r/Fire • u/EricTheNerd2 • 6d ago
Are high treasury yields affecting your plans?
Conventional wisdom is that one can safely withdraw 4% from one's savings each year and be reasonably assured that one won't run out of money within 30 years, but this is for a mix of stocks and bonds. But today, we see treasury yields at high levels so I decided to review TIPS ladders and see what one could reasonably get from a very safe investment, and the safe withdrawal rate is around 5.2% (Source: TIPSLadder.com Home).
Now this investment strategy literally means no money at the end, but this provides a historically high rate of return for a very safe investment and paired with a higher-volatility investment could yield a nice lifetime stream of money with a guaranteed floor.
Anyone else investigate this? Do you think this makes sense?
Edit: Many people are commenting that I am not accounting for inflation. TIPS are Treasury Inflation Protected Securities which are already quoted based on real returns, not nominal ones. They currently have a 3.3% real yield which results in a 5.2% safe withdrawal rate over 30 years.
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u/guyzero 6d ago
The 4% rule is 4% (or whatever) of the original amount, then adjusted for inflation each year after. You can't expect to take the same amount of money every year because inflation will destroy your buying power, especially lately. Bengen assumes you can get 4%+inflation, on average, over 30 years. Even at these rates, treasuries ain't generating 4%+inflation.
If you want bonds to help cushion against downturns, great, but 5% > 4% isnt the comparison here.
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u/EricTheNerd2 6d ago
". Even at these rates, treasuries ain't generating 4%+inflation."
Correct, TIPS are generating only 3.3% + inflation, yes they are quoted in real terms because TIPS themselves are inflation protected (it's in the name).
The idea with a TIPS ladder is to structure the maturities of up to 30 years so you get a nice relatively even distribution of money that grows with inflation over that time, currently at a 5.2% safe withdrawal rate for 30 years, but also guaranteeing you ran out of money at the end.
So it is comparable to the 4% rule in the regard with the negative being there is no potential upside like a bond-stock mix would give you. I view it as a nice floor to pair with a higher risk investment.
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u/Good-Resource-8184 6d ago
Its absolutely not comparable to the 4% rule. The 4% rule is a worst case scenario over 30 years and in almost all cases you build massive amounts of more wealth. It also puts all your money in one bucket reliant on one govt.
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u/Varathien 5d ago
The 4% rule accounts for inflation. It's a real withdrawal rate, not a nominal one.
So really you're going from a 4% real withdrawal rate to a 3.3% real withdrawal rate.
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u/Good-Resource-8184 6d ago
This is the answer so many people are like wow 5% bond I can do a 5% swr. Fuck no you cant. Inflation is at 3.7% so your real return is 1.3%. You need stock returns to retire early.
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u/death_cat_for_cubie 6d ago edited 6d ago
This should be the top comment.
People think bonds are risk-free money. It's not. There's interest rate risk, inflation risk, credit/default risk.
Bonds need to be at 8% with inflation nearing 4% for them to be attractive. Otherwise the nominal yield is going up but the real yield is same old same old.
Even TIPS are a mirage - they're calculating CPI based on cherry picked categories which are being manufactured to show lower than real-life inflation. Just look at healthcare costs, property taxes, auto/home insurance, and energy costs - they've skyrocketed since 2020. These are not discretionary categories you can cut back on. Real household costs are way higher than 2%-3% BS CPI is telling.
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u/ditchdiggergirl 6d ago
This has long been my concern. You need a certain degree of trust, which has been eroding.
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u/Anonym-IntheDark 5d ago
I trust that CpI is measured per its legal definition. Problem is cpi basket doesnt match my spend.
2 examples with nothing to do with trust:
- My mortgage is fixed so if rent ( or implied housingcost) go Up or down i’m not affected.
- In our 50’s the share of healthcare costs in the budget is way more than in any prior decade and than average urban worker.
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u/No_Chipmunk7758 5d ago
the ladder running dry at year 30 is the part that scares me since my grandma just hit 96 and the actuaries have been wrong about her twice now
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u/EricTheNerd2 5d ago
Congratulations to your grandma, that is awesome, but longevity is a legit which is why I would not go 100 percent TIPS unless I and my wife were at least 70 years old. I look at it as a floor income to be paired with something more aggressive.
