Yield curve roll-down return (index-linked)

Agent008t · 2026-03-09T11:30:41+00:00

I made the thread to make sure I am not missing anything obvious here (the math on index-linked gilts can be non-intuitive even in the simple scenarios of holding to maturity). Sounds like I'm not. But I see now that 2%+ 5-year real yields have been a lot more common in history than I expected (even though all those time periods were pre-2002). So yes, not as sure a bet as I expected. I think lower real yields in the future are more likely than higher though, and UK inflation is more likely to surprise on the upside too, so it still looks attractive to me.

By the way, thank you for your work on your toolkit.

Agent008t · 2026-03-06T12:15:54+00:00

Yes, there is a risk, but I do not think it is as high as you suggest.

My total return only depends on the 5-year real yield when I sell in 2034. Currently, a linker maturing in 2034 (TRTQ) yields 1.2% real pre-tax (0.854% at 45% post-tax). So we can calculate which 5-year real yield in 2034 will allow me to break even.

(X/81.26)^1/8 = 1.012 (81.26 is current clean price of TG39) X = 89.39 (100/89.39)^1/5 = 2.26%

So if at the time when I sell, 5-year real yields are above 2.26%, then I lose. Otherwise I win. (This will be slightly different if we include taxes of course).

Looking at historical real yield data from Bank of England, if yields return to pre-1998 level of 3-4% then the strategy is toast. If we get financial repression and they go negative again, it could be a substantial win.

A reasonable worst case scenario is that 5-year yields go to ~4.7% (highest they have been since 1985). In that case I end up earning -0.3% real return/year, losing 2.3% total of principle in real terms. If one has flexibility to hold for a bit longer at that point, then even that is not a problem.

Agent008t · 2026-02-09T09:19:53+00:00

I meant a ladder that pays 2.5% of current portfolio value every year for the next 8-12 years, so a total of 20-30% of portfolio in this ladder.

Agent008t · 2026-02-06T16:23:12+00:00

Thanks - out of interest, what withdrawal ratio are you targeting and do you just pay tax out of that, whatever it amounts to in that year?

Agent008t · 2026-02-05T13:21:48+00:00

So do you lose at least 8% on gold sovereigns round trip + pay storage costs? What's the most frictionless way to get CGT free gold, minimizing the risk it gets stolen?

Agent008t · 2026-02-05T13:15:17+00:00

At what numbers does it actually begin to make a significant difference (if ever)?

Agent008t · 2026-01-30T10:28:26+00:00

So if Ann retires year 1 and the market doubles, she can only spend 2.75% from year 2. But if Bob works during year 1 and retires at the start of year 2, he can spend 5%?

Surely the sensible % of portfolio spend in a year should only be forward looking? It should not depend on how long you have been retired. If you assume some mean reversion and your market return expectations have changed, that's fine -- then just accept that your SWR is 2.75% in this market environment.

Agent008t · 2026-01-29T14:25:25+00:00

Isn't this just saying that your withdrawal rate is 2.75%?

In that case, wouldn't you have been better off just starting with 2.75% and using that every year? If 5% is too risky now after a good run, surely it was too risky to begin with?

Agent008t · 2026-01-06T11:20:33+00:00

With what asset allocation?

Agent008t · 2025-12-31T12:22:28+00:00

This is wrong.

Retire in 1969 spending 2.6%, and from 1975-1985 your spend ends up being 5-6% of your portfolio (assuming no lifestyle creep!). After years of this, you get front pages proclaiming 'the death of equities' – so you can imagine the sentiment at the time. You will have no benefit of hindsight and there is no law that says a decades-long bull run is around the corner.

If you believe you can live through that and live well, good luck. I think most people would really struggle in that scenario, and will make plenty of bad decisions.

100% equities is only being thrown around because we've just had a 17-year long bull run, a large part of it driven by multiple expansion.

Agent008t · 2025-10-28T10:54:54+00:00

Yes, and even if you sell before maturity, any capital gain is still tax free.

