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Your after-tax, IRA, and Roth accounts each contain a mix of the following:
When you are ready to commit to a particular portfolio computation, you find your shopping list for year 0 under each account, with a page for each asset type.
The S&P 500 is the oldest, most studied index of stock market performance. Hedgematic uses an S&P ETF to capture stock market income and gains. Your brokerage account and any retirement accounts each may have S&P holdings.
Hedgematic tracks S&P holdings in “S&P units”. Each unit is valued at the current S&P average. Your ETF will be priced differently. When you are directed to buy or sell so many units, multiply by the current S&P and divide by the current ETF to get the number of ETF shares to transact.
On day 0, inflation adjusted values and actual dollars are the same. In the first year, as displayed here, you have deployed all Roth assets to S&P.
Following the initial purchase, you are not directed to make any additional purchases, with the exception of reinvested dividends. (there are also in-kind rollovers). In effect, your S&P assets are split into individual tranches, each targeted at a particular year and “held to maturity.”
Hedgematic specifies S&P unit withdrawals for each year. You could just uninstall the app and follow the plan, withdrawing your yearly sums. More likely, you will look to rebalance each year.
The dollar figures shown in future years are estimates denominated in today’s dollars, so you should not expect them to match your future sale proceeds. Your proceeds, if you do back out future inflation, may come out higher or lower than the today’s dollar figures shown, which are modeled estimates. Navigate to the Lessons page to learn how this model is constructed and employed.
There is a chance that these proceeds may not meet your specified after-inflation expenses. You indicated your tolerance for this outcome with the risk aversity you included when you created your profile. But there will be a payday every year. Barring national catastrophe, you will not run out of money.
Above is an out-year display.
At the top of the screen, you see you are holding multiple lots of S&P. At the top is your original 14.07 S&Ps. Following you see reinvested dividends for nine years.
In 2033, you are instructed to roll 3.23 S&Ps from your IRA to this Roth.
In later years, you are instructed to sell part or all of particular tranches. Sale proceeds wind up in cash where they are drawn to support your year’s expenses.
Three charts are shown. Swipe to view each in turn.
Yearly total account balances.
Withdrawals are on top. Initial purchases, reinvestments, and roll-ins are on the bottom.
If we are in an after-tax account, these figures show up on your tax return. Otherwise, they are tax-free accumulations.
Hedgematic uses TIPS to to hold the inflation/market risk protected portion of your portfolio.
Bonds are purchased on day zero and held to maturity. We are not concerned about intervening volatility, as we are just purchasing a known current dollar sum as of the maturity date. Bond funds that mix maturity dates take on unnecessary market risk.
Displayed above is your day zero TIPS shopping list for your IRA account. You see a ladder of bonds, each of which are redeemed in separate years to give you the guaranteed portion of your yearly expenses. Note that as the term increases, the values decrease. In the out years we can rely more on the typically more profitable S&P to provide more income.
Your broker will list these bonds with treasury bills. The maturity date and coupon yield (in column 2) is used to identify the specific bond.
When issued, these bonds are denominated at $100 “par” value. The third column tells you how many individual bonds you will buy. Many brokers deal only in $1000/ten bond trades. If that is the case, divide the quantities by ten and enter the rounded count in your order.
Since they were issued, their principal value has been contiuously updated for inflation, so you no longer see 158 bonds worth $15800. Your purchase price reflects the additional coupon and redemption value of the bond. This multiplier is called the factor, and is reported along with other bond info.
Bonds will pay coupons twice a year. In after-tax accounts, coupons and an inflation adjustment are reported as income.
Bond income and redemptions are drawn from the account at the end of the year and applied to next year’s expenses.
Figures shown in following years are denominated in today’s dollars, and can be relied on with one exception; the inflation adjustment shown is only an estimate and has an effect only in after-tax accounts.
Drill down to see more information on individual bonds.
Three charts are shown. Swipe to view each in turn.
Total bond value decreases as earlier maturities are redeemed.
Tall bars are redemptions. Tiny bars are coupons.
If we are in an after-tax account, these figures show up on your tax return. Otherwise, they document tax-free accumulations.
The information at the top of the page is commonly available when shopping for bonds.
Visit your broker’s Treasury Bonds page. Locate the TIPS bonds.
Each issued bond has a maturity date and a coupon rate. Find the bond that matches the first two columns.
Buy the quantity shown in the third column. This is tricky. The amount you order is not the amount you pay.
The actual price of the bond is computed as the Factor times the Ask.
The amount you pay also includes adjustments to compensate the previous owner for their share of the next coupon.
Your broker will likely offer a ladder builder, where you can enter all the bonds you want first, then buy them in a single transaction.
Three charts are shown. Swipe to view each in turn.
Present value of bond declines as coupons are paid out.
See small coupons followed by big redemption.
The coupons are in today’s dollars. Your adjustments will vary. If the bond is held in a broker account you will have to pay taxes on both coupons and adjustments. These adjustments are estimates from yield curve data of future inflation rates.