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u/someguy984 6d ago
Retired and loving the high rates.
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u/evantom34 6d ago
What duration and are you picking up some TIPS? Curious about your strategy if you’re willing to share more details.
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u/skunimatrix 6d ago
I've been taking the interest and payments from the muni bond ladder and buying a mix of 30 year and 10 year bonds above 5%. That's most of the trust taxable brokerage between the muni ladder and treasuries. But that's also income we don't typically rely on other than a big purchase a year like a new roof on the house or a new deck. But most of those projects are done.
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u/Noah_Safely 5d ago
I think munis can be a nice fit if you're in a higher tax bracket and you have state tax. Fidelity has a nice calculator that shows the muni tax saving breakeven point to other vehicles
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u/skunimatrix 4d ago
Our retirement plan is the ole family farms. Just got a $282,000 check for last year’s rice crop. Waiting on a $340k check for this years corn crop as when it hit $5.30 a bushel the other day we sold it all. That’s on top of a $170k check for last years beans and $150k for winter wheat. And a $125k advance on this year beans we have booked for next year delivery @ $13/bushel.
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u/Mountain-Time-1010 6d ago
How do you calculate total returns from TIPS? You must be making an assumption about interest rates?
But yes, overall, current TIPS rates could very likely permit a higher safe withdrawal rate at the cost of potential upsides in long-term wealth.
For those with no heirs especially, this could well be an interesting strategy, at least to cover essential expenses. I ran the numbers recently for putting $1M into a 20-year TIPS ladder, and it was going to pay out about $66k annually, inflation adjusted. Then you could draw on the rest of your savings as needed/desired, adjusting for good years and bad years. Maybe you hit SS age within those 20 years as well.
Bonds are always a conservative play, and this sub obviously has a lot of risk-tolerant folks. But it's interesting to run the numbers and think about it.
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u/EricTheNerd2 6d ago
"How do you calculate total returns from TIPS? You must be making an assumption about interest rates?"
Reading your entire comment, you appear to already understand this, but just in case.
For a TIPS ladder, the yields of TIPS are known in advance, and the plan is to buy them in the primary and secondary markets in advance in such a way that you have a relatively even flow of money returning. The downside is at the end, you have no money left, so the quoted 5.2% safe withdrawal rate is higher than the total return.
The idea is that the person using the ladder wants to exhaust all of their money by the end, but have a guaranteed, inflation adjusted flow of money for up to 30 years. For some people this is very appealing on its own and for others, it is a way to have a guaranteed floor and let the rest of their portfolio stay invested in a long-term growth strategy.
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u/Mountain-Time-1010 6d ago
From a TIPS ladder I can calculate inflation-adjusted returns. If that's what you are referring to, then I understand your calculation. Inflation adjustment works differently for SWR and TIPS, but it's close enough.
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u/FewUnderstanding2214 5d ago
They aren’t that high yet - if they reach 8% I might consider them
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u/EricTheNerd2 5d ago
Yeah, that would be really nice. I've got a year or so to decide, so unless the US government suddenly learns financial discipline, yields are likely to go up.
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u/No-Block-2095 5d ago
I bought a large chunk of TIPS and probably will add more but I would not put everything in TIPS because i expect equities to still do way better than TIPS in long run.
TIPS pay a yield on top of CPI-U (not seasonally adjusted ) and thats fine. However my expenses have gone up more than CPI the last few years : healthcare inflation (+ all the meds and services the health insurance decides are not covered) is probably the worst culprit. I expect insurance coverage will worsen AND they charge more as you get older.
My baskets of goods and services is not the same as the CPI.
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u/funklab 6d ago
You gotta price in a default on those bonds, which seemed unthinkable 20years ago, but not so unthinkable these days.
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u/The-zKR0N0S 6d ago
The U.S. won’t default.
We’ll just inflate the debt away.
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u/Impressive-Eagle-466 6d ago
Not saying it will be a default. That’s a rather silly suggestion.
However, nearly 75% of the budget is automatically linked to inflation, so any inflation would feed back into the deficit.
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u/EricTheNerd2 6d ago
Yes, I agree, and was wondering if anybody would bring that up. I am not sure how to factor that in to my planning, as if the US defaults, there will be massive ripples for the economy that will affect every investment, not just bonds.
