Delay bridge for Social Security, retirement income plan

[Airco_DH2_pilot]

Hi,
Assuming my wife & I retire when I turn 55, I'd like to get some advice on how best to build a 15 year social security delay bridge using secure income to cover basic essential living expenses until claiming social security at age 70.

Our retirement income preference is safety-first for minimum basic living expenses, but very comfortable with total return approach from a 60/40 portfolio for discretionary / fun expenses. Here are the numbers:

Emergency funds: 6 months of expenses.

Debt: just a little left on the mortgage, should pay off in 2026. Home is worth $500k.

Tax Filing Status: Married filing jointly

Tax Rate: 24% federal, 3.15% state
State of Residence: Indiana

Age: me (husband) 49, wife is 50

Desired Asset allocation: 75% stocks / 25% bonds (right now), 70/30 to 60/40 in retirement, TBD.
Desired International allocation: 30% of stocks

Approximate size of portfolio 1.6M


Current retirement assets

Taxable – $0.3M
10% Vanguard Total Stock Market VTI
6% Vanguard Total International Stock Market VXUS
3% Vanguard Total Bond Market BND
1% Vanguard Total International Bond Market BNDX

His 401k - $1.3M
80% Vanguard Target Retirement 2040 Fund VFORX
Company match? Yes, 50% of contributions up to 6% of pay.

HSA -$40k in SP500 index fund

No other IRA’s or 401k’s for me or wife

Pension: I have a fully vested cash balance pension plan projected to be worth $550,000 at age 55 (earliest possible retirement scenario). It can be taken as an annuity or lump sum upon retirement. If annuitized that is projected to be about $35k.


New annual Contributions
$34,000 his 401k (including company match contributions)
$90,000 taxable Vanguard brokerage account
$7,000 to HSA

Context
I’ve run the analysis in Open Social Security and it recommends that my wife take SS at 62 ($8k/yr) and I take SS at age 70 so that is our plan of record. My benefit plus my wife's spousal benefit cover our basic living expenses after age 70.

My question is really to get feedback on my retirement income plan. Assume we retire when I turn 55 (about 6 years from now). Using a 6% average growth rate & current contribution rates, my total investable retirement assets are projected to be about $3M (including the cash balance pension lump sum before annuitization). At that time almost 1/3 of that $3M should be in the taxable brokerage account. The pension if annuitized is projected to cover about half of our basic (minimum dignity floor) expenses ($35k of $70k total basic expenses) in retirement. I acknowledge this purchasing power gradually erodes with inflation. At age 70, our combined Social Security payment will cover 100% of our basic living expenses in retirement. If I pre-decease my wife, then her survivor benefit would fall short of covering those basic living expenses.

I like the idea of annuitizing my cash balance pension plan because if I retire at 55, we have no other source of secure income, so I feel more comfortable turning that on at least. Even though the purchasing power of this erodes with inflation, it would also provide secure cash to augment my wife’s Social Security survivor benefit if I die first.

I don’t think I want to buy a SPIA at age 55 that fully covers our basic expenses starting at age 55 because when I claim SS at age 70, that plus the “full SPIA” would be fixed income at a level well in excess of basic living expenses & I’d have given up investable capital too early. So that seems sub-optimal, but I'm open to advice (seeking it really).

Assume the $3M portfolio is split out 60/40, that puts $1.8M in stock index funds. Another $550k gets annuitized in the pension plan, netting us $35k in annual secure income. The remainder is the fixed income portion that can help build the social security delay bridge. I'd also view a 1% withdrawal rate from the $1.8M stock index funds as equivalently low risk as fixed income, so some low level of spending from the stock index fund is an option to build the SS delay bridge to age 70.

Questions:
1) How best to generate approximately $35k / yr of additional secure income during the 15 year period from age 55 to age 70, assuming I’ve already got $35k coming from my pension? (Secure income target is $70k). What fixed income strategy would you use & why? Pros & cons?

2) Any other advice on how to build out the retirement income plan? See anything that I'm not considering with respect to the income plan?

Thanks in advance for the feedback.

[Coastingthrulife]

IMO, this is a great time to start asking questions, getting answers, and test driving different scenarios.

Personally, I took my annuitized pension at 55 because I wanted guaranteed monthly income and, 15 years later, I wish I had held off until 65. I thought I needed it, but really did not.

Wish we knew what your DW's ss benefit will be at 62 because that will firm up some suggestions.

In the meantime, if your forecast is accurate, you will be have plenty of taxable and pre-tax assets to draw from. Taking $70K from your 401k each year creates a taxable event, but also reduces future RMDs. Delaying your pension will keep your income tax bracket low.

Plus, your annuitized pension grows to, what, $70K when you start it at 65. Now, between that and SS benefits, you are set.

But all this is pure speculation - spend 6 years scenario playing. I did and it helped.

[Airco_DH2_pilot]

Thanks for the input, my wife’s SS at 62 is about $8k per year. Sorry I left that out, good catch.

Aside from covering essential expenses with secure income, my other strategic priority was to minimize sequence of returns risk during this 15 yr delay period. My third priority was to address inflation / longevity risk after age 70, but I feel I am doing that by delaying SS, and maintaining a robust stock index fund portfolio for the long term.

