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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Laddering, redux, redux, re-ducks Date: 7/7/2006 5:07 PM
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Just completed quartlerly review of finances and continue to get further ahead of plan, even when factoring this being a light year for home improvement/big ticket (last year went over budget and someday we will need a new car) and the stock market doing better than my conservative estimate. My goal, set after the crash of 2000, was an initial withdrawal rate of 3% in July 2014, and I now estimate 2.5%-3% under a range of probable scenarios (could be better if stocks and fixed-income yields do a lot better than I'm projecting: combined average return of 4.5%) and, of course, things could still go terribly wrong, either personally or nationally/world. But 2.7%-2.8% looks very likely, which lasts more than 35 years, just keeping level with inflation (including taxes).

As noted last quarterly review, I am now taking note of missing rungs in my ladder. Basically the ladder is supposed to provide cash flow for phase one of retirement, until RMDs kick in. I think there should be plenty of cash to cover expenses for that period (most people would throw the extra into stocks, but being ahead of schedule without more stocks, I'd rather pay extra taxes than risk a grizzly attack).

As long as 10-year TIPS look attractive enough (wish they'd wait until after next auction to tell bad economic news), I'm going to try to use those for January and July rungs, with 3 months expenses: there are 2 auctions for each due date, so how the ladder gets filled will depend on TIPS yields and cash flow. In a few years, I may go for 5-year TIPS, which would fit an April ladder, or I may just stick to CDs for spring as well as fall (and some extra cash flow through the year).

One thing I'm thinking about now is buying some July 2014, January 2015, and July 2015 TIPS and paying commission (probably not if rates keep going down). This would fill in a space in the ladder—the alternative would be 3 and 4 year CDs or 3 year Treasuries (but the auctions aren't often enough). I have some dead CDs that are now worth dumping and paying 6 month penalty, which is what I would use. I'd also be just as happy to be getting the low coupon payment: almost like buying Strips.

Of course, real inflation isn't CPI-U, but I generally like TIPS as a base for long term planning, provided I leave margin for error on the personal inflation side. I just hope the discovery that the economy has been running on smoke and mirrors doesn't lead bond yields to crash again. I think they might go down some, but there's too much debt (and a slowing economy will increase the debt) for yields to crash, at least I hope.
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