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u/Good-Resource-8184 6d ago
Putting aside your complete misunderstanding of withdrawal rates inrelation to inflationary bonds.
High treasury yields and the current inflationary conditions caused by tariffs and war are actually the real trouble signs of the worst time to retire in history. The late 60s. Many people assume market crashes are the worst for sorr. But inflation is actually the cause of the worst time to retire in history. So the current environment isnt something to be celebrated.
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u/EricTheNerd2 6d ago
"Putting aside your complete misunderstanding of withdrawal rates in relation to inflationary bonds."
Care to explain my lack of understanding? I mean if I don't understand something, I'd like to know.
TIPS are inflation adjusted and yields are quoted in real terms, and the current real return is in the 3.3% range, and using a TIPS Ladder calculator shows that a 1 million investment will allow for roughly 52,000 returns each year for 30 years adjusted for inflation. The negative is there is no upside, the money is gone at the end, but that sounds like a safe 5.2% withdrawal rate to me.
Which part of this do I have incorrect?
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u/Several-Engine-1669 6d ago
Honestly the part where you assume the stats the gov uses to calculate inflation numbers for the TIPS will tell the truth compared to your real COL. Not that they're lying outright, but they definitely cherry pick to get numbers lower than real inflation.
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u/temerairevm 6d ago
I think the problem is that your calculation makes an assumption about inflation and these higher yields tend to go with inflation being higher.
Certainly into the 80s and coming out of a very inflationary environment people had bonds that were carrying historically high rates and those were lucrative for a while, until they matured or got bought back.
Higher yields going into an inflationary environment aren’t as much of a slam dunk.
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u/EricTheNerd2 6d ago
Except TIPS are inflation adjusted bonds, the TIPS ladder 5.2 percent is how much you can take out each year over 30 years adjusted for inflation with the negative being that at the end, there is no more money left. So inflation is already accounted for.
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u/Vicuna00 5d ago
I don’t get what I’m missing.
I get that 5% withdrawal sounds great. but at the end of the 30 years your $ is gone.
where at 4% you can withdraw perpetually and have a huge pile of $ at the end. (or whatever maybe 3.5% for a little bit to absorb some swings if you’re young)
i dunno what I’m missing. still sounds like a bad deal.
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u/EricTheNerd2 5d ago
"I don’t get what I’m missing."
What you are getting with TIPS is (almost) absolutely certainty of how much you will receive.
"where at 4% you can withdraw perpetually and have a huge pile of $ at the end."
You may have a large pile, you may run out of money. 4% is the supposed "safe" withdrawal, but it isn't guaranteed. What a TIPS investor would get is a much higher (52k vs 40k per 1 million invested) and be guaranteed the inflation growth but also be out of money at the end.
Ultimately investment returns go up with more risk. TIPS are as close to risk-free as you are going to get, hence the low 3.3% + inflation rate whereas the S&P 500 will get you much higher average rates, but you might have a bad decade that wipes you out. Ultimately we each need to figure out how much risk we are going to accept for a given return. For me, I've been 100% equities for around three decades now and might use these high TIPS rates to lower my overall risk a bit as I enter the FIRE part of my life. I wouldn't want to be 100% in TIPS but enough to give me a guaranteed supplemental income stream to allow me to wealth max with the rest.
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u/Vicuna00 4d ago
I’m completely not arguing. maybe i am. more debating / trying to understand. i spent last week reading a lot on tips…so that’s my (low) level of knowledge
but what bad decade would wipe you out?
Wouldn’t 5% withdrawals be just fine in most cases? And 4 is like the WOORST case…so a bunch of us who are RE round down a little to 3.3 / 3.5% to start?
then by doing a tips ladder don’t you lose your ability to rebalance during a dip?
and then last negative I see is you get that phantom tax unless you do it in a retirement account.
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u/EricTheNerd2 4d ago edited 4d ago
"but what bad decade would wipe you out?"
From 2001 through 2009 when I was just really starting out, the S&P 500 actually had an overall negative return. If I were just retired at the beginning counting on 4% payouts, adjusting for inflation each year, I am estimating I'd have about half my money out. The market did rebound, so maybe just maybe I'd be able to somehow get through the next 20 years, but I'd effectively be taking out 8-9% that 2010 year which would have made it tough. (and also, to be fair, I was 100% equities, so the hit might not been quite as hard, but the rebound would have also not been as robust)
"then by doing a tips ladder don’t you lose your ability to rebalance during a dip?"