[Irene]

Note that as we were just discussing in another thread, Opensocialsecurity is almost always going to recommend that one spouse claim benefits early, on the theory that you're going to be plowing them into the market and earning better returns. But that will in fact reduce your benefits forever (as the spousal benefit will also be reduced if your wife claims early), and if you live a long time and your investments weren't perfect, the difference may come back to bite you. Personally I prefer the idea of maximizing the eventual monthly check, because where else am I going to get an inflation-adjusted annuity with a survivor benefit like that? Others prefer differently, and that's fine, I just wanted to make sure you knew that was the choice you were making, especially given what you say about safety-first for basic expenses.

People always talk about 62 versus 67, but she could always just not claim for a bit and see how things go - the amount changes by the month and she'd get a bit more for every month she waited. But if she's going to take spousal eventually, there is no need for her to wait past FRA.

You should be well below the capital gains threshold, so could be doing some Roth conversions as well as potentially selling off stock or taking qualified dividends in cash. What's your plan for health insurance? If you're on ACA you may want to figure out the effect on potential subsidies (I believe capital gains, and otherwise untaxed interest from municipal bonds, do count toward your MAGI there).

[Airco_DH2_pilot]

Thanks Irene, I will explore the trade offs on my wife’s SS claiming age. I can model that in Boldin. The plan assumes ACA silver plan. Is there a good tool for modeling the effect of income sources on ACA credits?

[steadyosmosis]

No other IRA’s or 401k’s for me or wife

I would invest in a Roth IRA before I would invest in taxable.

[Airco_DH2_pilot]

No other IRA’s or 401k’s for me or wife

I would invest in a Roth IRA before I would invest in taxable.

Steadyosmosis, thanks for the reply.
Your signature reminded me that I forgot to list that I have an HSA that I am contributing to. I have edited my original post. My income is too high to do Roth. Back door Roth seems like it would be of limited gain right now but something I should probably look at again. I will be in a lower tax bracket in retirement than I am now. My plan modeled in Boldin includes fairly large Roth conversions during the SS delay period.

Thanks

[Airco_DH2_pilot]

IMO, this is a great time to start asking questions, getting answers, and test driving different scenarios.

Personally, I took my annuitized pension at 55 because I wanted guaranteed monthly income and, 15 years later, I wish I had held off until 65. I thought I needed it, but really did not.

Hi Coastingthrulife,
Can you say more about the lesson you learned above? Why did you not end up needing that secure income at 55? Maybe you had other sources of secure income or a tailwind from favorable stock market returns? You are certainly right about all the different scenarios that are possible. Thanks!

[dogagility]

Some thoughts.

My initial thought is that you don't need to worry about having a "bridge of secure income" from when you retire to age 70.

I suggest you put your numbers into the TPAWPlanner tool: tpawplanner.com. Even with extremely poor market returns (5th percentile in the Monte Carlo analysis) and maintaining your desired asset allocation, your portfolio could support your basic living expenses without having a "secure income". Essentially, your portfolio size and asset allocation would provide a "secure income".

If you really want an income bridge that is stable, a typical way of doing this is to purchase a ladder of inflation-protected Treasury bonds (TIPS). In your case, this would be ladder of individual TIPS with a TIPS maturing yearly from age 55 - 70. Here is a tool that can be used to generate this ladder: https://www.tipsladder.com/

Right now, you don't have sufficient money to purchase a TIPS ladder that would provide a yearly income of 70K for 15 years. Using today's TIPS yields, this would require about 900K. You only have 300K in your taxable account and likely can't purchase individual TIPS in your 401k.

You could consider is purchasing a TIPS ladder in your taxable account now that would provide income from age 55 to 59.5.

When you retire, your could rollover your 401k and lump sum into an IRA and purchase individual TIPS in that IRA to cover years 59.5 - 70.

TIPS spin off taxable money each year, so are not too tax efficient if held in a taxable account.

Again, I don't think you need to purchase a stream of "stable income" from age 55 - 70 given your expected portfolio size relative to your spending needs.

Final thought. I think you should open up Roth or traditional IRAs for yourself and your spouse now and contribute up to the maximum allowed rather than put this money in a taxable account. If you put money in Roth IRAs, you can withdraw the contributions penalty free. Opening IRAs would at least delay taxes on any capital gains and dividends compared to putting the money into a taxable account.

Final, final thought. I suggest you maximize the purchase of I bonds each year (10K/spouse/year) rather than put this money in a taxable account. I bonds provide a stable, inflation-protected value that is fully liquid after being held for 1 year. Consider this part of your fixed income asset allocation.

Last thought... Health Savings Accounts are another great retirement tool to consider.

[jeffyscott]

Is there a good tool for modeling the effect of income sources on ACA credits?

It'll probably be equivalent to around a 15% marginal rate on additional income until you get to the 4X poverty threshold. You can get an estimate using this calculator: https://www.kff.org/interactive/subsidy-calculator/

When you get closer, you can get a better estimate by just entering your income, etc. on healthcare.gov and then modify that income to see how the results change. Of course, things could change before and after your planned retirement.

For my spouse and I, this factor makes the time when we will use the ACA the worst time to do Roth conversions or otherwise withdraw from a traditional IRA. We will most likely remain in the 12% federal tax bracket (with sole survivor moving to 22%), but the ACA will create an effective marginal tax rate of about 27%.

[Cah]

Keep your income under 80 thous for a decent tax credit on ACA. Once you both turn 62 reduce your IRA withdrawals and start taking your ss while your still young enough to spend it on fun instead of depends. And let your IRAs grow tax deffered instead of giving a big tax to the IRS any sooner than you have to.

