Investing - Theory, News & General • Re: Filling the TIPS gap years with bracket year duration matching

Combining the two plans in a 50/50 approach (i.e. averaging the results in the above table with the equivalent one in the previous post), leads to the following outcomes for income and number of rungs N.

Code:

YTMIncomeN-4406355.08-3404425.06-2402675.04-1401085.020399695.001398494.982397444.963396604.954389364.94

Holding a fixed proportion of bonds pre- and post-gap, greatly improves the results even over this large range yields. For example, the total income only falls to about 3% below the $40k target at a yield of 4%. Of course, this is not duration matching since the proportion of before and post gap bonds is fixed at the start and does not respond to changes in yield, and hence duration, but does result in an income that may be close enough to that required.

Cheers
StillGoing

It seems to me that averaging the results for filling with all 2034s and filling with all 2040s would give results equivalent to filing each gap year with a 50/50 mix:

Code:

year       filled with bracket years2035       50% 2034 and 50% 20402036       50% 2034 and 50% 20402037       50% 2034 and 50% 20402038       50% 2034 and 50% 20402039       50% 2034 and 50% 2040

What isn't quite obvious to me is whether the result would be the same if one followed the actual plan which is to fill the gaps like this:

Code:

year       filled with bracket years2035       83% 2034 and 17% 20402036       67% 2034 and 33% 20402037       50% 2034 and 50% 20402038       33% 2034 and 67% 20402039       17% 2034 and 83% 2040

Does averaging give the correct result for both of these filling methods, or not?

I think it depends on exactly how you are going to fill the gap.

In the analysis I've done above, I've assumed that in 2034, the retiree liquidates all of the 2034 assets (if any) and any of the 2040 assets in excess of those required to provide the income for 2040 (again, if any) in order to construct the entire 5 year ladder (and to obtain income for 2034). For that approach, I think the two filling methods you've outlined above are identical.

However, if the rungs are filled as and when assets become available to invest in (i.e., a TIPS maturing in 2035 will presumably become available next year) then the two filling methods are likely to produce different results. That the two methods will give different outcomes will also be the case if the assets are liquidated one year at a time from 2035 onwards.

cheers
StillGoing

Statistics: Posted by StillGoing — Wed Jul 10, 2024 3:38 am

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