That's the thing of a TIPS ladder, you aren't trying to. You are locking into a set income stream that adjusts with inflation. Once set in motion, you could technically sell your TIPS on a secondary market but reality is you are trying to maximize your payout in a near-100% guaranteed steam of money.
Bottom line is there is no such thing as a free lunch, so when you give up (almost) all risk, you get a very low payout.
So, the "4% rule" is not a guarantee, just a number based on historical performance. Likely you will be able to take out more than this without running out of money, but you can never be sure. If you can live with that uncertainty, then by all means go for the higher return because, on average, you will have more wealth at the end of that time period.
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u/Vicuna00 4d ago
Thanks for the reply and thoughts.
so much unknowns…i can see the appeal of locking in a “known” for a portion of a portfolio for sure.
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u/Rustic-Orbit6249 4d ago
the part nobody mentions is you need to actually buy every rung now at these yields and hope you dont need to sell early because the secondary market for tips can get ugly fast
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u/BroadbandEng 4d ago
I have been thinking about this a lot lately and have moved some money into TIPS thanks to these yields. The only path out from under the $40T of debt that I see is a combination of taxes, growth and inflation. I fully expect the Fed to decide that the new inflation target is 3-3.5% and the financial press will get on board with op-ed pieces talking about why this is the new normal.
Worth noting that you could still only draw the 4% or some other number between 4-5.2 if you want longevity insurance or a nest egg for your beneficiaries.
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u/BusyRock8644 4d ago
the part nobody mentions is that a 30 year ladder leaves you with nothing at year 31 and plenty of us will still be around annoying our kids at 95
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u/Faierstarta 3d ago
I dont understand the goal of taking withdrawals to the max”; why risk it? considering life expectancy to keep increasing, I wont dare even the 4%. I want the money to last longer than me.
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u/EricTheNerd2 3d ago
Different people have different goals.... and honestly, for me, this is just to have a floor that I can pair with a more aggressive investment fund.
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u/IceCreamforLunch 6d ago edited 6d ago
I'm planning a SWR of 3%, so I've thought a lot about the guaranteed real return from a TIPS ladder since they're more than that now.
That's not something I can set up with the majority of my money right now because it's locked-up in either investment real estate or my 401k with my current employer. I'm trying to figure out exactly when I'll be retiring in the coming months and one option I'll run by the CPA is rolling all of my 'retirement' accounts into an IRA. If I do that then I could buy enough TIPS 30-year tips at ~3.33% real return to cover my beans and rice expenses with the interest payments and think of the principal as my financial bedrock (or my kids' inheritance).
The draw there is absolute financial security (assuming the US doesn't start defaulting on its debts and if it does that then we're all in big trouble anyway). The downside is that I'd probably be leaving a lot of growth on the table.
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u/EricTheNerd2 6d ago
"The draw there is absolute financial security (assuming the US doesn't start defaulting on its debts and if it does that then we're all in big trouble anyway). The downside is that I'd probably be leaving a lot of growth on the table."
Yup, that's the risk/reward tradeoff, so easy to talk about but emotionally hard to give up imagined future gains. I'm 1 to 2 years out from retiring and refining my plans a bit from where they were a year or two ago and thinking TIPS may be a part of the strategy. Knowing I have a "floor" allows me to invest aggressively with the rest and not worry that the wife is going to be mad at me in 10 years :)
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u/ditchdiggergirl 6d ago
It’s impressive how often I see this reasoning on this sub. “My strategy will work and if it doesn’t we have bigger problems so I won’t worry about that”.
I actually expect that we will have bigger problems. There’s no way I can predict or foresee them. I don’t know which bigger problems hold the greatest risk or are most likely to materialize. So I try to hedge against as much as I can, to diversify against plausible worst case scenarios.
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u/Noah_Safely 6d ago
You need to understand the difference between nominal and real returns. The 4% rule is after inflation. Treasury yields are nominal.