[Coastingthrulife]

IMO, this is a great time to start asking questions, getting answers, and test driving different scenarios.

Personally, I took my annuitized pension at 55 because I wanted guaranteed monthly income and, 15 years later, I wish I had held off until 65. I thought I needed it, but really did not.

Hi Coastingthrulife,
Can you say more about the lesson you learned above? Why did you not end up needing that secure income at 55? Maybe you had other sources of secure income or a tailwind from favorable stock market returns? You are certainly right about all the different scenarios that are possible. Thanks!

Airco,

The lesson learned, for me anyway, is to maintain a 60/40 AA or higher and sell shares if we need any cash.

I became eligible for the pension in 2009 (at 55). As everyone knows, it was a bleak time. Our NW had declined 40% ($1.7M - $1M) and I sold out of equities (at the bottom of course). We held a promissory note ($250K @ 7%) with a 100 yr old company that filed for bankruptcy. Moved to east coast to be with ageing parents, rented, new job with some uncertainty, and higher expenses. I felt I needed guaranteed income. I figured 10 years at 50% was better than waiting until 65, so I signed up for the pension (including the clause that DW continues the pension if she outlives me).

We did not need the extra - Expenses were not as high, better than average wages came along, fixed income from investments was a boost, and picked up a PT job. Maybe my gut was right back then and have not back checked it to see.

Now, fast forward to 2015. Another major set of changes: parents passed away, inherited $550K, moved to Oregon (HCOL), semi-retired. We had little income (earned, otherwise) and higher expenses, but needed to keep MAGI low to qualify for ACA, so I increased equity exposure to reduce interest/dividend income and only sold shares if we needed money. Could have taken SS at 62, but the scenario said that was a bad move until at least 2019 or 2020. Based on past experience, I was now comfortable with selling shares for cash instead of guaranteed income.

For you, alot can change in the next 6 years. Your first set of decisions will be when you actually retire and have to bridge to 65. Still, between now and then, every 6-12 months work on your scenarios, ask questions, write down your plan. Update and revise as needed.

Hopes this helps...

[ScubaHogg]

1) How best to generate approximately $35k / yr of additional secure income during the 15 year period from age 55 to age 70, assuming I’ve already got $35k coming from my pension? (Secure income target is $70k). What fixed income strategy would you use & why? Pros & cons?

It’s been said, but a TIPS ladder is a pretty straightforward way to do exactly what you are asking to do. A 15-year ladder paying $35k a year would cost you about $460,000 today

https://www.tipsladder.com/generate

I don’t know how to share an actual ladder with the new website, but it’s easy enough to enter your requirements

[Airco_DH2_pilot]

Coastingthrulife,

Thanks for sharing your personal experience & lesson learned. Since you were still making an income not long after claiming that pension at 55, I can see how you might wonder if that was taking it too soon, but it sounds like it worked out well in the end so you should feel good about that. In my case, at least in this planning scenario; I am not planning on working at any significant income level so that pension at 55 would be valuable secure income, reducing sequence of returns risk during that first critical 10-15 years. Thanks again for sharing your experience & insights!

[Airco_DH2_pilot]

Some thoughts.

My initial thought is that you don't need to worry about having a "bridge of secure income" from when you retire to age 70.

I suggest you put your numbers into the TPAWPlanner tool: tpawplanner.com. Even with extremely poor market returns (5th percentile in the Monte Carlo analysis) and maintaining your desired asset allocation, your portfolio could support your basic living expenses without having a "secure income". Essentially, your portfolio size and asset allocation would provide a "secure income".

If you really want an income bridge that is stable, a typical way of doing this is to purchase a ladder of inflation-protected Treasury bonds (TIPS). In your case, this would be ladder of individual TIPS with a TIPS maturing yearly from age 55 - 70. Here is a tool that can be used to generate this ladder: https://www.tipsladder.com/

Right now, you don't have sufficient money to purchase a TIPS ladder that would provide a yearly income of 70K for 15 years. Using today's TIPS yields, this would require about 900K. You only have 300K in your taxable account and likely can't purchase individual TIPS in your 401k.

Hi dogagility,

Thanks for sharing those tools. Correct, I cannot purchase TIPS in my 401k. The taxable brokerage account should have 800k - 1M in it by the time I hit 55 though. Right now, I don't have 900k to put into a TIPS ladder, but with my asset allocation & pension, I actually only need another $20k to come from the (non-pension) fixed income portion of the portfolio. So I don't think I need 900k for this scenario...

Here's how I am breaking it down, in this scenario that non-pension fixed income source is a MYGA or MYGA ladder assumed to earn 4%:

1% from the 1.8M stock index fund = 18k
The pension is providing 35k
a $500k MYGA at 4% is providing 20k
That provides $73k of pretty secure income during those first 15 years and the $500k principal from the MYGA is still available at age 70 for reinvestment.

I like the MYGA concept because there isn't any interest rate risk for the term of the MYGA and the yields appear higher than bonds of similar duration. I was thinking about TIPS as a long term inflation countermeasure. I wasn't too worried about the damage that inflation could do over that first 15 years, maybe I should be though.

Okay so next I play with the Tipsladder tool & to generate $20k of income for 15 years (2025-2039), that tool says it will cost me $271k. How best to compare this to the MYGA strategy that could also generate $20k per year for 15 years, and leaves me with $500k of principal returned back to me (assuming it earns me 4% each year and I only take the interest as income)?

