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SWR and AA as a function of real yields
The 5-year breakeven inflation rate implied by TIPS versus treasuries is now 2.13%. However, one can now earn about 3.2% above that expected inflation in risk-free assets like FDIC-insured CDs. Usually, risk-free rates offer real interest rates closer to zero.
Take a couple of steps out on the risk spectrum and find lots of money-good corporate bonds and preferred stocks yielding 6%+, which suggests real yields near 4% are available from sources that used to be considered the ballast or baseline income of portfolios.
I'm reluctant to say the breakeven rate is wrong, because that makes me one internet opinion versus the most liquid and well-informed markets on earth. The only way I can process all this seemingly incongruent information is to accept the conclusion that decent-sized positive real returns are now available from low-risk and no-risk sources. Do you agree?
And if that's the case, most of what we assume about optimal asset allocation and SWRs based on previous decades' experience may be incorrect for the current conditions. Fixed income assets are suddenly offering real yields of +3-4% AND many of them also offer appreciation potential if rates go down, as markets expect they will.
Doesn't this suggest an AA tilted more toward fixed income? And if fixed income is supplying a larger proportion of our real returns, does that mean our income stream is less risky and can support a higher WR?
Example: Maybe an 90/10 AA made sense in the era of ZIRP, because that fixed income portion of the portfolio had a negative real yield. But maybe now a 60/40 AA makes sense because 40% of the portfolio can be hard at work earning a 2-4% real yield from a mix of treasuries and corporate bonds while simultaneously shielding more of our assets from SORR events.