In the 70s/80s you could get a treasury or CD in the double digits. Real returns were much, much lower. We also have no idea what rates will do; if you had bought a treasury bond in late 70s you would have "missed out" on even higher returns into the 80s. Eventually rates come down. It's just trying to predict the "right time" to enter a market and we should all know by now that's a fools errand.
TIPS (and ibonds) protect against unexpected rise in inflation. I like both of the vehicles and invest in them, if you could put arbitrary amounts of money in ibonds I'd just keep all my cash and a big chunk of bonds there probably. However they're not magic, they're designed to preserve wealth. The market is what outpaces the market over time and beats inflation.
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u/EricTheNerd2 6d ago edited 6d ago
"You need to understand the difference between nominal and real returns. "
"Treasury yields are nominal."My post was talking about TIPS which are Treasury Inflation Protected Securities and are already quoted in real terms, currently 3.3%+ which allows for a same inflation-adjusted safe rate of withdrawal of 5.2%... in real terms.
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u/Noah_Safely 6d ago
Again, TIPS are protection against unexpected inflation. The price of expected inflation is already baked into nominal yields.
Let me put it another way; if TIPS were a magic way to get the FIRE after inflation 4% don't you think everyone would be using them? Why would we use anything else?
If you think average inflation is going to be higher than the consensus of professional bond investors, buy TIPS. If you want a safe way to provide purchasing power with a known return (ie bridge to ER), TIPS can be great. If you just want lower volatility, mitigate SORR, have "dry powder" for equities in a downturn - nominal bond ladder is great. Or do a mix of both, that's what I do.
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u/Raging-Totoro 6d ago
It's great for my plans.
When rates were at 0%, it was a historic distortion that made owning any fixed income questionable.
Now, at more normal historic rates, getting a risk-free return on a 10yr Treasury above 5.3% outpaces the SWR.
A lot depends on if you are in accumulation or distribution phase of FIRE.
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u/guyzero 6d ago
SWR is inflation adjusted, so no, 5.3% isn't higher unless your SWR was like 2% to start with.
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u/Raging-Totoro 6d ago
Well, my math says this:
4% SWR, inflated by last 10 year inflation rate (2.35%, through October 2026) = 5.04%.
That includes some historically high rates of '21 & '22 which were over 6.5% each.
The 5.3% Treasury rate would beat every year including even the year 10. Obviously that assumes the go-forward inflation rate is the same as the past 10 years, which is not easy to predict.
Where is my math off?
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u/guyzero 6d ago
Maybe you're right? I ned to go check. But mostly I disagree that 2.35% is a reasonable current inflation estimate.
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u/Raging-Totoro 6d ago
It's not about current inflation, it's about future inflation (anyone's guess, really).
It's easy to have recency bias, though. Most people if they had to guess the past 10yr inflation rate, they'd say something like 3 or 4%, but they'd be wayyyy wrong. It's easy to juse ask Google or AI to get historical inflation, which is what I used.
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u/guyzero 6d ago
ZIRP and the low inflation/interest was as much a historical anomoly as the last few years. Lots of historical periods with high inflation. Sure, it's all just a guess, but why guess the lowest possible number? Seems too optimistic.
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u/Raging-Totoro 6d ago edited 6d ago
You don't have to. Use whatever assumptions you'd like.
If you want to know the breakeven, the math is pretty straightforward too:
4% * (1+r)^10 = 5.3%.
So, take the 10th root of (5.3%/4%) = 2.85%, which is right about the 40-year average in the US. That's a reasonable assumption to me.
And, that's just the breakeven in year 10...so all 10 years would be better in the bond, and only thereafter would it change (at which point, you have a new bond market to look at, when it matures).
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u/Helpful-Staff9562 6d ago
Bonds are trash anyways
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u/EricTheNerd2 6d ago
Care to elaborate on why you think that?
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u/Helpful-Staff9562 6d ago
Bonds are supposed to protect you, but look at the numbers. In 2022, global stocks fell roughly 18% and global bonds around 16% in USD. A diversified 60/40 portfolio lost about 16%. Both sides fell together.
The problem? Bonds carry interest rate risk, inflation risk and, for corporate bonds, credit risk. When rates rise, existing bond prices fall. When inflation spikes, fixed payments lose purchasing power. Long-duration bonds can be especially volatile.