I have to accept the fact that over 15 years, that $500k was held captive and eroding due to inflation, whereas with the TIPS ladder approach, I have to deploy $271k out of that $500k fixed income chunk, but the remaining $229k could have been invested for 15 years and growing. So then... I calculate that $229k left after buying the TIPS ladder would have to grow at 6% compounded annually in order to grow to more than the $500k by year 15. Feasible but not exactly a risk free rate of return. The MYGA actually seems like a better option with this math because I've got $500k left at year 15 guaranteed. I am sure I'm missing something. What am I missing? Thanks for the help & guidance!

[Airco_DH2_pilot]

Is there a good tool for modeling the effect of income sources on ACA credits?

It'll probably be equivalent to around a 15% marginal rate on additional income until you get to the 4X poverty threshold. You can get an estimate using this calculator: https://www.kff.org/interactive/subsidy-calculator/

When you get closer, you can get a better estimate by just entering your income, etc. on healthcare.gov and then modify that income to see how the results change. Of course, things could change before and after your planned retirement.

For my spouse and I, this factor makes the time when we will use the ACA the worst time to do Roth conversions or otherwise withdraw from a traditional IRA. We will most likely remain in the 12% federal tax bracket (with sole survivor moving to 22%), but the ACA will create an effective marginal tax rate of about 27%.

Thanks Jeffyscott, that calculator is helpful. bookmarked now.

[MedEngineer]

I'm just starting to grapple with this Bridge planning myself, e.g. how to get from retirement @ 65 to SS @ 70. Are there any general strategies to pursue or is it just crank everything through a spreadsheet?

[White Coat Investor]

Hi,
Assuming my wife & I retire when I turn 55, I'd like to get some advice on how best to build a 15 year social security delay bridge using secure income to cover basic essential living expenses until claiming social security at age 70.

How about a 15 year ladder of $35K TIPS? That's how I'd address this.

[Airco_DH2_pilot]

Hi,
Assuming my wife & I retire when I turn 55, I'd like to get some advice on how best to build a 15 year social security delay bridge using secure income to cover basic essential living expenses until claiming social security at age 70.

How about a 15 year ladder of $35K TIPS? That's how I'd address this.

Thanks for the feedback. My earlier impression was that yields on MYGA's were generally higher than bonds (regular bonds) so that seemed like the way to go. From TipsLadder.com, it does say "At current yields (as of 2024-10-31) a 30 year TIPS ladder can provide a a Safe Withdrawal Rate of 4.45%, and a real yield of 2.11%."

MYGA rates can be 5-6% in today's environment, so that is higher than the 4.45% nominal yield of a 30 year tips ladder. What's the key advantage of the TIPS ladder over a MYGA? Is the attractiveness of the TIPS ladder just the certainty that the TIPS will blunt any impact from inflation on the secure income stream, plus the liquidity in the near term knowing I could sell the TIPS before maturity if needed? I do suppose that even we bought a MYGA returning 6% that could fail to keep up with inflation at some point.

[dogagility]

I like the MYGA concept because there isn't any interest rate risk for the term of the MYGA and the yields appear higher than bonds of similar duration.

The interest on a MYGA is not inflation adjusted over time; these are nominal interest rates.

The return you would receive on individual TIPS (see https://www.wsj.com/market-data/bonds/tips) is a rate in "real", inflation-adjusted terms. For example, a 10 year TIPS has a current yield of above 2.1%. If inflation as 2% over that 10 year period, the total return would be 4.1% in nominal terms.

With TIPS, you are being protected against unexpectedly high inflation. Personally, I would rather be protected against unexpected higher inflation.

Okay so next I play with the Tipsladder tool & to generate $20k of income for 15 years (2025-2039), that tool says it will cost me $271k. How best to compare this to the MYGA strategy that could also generate $20k per year for 15 years, and leaves me with $500k of principal returned back to me (assuming it earns me 4% each year and I only take the interest as income)?

You would have to do the calculations, but remember... your 20K of income is eroding to inflation over the 15 years. With a modest inflation rate of 2.5%, your 20K in income equates to only about 14K of inflation-adjusted income by year 15.

And... that 500K in principal is only worth about $350K in real dollars after 15 years of 2.5% inflation.

[White Coat Investor]

How about a 15 year ladder of $35K TIPS? That's how I'd address this.

Thanks for the feedback. My earlier impression was that yields on MYGA's were generally higher than bonds (regular bonds) so that seemed like the way to go. From TipsLadder.com, it does say "At current yields (as of 2024-10-31) a 30 year TIPS ladder can provide a a Safe Withdrawal Rate of 4.45%, and a real yield of 2.11%."

MYGA rates can be 5-6% in today's environment, so that is higher than the 4.45% nominal yield of a 30 year tips ladder. What's the key advantage of the TIPS ladder over a MYGA? Is the attractiveness of the TIPS ladder just the certainty that the TIPS will blunt any impact from inflation on the secure income stream, plus the liquidity in the near term knowing I could sell the TIPS before maturity if needed? I do suppose that even we bought a MYGA returning 6% that could fail to keep up with inflation at some point.

Yes, the point of the TIPS is for the inflation protection.

[Airco_DH2_pilot]

I like the MYGA concept because there isn't any interest rate risk for the term of the MYGA and the yields appear higher than bonds of similar duration.

