier, but that would be disorienting to the user who enters $200 one day and sees it auto-updated to $200.14 next month. But we can make it easier to manually update for inflation. Maybe a button that will increase all real inputs (or a selected subset) by x%. Then lumpy real income and expenses won't be any harder to update than constant real income and expenses.

Here is an expansion of one of my points about representing a TIPS ladder as a pension in TPAW, phrased in the form of a question:

In the year 2000 Joe creates a 30-year TIPS ladder that pays out $50K real principal and interest every year. It's now 2028, so only two rungs are left and Joe decides to start using TPAW and wants to model those two rungs as a real pension. What value does he enter for the annual pension payout? What does he do the next year for the last rung?

I may not be getting your question...but...

Lets say Joe's ladder just paid out $93K (which was the $50K adjusted for 28 years of inflation) for the 2028 rung. For 2029 and 2030 he enters $93K real income for each of the last two rungs.

If the ladder has equal rungs, then I agree that he can use the previous year's (2027) payout as the base in 2028. If the rungs are not equal, then I think it would need to be adjusted in proportion to the rung differences. For 2029 (and going back to the uniform payout case), I believe he would need to enter the 2028 payout as the base. And (a question I didn't ask before) what should the growth rates of these pensions be? The weighted YTM of the rung components at the time of pension entry? Now do this all for a ladder decomposed into 5 income streams. Yikes!

I'm not following. In the case where the ladder has equal rungs, you'd enter the same real dollar amount for future years. So in this example, in 2028, Joe would enter both 2029 and 2030 payouts as $93K (real). Why would there be a growth rate for the pension?

Statistics: Posted by Ben Mathew — Sun Jul 07, 2024 2:04 am — Replies 831 — Views 233308

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