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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35365  
Subject: Re: Bernanke, I and EE Bonds Date: 10/27/2005 10:07 AM
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I stole the inflation numbers off some Googled web site, where I had do one year at a time. I won't attest to their accuracy, though they seemed right.

I took my numbers from the BLS website, but they had rounded them to 1 decimal place. The differences were negligible, so I don't believe they would affect the outcome I got on my spreadsheet. In case anyone's interested, here are the BLS numbers for inflation:

1914 1.0
1915 1.0
1916 7.9
1917 17.4
1918 18.0
1919 14.6
1920 15.6
1921 (10.5)
1922 (6.1)
1923 1.8
1924 0.0
1925 2.3
1926 1.1
1927 (1.7)
1928 (1.7)
1929 0.0
1930 (2.3)
1931 (9.0)
1932 (9.9)
1933 (5.1)
1934 3.1
1935 2.2
1936 1.5
1937 3.6
1938 (2.1)
1939 (1.4)
1940 0.7
1941 5.0
1942 10.9
1943 6.1
1944 1.7
1945 2.3
1946 8.3
1947 14.4
1948 8.1
1949 (1.2)
1950 1.3
1951 7.9
1952 1.9
1953 0.8
1954 0.7
1955 (0.4)
1956 1.5
1957 3.3
1958 2.8
1959 0.7
1960 1.7
1961 1.0
1962 1.0
1963 1.3
1964 1.3
1965 1.6
1966 2.9
1967 3.1
1968 4.2
1969 5.5
1970 5.7
1971 4.4
1972 3.2
1973 6.2
1974 11.0
1975 9.1
1976 5.8
1977 6.5
1978 7.6
1979 11.3
1980 13.5
1981 10.3
1982 6.2
1983 3.2
1984 4.3
1985 3.6
1986 1.9
1987 3.6
1988 4.1
1989 4.8
1990 5.4
1991 4.2
1992 3.0
1993 3.0
1994 2.6
1995 2.8
1996 3.0
1997 2.3
1998 1.6
1999 2.2
2000 3.4
2001 2.8
2002 1.6
2003 2.3
2004 2.7

I take it you averaged the 5-years (I didn't bother) and got 2.57%.

Yes.

(90% would be 2.31% for EEs.)

Yes.

I was just suggesting with the 3% SS proposal that they were claiming that as the historical real return for long bonds, so 2.25%-2.5% for EE bonds made sense as the right ballpark.

I understand. When I was evaluating the proposal, I was using the shorter-term rates because I'm within (hopefully) 7 years of retirement. That's why I could never hope to recover the SS benefits they proposed taking out of my pocket--but I'll get off that soapbox now. ;-)

I hadn't actually looked at the year to year numbers before, and whatever the average, they do make me more inclined toward 10-year TIPS of 2% and above, even if I can get 5-year CDs of 5%-5.25%. We'll see what things look like come January,...

Do you consider 2% realistic, or just hoping?

I just did a search on tax treatment of TIPS, and for those in my tax situation (high marginal Federal, State and City), it appears that the only reasonable place to hold them would be in a Roth. Many suggest holding them in a tax-deferred account, but then you lose the benefit of the local tax exemptions, as all withdrawals from tax-deferred accounts are taxed at the local level. (An eye-opening point for those of us in high tax localities)

Here are 2 links you (or others) might be interested in reading. I found both informative and they added to my understanding of how these markets work. Both are based on 'old' info, so tax and return rates have changed, but the underlying explanations are still good, IMHO. They might contain some good content for the FAQs of this board:

A paper on TIPS tax treatment vs: conventional Treasury securities:

Are Treasury Inflation Protected Securities Really Tax Disadvantaged?
Scott E. Hein, Briscoe Chair Professor of Finance
Rawls College of Business Administration, Texas Tech University
Jeffrey M. Mercer,Associate Professor of Finance
Rawls College of Business Administration, Texas Tech University

http://www2.tltc.ttu.edu/hein2/images/TIPS%20November%202003.pdf


An Andrew Tobias 2000 article on TIPS in which he mentions the tax-deferred account taxation drawback:

And a footnote to the retirement-account solution to the tax problem is this minor but annoying little twist. Namely, that TIPS, being Treasury securities, are meant to be free of state and local income tax. Yet if you own them inside a retirement plan, they will be taxed, when you withdraw them, like any other retirement dollars you withdraw from the account -- as ordinary taxable income.

http://www.andrewtobias.com/newcolumns/000512.html

My apologies to all those who already know/knew this stuff--I didn't.

2old
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