The interest on a MYGA is not inflation adjusted over time; these are nominal interest rates.

The return you would receive on individual TIPS (see https://www.wsj.com/market-data/bonds/tips) is a rate in "real", inflation-adjusted terms. For example, a 10 year TIPS has a current yield of above 2.1%. If inflation as 2% over that 10 year period, the total return would be 4.1% in nominal terms.

With TIPS, you are being protected against unexpectedly high inflation. Personally, I would rather be protected against unexpected higher inflation.

Okay so next I play with the Tipsladder tool & to generate $20k of income for 15 years (2025-2039), that tool says it will cost me $271k. How best to compare this to the MYGA strategy that could also generate $20k per year for 15 years, and leaves me with $500k of principal returned back to me (assuming it earns me 4% each year and I only take the interest as income)?

You would have to do the calculations, but remember... your 20K of income is eroding to inflation over the 15 years. With a modest inflation rate of 2.5%, your 20K in income equates to only about 14K of inflation-adjusted income by year 15.

And... that 500K in principal is only worth about $350K in real dollars after 15 years of 2.5% inflation.

Thanks for laying it out like that, much appreciated!

[Airco_DH2_pilot]

Thanks for the feedback. My earlier impression was that yields on MYGA's were generally higher than bonds (regular bonds) so that seemed like the way to go. From TipsLadder.com, it does say "At current yields (as of 2024-10-31) a 30 year TIPS ladder can provide a a Safe Withdrawal Rate of 4.45%, and a real yield of 2.11%."

MYGA rates can be 5-6% in today's environment, so that is higher than the 4.45% nominal yield of a 30 year tips ladder. What's the key advantage of the TIPS ladder over a MYGA? Is the attractiveness of the TIPS ladder just the certainty that the TIPS will blunt any impact from inflation on the secure income stream, plus the liquidity in the near term knowing I could sell the TIPS before maturity if needed? I do suppose that even we bought a MYGA returning 6% that could fail to keep up with inflation at some point.

Yes, the point of the TIPS is for the inflation protection.

Yep I get it now. Thanks!

[dogagility]

The pension is providing 35k

A useful tool (in my opinion) to compare taking the 500K lump sum vs the 35k/year (nominal) pension is to explore potential outcomes using the Monte Carlo tool in Portfolio Visualizer.

You can model probabilities of outcomes across different asset allocations and time periods.

I modeled a 500K lump sum invested in a 60:40 (US Stock market:10 year Treasure bond) asset allocation and withdrawing a nominal 35K/year for 40 years.

With very poor portfolio returns (10th percentile), you would be able to withdraw 35K (nominal) for 29 years. The portfolio would be depleted at that time. Taking the pension payout wins in this case (assuming you live to at least age 84).

With average returns (50th percentile), you would be able to withdraw 35K (nominal) for more than 40 years. After 40 years (when you're 95), your portfolio would have an ending balance of 4.4M in nominal terms and 942K in real terms.

With exceptional returns (90th percentile), your ending balance is 17.2M and 3.9M in nominal and real terms, respectively.

https://www.portfoliovisualizer.com/mon ... jtiANDCLzH

In my own life, I've taken two pension lump sum payouts rather than the pension payout that is not inflation adjusted.

[Airco_DH2_pilot]

Thanks for the feedback. My earlier impression was that yields on MYGA's were generally higher than bonds (regular bonds) so that seemed like the way to go. From TipsLadder.com, it does say "At current yields (as of 2024-10-31) a 30 year TIPS ladder can provide a a Safe Withdrawal Rate of 4.45%, and a real yield of 2.11%."

MYGA rates can be 5-6% in today's environment, so that is higher than the 4.45% nominal yield of a 30 year tips ladder. What's the key advantage of the TIPS ladder over a MYGA? Is the attractiveness of the TIPS ladder just the certainty that the TIPS will blunt any impact from inflation on the secure income stream, plus the liquidity in the near term knowing I could sell the TIPS before maturity if needed? I do suppose that even we bought a MYGA returning 6% that could fail to keep up with inflation at some point.

Yes, the point of the TIPS is for the inflation protection.

What about cases where the TIPS yield is negative? Does the principal's inflation adjustment if the TIP bond is held to maturity compensate for this fully?

I'm also studying an alternative where I just hold serval years of essential expenses in a short term treasury bond fund and use that as the income source when the stock market as a whole goes down to mitigate sequence of returns risk. Even if I did a TIPS ladder, having some funds in a short term treasury bond fund would seem to be advantageous, so I have some cash with which to rebalance the asset allocation when stocks drop. Any suggestions of things to consider there? Thanks!

[Airco_DH2_pilot]

The pension is providing 35k

A useful tool (in my opinion) to compare taking the 500K lump sum vs the 35k/year (nominal) pension is to explore potential outcomes using the Monte Carlo tool in Portfolio Visualizer.

You can model probabilities of outcomes across different asset allocations and time periods.

I modeled a 500K lump sum invested in a 60:40 (US Stock market:10 year Treasure bond) asset allocation and withdrawing a nominal 35K/year for 40 years.

With very poor portfolio returns (10th percentile), you would be able to withdraw 35K (nominal) for 29 years. The portfolio would be depleted at that time. Taking the pension payout wins in this case (assuming you live to at least age 84).