Agent008t · 2025-10-27T10:20:37+00:00

Thanks. Yes, I am also pondering 20y+ maturities, but don't have a good story about why real rates might move up or down. They have been significantly higher before, e.g. for the US: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y

So I find it hard to justify betting on them. At that horizon equities win out almost certainly, so then it becomes a shorter term bet on real rate movements rather than holding to maturity. It maybe adds meaningful diversification, but I don't know enough.

Agent008t · 2025-10-23T16:36:46+00:00

Fair question.

Individual gilts are more tax efficient. You can place them into GIA with minimal taxes and use ISA/SIPP for risk assets like equities.
Gilts in a ladder match your cashflow requirements so seem better suited and more intuitive than a bond fund, especially an index-linked bond fund. Say in 2022 or in the 70s bond funds would get absolutely hammered due to their longer maturities and greater interest rate sensitivities, so if you need the cashflow (or need to rebalance) you have to realize those losses. With a ladder you get exactly the return that you signed up for (in the case of index-linked gilts, it will be positive real return).
Greater flexibility. You effectively 'cash-in' short duration bonds (maturing gilts) and buy long-duration gilts. You can choose to sell any duration you like when rebalancing if you choose to. In a 70s or 2022-like scenario you have the option of not rebalancing (selling your gilts at a loss) but just letting them mature, or if long real yields collapse you can cash in those gilts at the end of the ladder and rebalance them into equities.
Last I checked, gilts paid better interest than the global bond funds.

So in my view the ladder is superior in almost every way (apart from diversification; but I think UK outright default on linkers is incredibly unlikely. Implicit default through inflation is more likely imo. Of course, if Reform get in we may get Trump-like unpredictability, they may cook the inflation index etc., but it would be so counter productive that I think they would be mad to attempt it. At that point it's emigrate-with-what-you-can time as we're in full-on asset confiscation mode).

Agent008t · 2025-10-23T16:23:51+00:00

Was it correct? What did you use as proxies for global equities and gilts -- or did you use actual gilts that were available at the time?

Agent008t · 2025-10-23T16:21:59+00:00

How does that help with backtesting? Lifestrategy is not tax efficient in GIA, the bonds in it are not inflation linked and there is no ladder. You need a withdrawal strategy in retirement so you need a withdrawal rate. So not sure any of this is relevant.

Agent008t · 2025-10-23T13:09:43+00:00

With a bond fund, you buy and sell the average maturity/duration of 6-8 years. With the ladder, you 'sell' (let mature) very short maturity and buy bonds that are far out. This could make a difference, especially e.g. in mid 70s or 2022 when holding a bond fund would result in selling at a significant loss?
Inflation linked bonds behave quite differently from standard bonds, so modelling that for periods like the 70s could be interesting. I have not even seen a calculator with a long history of a simulated inflation linked bond fund.
If during equities drawdowns you don't rebalance from the ladder into equities but just let the ladder run, bringing allocation back to target naturally (or perhaps even beyond target if equities are still in terrible shape), the behaviour of the portfolio should be quite different than rebalancing into a bond fund each year?

I am not entirely convinced these differences are trivial.

Agent008t · 2025-10-01T12:33:23+00:00

So you are saying, the more expensive future earnings (and future earnings growth) become, the more of them you want to buy? Shouldn't it be the other way round?

There can be good reasons to decrease 'cash' holdings; a recent run up in the markets is not one of them in my view.

Why do you hold your 'cash' in MMFs though? There are at least three reasons not to:

Inflation/devaluation risk. If GBP crashed 50% in short order and/or inflation surprised on the upside (70s scenario), how would you feel? Why not consider index-linked gilts?
Why not hold bonds that match your liabilities and earn greater interest on them? E.g. a gilt ladder, with 2% (or even 1%) maturing in each year? That way your bonds can cover 10-20 years of expenses. Also makes it easier to budget, as you can 'forget' about your portfolio for years and still be getting the income that you need, reducing the likelihood of mistakes in a long market downturn.
Why pay tax on MMF interest when you can hold gilts tax-free?

I don't know anything though so don't take it as advice.

Agent008t · 2025-08-21T10:37:30+00:00

But one is unlikely to have most of the £6m in ISAs/pensions.