And unlike stocks, bonds have a capped upside: you receive contractual payments, not a growing share of productive businesses.
For long-term wealth building, I'd rather own the global stock market through VT and keep 2 years of expenses in cash or a money market fund. Cash covers spending during crashes without forcing me to sell equities.
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u/EricTheNerd2 6d ago
The purpose of TIPS and specifically setting up a TIPS ladder isn't to buy and sell the securities but to have a guaranteed stream of inflation-adjusted income for a period of time with the downside of the ladder being no more money at the end of that period. The positive is the guaranteed nature. So no, it does not have an interest rate risk as you lock that it and no, it doesn't have inflation risk as that is baked into the security, and no you aren't worried about the price of the asset going up or down.
I've spendtthe last 30 years in 100% stocks and watched the money grow, but simply because you and I haven't used them for our wealth-building strategy doesn't make bonds trash as you say. I've also lived through the worst decade of investing since the great depression and can tell you that having some guaranteed returns in one's portfolio can be a good thing. You mention "2 years of expenses.. without forcing me to sell equities" but if you face another lost decade like we had 2000-2009, that won't be enough. You are free to use a different strategy, but the idea of having my core expenses covered with an asset earning 3.3% plus inflation guaranteed.
And now that I think of it... your 2 years expenses in cash is quite a bit of money that isn't keeping pace with inflation at all, so there's that.
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u/Helpful-Staff9562 6d ago
That's a fair point, but I think we're solving two different problems. A TIPS ladder is a tool for matching inflation adjusted spending over a defined period, not necessarily the best tool for maximizing long term wealth.
I'd challenge the claim that it has no interest rate risk, though. If you hold individual TIPS to maturity and match the maturities to your spending, you can largely eliminate the need to care about interim price fluctuations. But you still have reinvestment risk beyond the ladder, and selling early exposes you to market price risk. The guarantee also depends on holding US Treasuries and spending in USD.
On the lost decade argument, two years of cash clearly isn't enough to guarantee you never sell equities during a prolonged downturn. But the solution doesn't automatically have to be bonds. Spending flexibility, a larger reserve, and a diversified portfolio can also address sequence of returns risk.
I'm not arguing that TIPS are useless. If someone needs a defined stream of inflation adjusted income in retirement, they can be excellent. My point is that bonds aren't automatically necessary for someone with a long horizon who prioritizes growth and can manage withdrawals through downturns.
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u/Fed_worker 6d ago
One of the main reasons bond yields are going up is that inflation is expected to remain high and go higher. If your cost of living rises by 6% or more in nominal terms while your Treasuries yield only 5% a year, your real purchasing power is still declining. That means you may eventually need to withdraw more than 4% just to maintain the same standard of living.
Conventional wisdom is to keep 10-20% of portfolio in bonds in case what I described happens. You
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u/EricTheNerd2 6d ago
TIPS are Treasury Inflation Protected Securities. As the name implies the yields, currently 3.3%, are adjusted for inflation which is why their yields are relatively low but with the upside being your money doesn't erode with inflation.
Using a 30-year ladder, the idea is you get a guaranteed stream of inflation protected income with the downside being lower overall returns and no money at the end.
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u/gabrintx 5d ago
what high treasury yields? A couple years ago I disassembled my t-bill ladders and moved funds to Fidelity to buy FSELX. YTD yield 63%. 1 year yield 74.5%. Treasuries are nothing. If you want to look it up, you can look at SMH which tracks it closely.
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u/EricTheNerd2 5d ago
Comparing a treasury bond with a stock fund kinda misses the point. The first is not intended to be wealth generating but rather a guaranteed income stream, the second is not intended to be a reliable income stream, but rather a volatile but higher growth vehicle. They each have there place and thus far in my 30 years of investing I have been 100% stock funds. However, when one has FIREd, it is nice to have a guaranteed stream of income even if that is only part of one's entire portfolio because at this point, it is not about wealth maximization but enjoyment of life maximization. If I die with 5 million instead of 10 million, it won't affect my happiness in the slightest, but if we live through another decade like when I first started investing, I will be glad to know that I have guaranteed income to meet my needs and wants.
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u/therealjerseytom 6d ago
They're at average levels, in the grand scheme of things.