With average returns (50th percentile), you would be able to withdraw 35K (nominal) for more than 40 years. After 40 years (when you're 95), your portfolio would have an ending balance of 4.4M in nominal terms and 942K in real terms.

With exceptional returns (90th percentile), your ending balance is 17.2M and 3.9M in nominal and real terms, respectively.

https://www.portfoliovisualizer.com/mon ... jtiANDCLzH

In my own life, I've taken two pension lump sum payouts rather than the pension payout that is not inflation adjusted.

Thank you! These trade-offs have me thinking. I probably will sleep better at night knowing there is at least "some" secure income but not overdoing it to the point where I miss out on investment opportunities.

[White Coat Investor]

Yes, the point of the TIPS is for the inflation protection.

What about cases where the TIPS yield is negative? Does the principal's inflation adjustment if the TIP bond is held to maturity compensate for this fully?

I'm also studying an alternative where I just hold serval years of essential expenses in a short term treasury bond fund and use that as the income source when the stock market as a whole goes down to mitigate sequence of returns risk. Even if I did a TIPS ladder, having some funds in a short term treasury bond fund would seem to be advantageous, so I have some cash with which to rebalance the asset allocation when stocks drop. Any suggestions of things to consider there? Thanks!

It's pretty hard to get excited about TIPS with a negative yield isn't it? Still better in a situation of massive inflation but maybe not anything else. Low bond yields suck for lots of reasons.

[Tom_T]

What about cases where the TIPS yield is negative? Does the principal's inflation adjustment if the TIP bond is held to maturity compensate for this fully?

The TIPS principal can't go lower than the original par value when it matures. You get either that or the inflation-adjusted amount.

[Airco_DH2_pilot]

What about cases where the TIPS yield is negative? Does the principal's inflation adjustment if the TIP bond is held to maturity compensate for this fully?

I'm also studying an alternative where I just hold serval years of essential expenses in a short term treasury bond fund and use that as the income source when the stock market as a whole goes down to mitigate sequence of returns risk. Even if I did a TIPS ladder, having some funds in a short term treasury bond fund would seem to be advantageous, so I have some cash with which to rebalance the asset allocation when stocks drop. Any suggestions of things to consider there? Thanks!

It's pretty hard to get excited about TIPS with a negative yield isn't it? Still better in a situation of massive inflation but maybe not anything else. Low bond yields suck for lots of reasons.

Yeah, the negative yield is depressing, but I guess at the end of the day Tips keep the purchasing power constant relative to whatever inflation exists.

[Airco_DH2_pilot]

What about cases where the TIPS yield is negative? Does the principal's inflation adjustment if the TIP bond is held to maturity compensate for this fully?

The TIPS principal can't go lower than the original par value when it matures. You get either that or the inflation-adjusted amount.

Thanks Tom_T, if it's a scenario where the TIps yield is negative (low inflation), is a TIPS bond holder at least made whole once the bond matures? By made whole, let's consider this example: For 5 -year TIPs bond with a negative yield, if held to maturity, does that inflation adjusted principal amount that I get back compensate for the fact that I had negative yields for 5 years so that I at least end up with constant purchasing power I had 5 years earlier?

[Airco_DH2_pilot]

Found this in the Wiki...

But, TIPS are more likely to have a negative real yield to maturity because investors know they will get an additional return to compensate for inflation.

Assume the bond costing $1,025 is a TIPS, and that the CPI increases 3% during the year. Investors will get $1,051 = ($1,020 X 1.03) a year from now, so they will have a positive nominal return.[6]

That indicates that the 3% inflation adjustment only acts on the par value, not the price I paid, so I'm still losing a little. I guess that's the value of the inflation "insurance" the tips offer?

[watchnerd]

We have a TIPS ladder that runs from 55 to 70 for this purpose

It gives $84k/yr, inflation adjusted.

Rungs mature every Jan and Jul

[Airco_DH2_pilot]

We have a TIPS ladder that runs from 55 to 70 for this purpose

Thanks watchnerd, I have to say this negative yields issue is confusing. I have found multiple articles stating that TIPS have negative yields when Treasuries of the same duration are yielding below the expected inflation rate. So... if the inflation rate is higher than a regular treasury bond yield, the TIPS yield is even more negative? How is that helping me? Ugh. I guess this is what White_Coat_Investor was saying when he said "low bond yields suck for lots of reasons"... when regular bond yields are lower than inflation, TIPS yields become more negative? This hardly seems like a guarantee of constant purchasing power, unless the inflation adjustment to the par value redeemed at maturity compensates for this. Is that how it works watchnerd? Has that been your experience? Thanks

[watchnerd]

We have a TIPS ladder that runs from 55 to 70 for this purpose

Thanks watchnerd, I have to say this negative yields issue is confusing. I have found multiple articles stating that TIPS have negative yields when Treasuries of the same duration are yielding below the expected inflation rate. So... if the inflation rate is higher than a regular treasury bond yield, the TIPS yield is even more negative? How is that helping me? Ugh. I guess this is what White_Coat_Investor was saying when he said "low bond yields suck for lots of reasons"... when regular bond yields are lower than inflation, TIPS yields become more negative? This hardly seems like a guarantee of constant purchasing power, unless the inflation adjustment to the par value redeemed at maturity compensates for this. Is that how it works watchnerd? Has that been your experience? Thanks

Current TIPS all have positive real yields.