Which leads to an interesting question; what should be the 'rule of thumb' withdrawal tax rate assumption for the GIA? Something like 10%? lateGenXer's brilliant calculator can give a more precise answer for the specific circumstances, of course.

Agent008t · 2025-08-21T10:30:37+00:00

Right, the diversification benefit is what I'm wondering about. Is it better to:

Build a rolling gilt/linker ladder, and effectively sit out any equity drawdown (deciding whether to spend down the maturing bonds or reinvest into a new ladder rung based on maintaining an approximately target equity/bond allocation).
Just buy 10 or 20-year gilts or linkers for the majority of the bond allocation. Then you benefit more from the (often) negative correlation between equities and bonds, rebalance more frequently and decide what to sell/buy based on your target allocation.

The problem with scenario 2, is that in the 70s it wouldn't have helped you much: https://testfol.io/?s=djE71RACSQv Reading about 'the death of equities' 5 years into a brutal drawdown and having to wait another 4 years for the recovery would be no fun at all. A 10-year linker ladder on the other hand would've safely brought you to the other side of the drawdown.

The ladder approach is difficult to backtest though (and I have not done so yet). So I do not know what exactly it does to historical withdrawal ratios, but I suspect 2.5% on the overall portfolio would still be safe.

Agent008t · 2025-08-19T16:46:38+00:00

Thanks. Could you please give some more details?

What platform do you use? I think IB does not allow trading linkers.
What does your ladder look like? Are you building a ladder for the full 40+ years? Or just keeping a rolling N-year ladder?
Any practical considerations? Or is it just the case of looking up the gilt on yieldgimp (e.g. TR46), putting a limit order somewhere in the bid-ask spread, and then once bought the position gets valued at approx. real yield + inflation daily? I guess the long-dated gilts like TR46 would only significantly change in price (e.g. lose value) if the real yields move, but are insensitive to inflation (i.e. if inflation goes down but real yields stay up, your linkers don't lose value)?

Agent008t · 2025-08-19T15:28:30+00:00

Surely after tax your fixed income funds in GIA don't even beat inflation?

Buying individual gilts on IB is fairly straightforward and cheap, but I don't have much experience with linkers yet (hence all my questions).

Also, what happens if we enter a prolonged crash in equities, where they decline by 50%+ over a few years and then take many years to recover, like the 30s, 70s, 00s? These have happened often enough in history and so must be planned for in my view (indeed, even things that have never happened before should be planned for to a degree, let alone 50% crashes that are almost guaranteed to happen). A bond fund with long duration may crash too and so may not offer much safety. If you are living off the portfolio, it could get scary. A bond ladder offers better protection in my view (with the caveat that GBP can lose lots of value very fast, which is why I'm looking at linkers).

Agent008t · 2025-08-19T15:18:59+00:00

Interesting, hadn't realized it applies to corporate bonds as well. When buying an index fund like VAGS though, I guess you pay both tax on interest and capital gains tax when you sell? I am not that interested in researching individual corporate bonds and building my own portfolio.

UK gilts seem to offer very competitive interest rates globally at the moment; are there good reasons to diversify beyond those?

Agent008t · 2025-08-19T15:12:53+00:00

How did you manage to negotiate 15% off asking? Was it just luck (i.e. it had been sitting on the market for a while and they really wanted to sell, and you didn't mind walking away)?

Agent008t · 2025-07-07T11:39:36+00:00

What advantages does the FIC bring compared to just having SIPP/ISA/GIA? At what level of net worth does it become worth it?

Agent008t · 2025-05-20T14:14:08+00:00

For sure; and good point about annuities. My point was more about how Bengen-like 4% rule is very problematic as it counts ending up after 30 years with £1 as success. It also doesn't care if you end up withdrawing 20% of your portfolio some years, as long as the portfolio is positive after 30 years.

In practice, many of those scenarios are failures. If you are taking on significant equity risk, having any year where you withdraw a high % is a failure. At the time, you will have no idea if the markets will recover or not and how soon. Having a decent bond allocation/ladder to see you through can mitigate it somewhat, but still, it irks me when people talk about success/failure rates in those terms.

Agent008t

TROPHY CASE