Indexer88 wrote:Yes, if one is planning to withdraw 4% per year, than a fund might make more sense. Or a non-rolling ladder could as well.
I think looking at your withdrawal rate is one interesting way to compare bond ladders and funds. If you withdrawal 10% of your original principal per year, then your money will only last 10 years. So, the risk of volatility in a bond fund (and
in a rolling bond ladder) is way too high, given that a big drop in NAV in year 1 could really hurt your principal. This is another way of saying that a bear market is really tough at the beginning of your retirement, and challenges anything more than a 4% safe withdrawal rate. So, a non-rolling bond ladder is definitely the smart bet, of just buying bonds (zero-coupon, even), with maturities of 1 through 10 years.
But if you are withdrawing smaller amounts (like a 4% SWR), and want to continue doing so for 20 years or more, either a bond fund or a rolling bond ladder would work. But there is no difference in volatility between the two.
Indexer88 wrote:Each four years you have a bond maturing with a known value. No worries about NAV. (Yes, NAV will vary on the ladder, but there are known value points throughout the future.)
If you do not rollover a bond that is greater than your planned annual withdrawal, you have just suffered a NAV drop exactly equivalent to selling a fund when the NAV is down.
That's why the key distinction is between a rolling and a non-rolling ladder, not between a ladder and a fund. Your concept of known-value points are an illusion. Calculate the NAV of your ladder, and you will find it is identical to a fund.
Indexer88 wrote:Instead of holding only VIPSX, one should probably have something for the short term. It seems holding a second TIPS fund or a nominal treasury fund would balance withdrawal needs better. I will have to check if the NAV volativity is less with those. I know the short term treasury funds have done great b/c of a flight to safety. Not sure at all about short term TIPS funds or if there are any.
The standard Boglehead advice is to go 50/50 Total Bond and TIPS fund. The first protects you against deflation, and the latter protects you against inflation. Replacing Total Bond with the IT Treasuries fund is fine if you're particularly risk-averse.
If you want to shorten the duration of your TIPS fund (or rolling ladder), you can do simply by holding cash in a money market. The money market adjusts nearly instantly to inflation, and the 68 day maturity (or Prime Money Market) is averaged against the maturity of the bonds in your fund or ladder.