Negative yields would have been an issue if you were buying in the past,

If you build a ladder now you can lock in current positive real yields into the future

[Airco_DH2_pilot]

Thanks watchnerd, I have to say this negative yields issue is confusing. I have found multiple articles stating that TIPS have negative yields when Treasuries of the same duration are yielding below the expected inflation rate. So... if the inflation rate is higher than a regular treasury bond yield, the TIPS yield is even more negative? How is that helping me? Ugh. I guess this is what White_Coat_Investor was saying when he said "low bond yields suck for lots of reasons"... when regular bond yields are lower than inflation, TIPS yields become more negative? This hardly seems like a guarantee of constant purchasing power, unless the inflation adjustment to the par value redeemed at maturity compensates for this. Is that how it works watchnerd? Has that been your experience? Thanks

Current TIPS all have positive real yields.

Negative yields would have been an issue if you were buying in the past,

If you build a ladder now you can lock in current positive real yields into the future

Great point. Thank you. So the TIPS yields are positive now because bond yields in general have risen & inflation is relatively lower? Just trying to make sure I understand the why's and fundamentals.

[Dufus]

I did TIPS ladder to supplement Social Security so that TIPS plus SS = Desired Spend, and keep a 50/50 portfolio instead of a 64/40 since I have the added security.

I also built a CD ladder up to the year before SS starts, built it when yields were between 4 and 6.25.

[watchnerd]

Current TIPS all have positive real yields.

Negative yields would have been an issue if you were buying in the past,

If you build a ladder now you can lock in current positive real yields into the future

Great point. Thank you. So the TIPS yields are positive now because bond yields in general have risen & inflation is relatively lower? Just trying to make sure I understand the why's and fundamentals.

All bonds are currently giving positive real yields because of monetary policy and an increase in the neutral rate.

With TIPS, you’re locking that positive real yield in until the bond matures, even if inflation goes higher than expected in the future.

I.e. if you buy 10 YR TIPS now you’ll get 2% above the rate of inflation for next 10 years.

That’s not true of nominal bonds.

[Airco_DH2_pilot]

Great point. Thank you. So the TIPS yields are positive now because bond yields in general have risen & inflation is relatively lower? Just trying to make sure I understand the why's and fundamentals.

All bonds are currently giving positive real yields because of monetary policy and an increase in the neutral rate.

With TIPS, you’re locking that positive real yield in until the bond matures, even if inflation goes higher than expected in the future.

I.e. if you buy 10 YR TIPS now you’ll get 2% above the rate of inflation for next 10 years.

That’s not true of nominal bonds.

Thanks watchnerd. If I happen to buy in the future & the real yield is negative again; does the inflation adjustment to the par value (assuming I keep the bond until maturity) make me whole again, or would I still have lost ground due to inflation?

[Dufus]

I did TIPS ladder to supplement Social Security so that TIPS plus SS = Desired Spend and keep a 50/50 portfolio instead of a 60/40 since I have the added security.

I also built a CD ladder up to the year before my SS, built it when yields were between 4 and 6.25.

When building the TIPS ladder, I got the desired CUSIPS from TIPSladder.com and built it gradually over a couple of years. Every so often I would buy a few rungs in my IRA, depending on which ones had the best yield that day for the rungs I was missing.

One common thing that happens when people buy TIPS: They look at them at some point in time when they are "down" in value. They are only down if you are selling them that day. If you are holding to maturity, you will get the deal you signed up for.

[Dufus]

People buying at a negative yield are hedging against higher-than-expected inflation. If you buy TIPS at -1% Yield and inflation jumps to 10%, I'd say you did ok. It all depends on what the math is at the time.

Also, while most of the folks on this thread are pro-TIPS, there are folks who are firmly against them. Be sure to read their threads and decide whether they are right for you.

[watchnerd]

All bonds are currently giving positive real yields because of monetary policy and an increase in the neutral rate.

With TIPS, you’re locking that positive real yield in until the bond matures, even if inflation goes higher than expected in the future.

I.e. if you buy 10 YR TIPS now you’ll get 2% above the rate of inflation for next 10 years.

That’s not true of nominal bonds.

Thanks watchnerd. If I happen to buy in the future & the real yield is negative again; does the inflation adjustment to the par value (assuming I keep the bond until maturity) make me whole again, or would I still have lost ground due to inflation?

I want to clarify something, as I think you're getting fixated on negative real rates when we don't even have them right now and you can purchase a ladder today at positive real rates.:

If you buy a full TIPS ladder to age 70 *right now* with +2% real yield, you will not be impacted if rates go negative in the future.

If you lock in a 2% positive real yield from now until age 70 in the present, you will get that, even if real rates go negative in the future.

Conversely, if you bought bonds (nominals or TIPS) in 2019, when we did have negative real interest rates (e.g. -1%), you would have locked that in to the maturity of the bond, regardless of whether you bought nominals or TIPS. But at least with TIPS you got an inflation adjustment, even if negative (e.g. 8% inflation -1% real yield = 7% nominal), whereas with nominals you did worse (1% nominal yield -8% inflation = -7% real yield).

Everything I said above applies to individual bonds. If you buy bond funds, it's a different kettle of fish, as funds don't mature and are always rotating in new bonds.

[watchnerd]

People buying at a negative yield are hedging against higher-than-expected inflation. If you buy TIPS at -1% Yield and inflation jumps to 10%, I'd say you did ok. It all depends on what the math is at the time.

