Help me understand the math behind Mark Hulbert's article claiming you can get inflation-protected income for life by mixing 50% TIPS with 50% in an annuity. See https://www.morningstar.com/news/market ... -set-it-up
The article notes the obvious about inflation that:
by strategically combining an annuity with a TIPS ladder, it's possible to construct something otherwise not available in the financial markets: An inflation-hedged life annuity.
I don't understand how the TIPS ladder protects anything but itself from inflation and don't see how a 50%-50% mix turns into an inflation-hedged life annuity. Maybe it's just a matter of what we call it, but the annuity portion is not inflation hedged at all and once the 30 year TIPS are gone you will face the full effects of inflation.
The article also gives the advice that the inflation rate above which you'd be better off with a TIPS ladder and below which you'd be better off with an annuity is between 3% and 3.5%.
In any case, I really don't see the advantage to buying an annuity early as opposed to holding it in TIPS (perhaps laddered to mature a large amount to purchase an annuity at a later date when you are older and can get a higher payout rate - ie take better advantage of mortality credits).
The article notes the obvious about inflation that:
And Hulbert cites Edward McQuarrie, an emeritus professor at Santa Clara (Calif.) University who asserts that:At 3% inflation, which is close to the current rate, an annuity payout that stays constant in nominal terms will have 60% less purchasing power in 30 years' time. At 4% inflation, your purchasing power will be 71% lower.
by strategically combining an annuity with a TIPS ladder, it's possible to construct something otherwise not available in the financial markets: An inflation-hedged life annuity.
I don't understand how the TIPS ladder protects anything but itself from inflation and don't see how a 50%-50% mix turns into an inflation-hedged life annuity. Maybe it's just a matter of what we call it, but the annuity portion is not inflation hedged at all and once the 30 year TIPS are gone you will face the full effects of inflation.
The article also gives the advice that the inflation rate above which you'd be better off with a TIPS ladder and below which you'd be better off with an annuity is between 3% and 3.5%.
In any case, I really don't see the advantage to buying an annuity early as opposed to holding it in TIPS (perhaps laddered to mature a large amount to purchase an annuity at a later date when you are older and can get a higher payout rate - ie take better advantage of mortality credits).
Statistics: Posted by typical.investor — Sun Sep 15, 2024 3:44 pm — Replies 2 — Views 239