Also, while most of the folks on this thread are pro-TIPS, there are folks who are firmly against them. Be sure to read their threads and decide whether they are right for you.

If we have 10% inflation, I'd sure rather have TIPS yielding -1% real / 9% nominal, than nominals yielding 8% / -2% real.

[ObliviousInvestor]

Note that as we were just discussing in another thread, Opensocialsecurity is almost always going to recommend that one spouse claim benefits early, on the theory that you're going to be plowing them into the market and earning better returns.

FWIW it's assuming 20-year TIPS yields, not stock market returns -- with the explicit idea being that that's the investment with the most similar level of risk and therefore most suitable as a discount rate.

[Airco_DH2_pilot]

Conversely, if you bought bonds (nominals or TIPS) in 2019, when we did have negative real interest rates (e.g. -1%), you would have locked that in to the maturity of the bond, regardless of whether you bought nominals or TIPS. But at least with TIPS you got an inflation adjustment, even if negative (e.g. 8% inflation -1% real yield = 7% nominal), whereas with nominals you did worse (1% nominal yield -8% inflation = -7% real yield).

Everything I said above applies to individual bonds. If you buy bond funds, it's a different kettle of fish, as funds don't mature and are always rotating in new bonds.

Thanks watchnerd, I think your example above illustrates the answer to the question I was seeking.

I do get that if I bought the ladder now, I'd lock in today's rates & I appreciate your explanation. However, I'm not ready to buy it now. I am still in a mode of plowing money into my stock index funds in the taxable account and I want to keep doing to that for a few more years.

So it's possible that when I do buy the Tips ladder, the real yield could be negative again. In that scenario, I am wanting to know if the inflation adjustment I'd get on the Tips bond at maturity would be enough to fully compensate for the erosion of purchasing power caused by the fact that the real yield was -1% during the years that the tips bond was maturing while experiencing that (in your example) 8% inflation. Does it?

[watchnerd]

Conversely, if you bought bonds (nominals or TIPS) in 2019, when we did have negative real interest rates (e.g. -1%), you would have locked that in to the maturity of the bond, regardless of whether you bought nominals or TIPS. But at least with TIPS you got an inflation adjustment, even if negative (e.g. 8% inflation -1% real yield = 7% nominal), whereas with nominals you did worse (1% nominal yield -8% inflation = -7% real yield).

Everything I said above applies to individual bonds. If you buy bond funds, it's a different kettle of fish, as funds don't mature and are always rotating in new bonds.

Thanks watchnerd, I think your example above illustrates the answer to the question I was seeking.

I do get that if I bought the ladder now, I'd lock in today's rates & I appreciate your explanation. However, I'm not ready to buy it now. I am still in a mode of plowing money into my stock index funds in the taxable account and I want to keep doing to that for a few more years.

So it's possible that when I do buy the Tips ladder, the real yield could be negative again. In that scenario, I am wanting to know if the inflation adjustment I'd get on the Tips bond at maturity would be enough to fully compensate for the erosion of purchasing power caused by the fact that the real yield was -1% during the years that the tips bond was maturing while experiencing that (in your example) 8% inflation. Does it?

No, it would not fully compensate.

But it would be better than nominal bonds of the same maturity and same real yield. See the example I gave for 2019.

[watchnerd]

However, I'm not ready to buy it now. I am still in a mode of plowing money into my stock index funds in the taxable account and I want to keep doing to that for a few more years.

You can still keep plowing money into your stock index funds in your taxable account.

It's preferable to hold TIPS in tax-sheltered accounts.

So you would fund most of the TIPs ladder from your 401k that already exists.

[Irene]

FWIW it's assuming 20-year TIPS yields, not stock market returns -- with the explicit idea being that that's the investment with the most similar level of risk and therefore most suitable as a discount rate.

Oh, that makes sense, thank you.

[Airco_DH2_pilot]

Thanks watchnerd, I think your example above illustrates the answer to the question I was seeking.

I do get that if I bought the ladder now, I'd lock in today's rates & I appreciate your explanation. However, I'm not ready to buy it now. I am still in a mode of plowing money into my stock index funds in the taxable account and I want to keep doing to that for a few more years.

So it's possible that when I do buy the Tips ladder, the real yield could be negative again. In that scenario, I am wanting to know if the inflation adjustment I'd get on the Tips bond at maturity would be enough to fully compensate for the erosion of purchasing power caused by the fact that the real yield was -1% during the years that the tips bond was maturing while experiencing that (in your example) 8% inflation. Does it?

No, it would not fully compensate.

But it would be better than nominal bonds of the same maturity and same real yield. See the example I gave for 2019.

Ok I follow you. Thanks for confirming that! I have learned a lot from all of you, much appreciated.

[Airco_DH2_pilot]

[/quote]

You can still keep plowing money into your stock index funds in your taxable account.

It's preferable to hold TIPS in tax-sheltered accounts.

So you would fund most of the TIPs ladder from your 401k that already exists.
[/quote]

Gotcha. Since I can’t buy TIPS in my 401k I think I have to wait until right when I retire (using the rule of 55) and then roll it over to an IRA where I could then build the TIPS ladder.

[watchnerd]

Gotcha. Since I can’t buy TIPS in my 401k I think I have to wait until right when I retire (using the rule of 55) and then roll it over to an IRA where I could then build the TIPS ladder.

Can you buy TIPS funds in your 401k?

If yes, there are strategies to simulate a ladder using short and long TIPS funds.