TIPS Ladder instead of Bond Funds

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Dfgdfg
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TIPS Ladder instead of Bond Funds

Post by Dfgdfg »

My wife and I are currently 58 and plan to retire at the end of 2023, when I’ll be 59.5. We have a bit over $2M in retirement savings in a 50/50 portfolio. We‘ll collect around $70K in social security as a couple at 70. I have around $690k split roughly 50/50 between a Total Bond fund (FXNAX) and an intermediate TIPs fund (FIPDX) in an IRA. I’m thinking of reallocating most of this to a TIPs ladder. I can build a 10 year TIP ladder to give me $60K a year (adj to take into account my wife’s social security on her record and a very small pension) from 60 to 69 for a little over $500k; with the adjustments $535K in TIPs income. This was calculated based on todays Fidelity TIPs quotes. $60k would cover our base cost of living. This seems like a good idea to me. Thoughts?
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vineviz
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Re: TIPS Ladder instead of Bond Funds

Post by vineviz »

Dfgdfg wrote: Thu Sep 22, 2022 10:19 am My wife and I are currently 58 and plan to retire at the end of 2023, when I’ll be 59.5. We have a bit over $2M in retirement savings in a 50/50 portfolio. We‘ll collect around $70K in social security as a couple at 70. I have around $690k split roughly 50/50 between a Total Bond fund (FXNAX) and an intermediate TIPs fund (FIPDX). I’m thinking of reallocating most of this to a TIPs ladder. I can build a 10 year TIP ladder to give me $60K a year (adj to take into account my wife’s social security on her record and a very small pension) from 60 to 69 for a little over $500k. This was calculated based on todays Fidelity TIPs quotes. $60k would cover our base cost of living. This seems like a good idea to me. Thoughts?
Seems like a decent plan to me.

You might consider building the ladder slightly smaller (maybe $45k/year) to allow for some flexibility to take modest withdrawals from equities as well. I’d have no issue with a plan to take 2% from equities each year almost indefinitely , for instance , and it will help somewhat with keeping your asset allocation where you want.

I’d also consider adding a few longer TIPS to the ladder ( maybe $45k each in 15, 20, and 25 year TIPS) just to keep your average duration closer to what it should be.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Dfgdfg
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Re: TIPS Ladder instead of Bond Funds

Post by Dfgdfg »

vineviz wrote: Thu Sep 22, 2022 10:31 am

Seems like a decent plan to me.

You might consider building the ladder slightly smaller (maybe $45k/year) to allow for some flexibility to take modest withdrawals from equities as well. I’d have no issue with a plan to take 2% from equities each year almost indefinitely , for instance , and it will help somewhat with keeping your asset allocation where you want.

I’d also consider adding a few longer TIPS to the ladder ( maybe $45k each in 15, 20, and 25 year TIPS) just to keep your average duration closer to what it should be.
Thank you. Good thoughts. Not sure I understand your last comment though. Are you saying to add some longer TIPs in addition to the ladder. The ladder had to have 2 years of 2032s to handle the 2033 payment to account for the gap. I could take that last rung out to 2040 instead.
dbr
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Re: TIPS Ladder instead of Bond Funds

Post by dbr »

A consideration with any bond ladder is that it is a timing decision to lock in what is offered now compared to what might be offered at another time.

That does not constitute clearly actionable advice, but just something to be aware of. The issue is what is the TIPS real return on the ladder you buy. In just a year that has shifted from a percent or two negative to a percent or two positive , and that has a big effect on the income you get for your money. The yield curve also depends on the maturity of the bonds you buy. Data is here: https://home.treasury.gov/resource-cent ... nth=202209

A bond fund will, with some complicated timing considerations, basically follow what future history has to offer us, for better or for worse. How fund duration is matched to withdrawal timing has an effect.
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squirrel1963
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Re: TIPS Ladder instead of Bond Funds

Post by squirrel1963 »

Dfgdfg wrote: Thu Sep 22, 2022 10:19 am My wife and I are currently 58 and plan to retire at the end of 2023, when I’ll be 59.5. We have a bit over $2M in retirement savings in a 50/50 portfolio. We‘ll collect around $70K in social security as a couple at 70. I have around $690k split roughly 50/50 between a Total Bond fund (FXNAX) and an intermediate TIPs fund (FIPDX) in an IRA. I’m thinking of reallocating most of this to a TIPs ladder. I can build a 10 year TIP ladder to give me $60K a year (adj to take into account my wife’s social security on her record and a very small pension) from 60 to 69 for a little over $500k; with the adjustments $535K in TIPs income. This was calculated based on todays Fidelity TIPs quotes. $60k would cover our base cost of living. This seems like a good idea to me. Thoughts?
Definitely a good plan IMHO. Like @vineviz, I'd also perhaps suggest making the ladder a bit longer. Our ladder goes all the way out to 2052 because social security income will not cover all of our living expenses.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
CloseEnough
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Re: TIPS Ladder instead of Bond Funds

Post by CloseEnough »

Is the $2M all in tax deferred accounts? If not, and if you have not already, I would take a look at the tax efficiency of your plan, and evaluate if you have flexibility to adjust your withdrawals to be more tax efficient. Could some of the withdrawals be made from taxable accounts at lower tax rates than from tax deferred? I am assuming that the $690 is all in tax deferred, since you are switching it up without mentioning any tax considerations.
dbr
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Re: TIPS Ladder instead of Bond Funds

Post by dbr »

I was going to add that a ladder covering a shorter term transition, for example to Social Security, might be very helpful. For a retirement long ladder you need long bonds, 30 years being the max, and I am not sure how evident it is that the tactic is or isn't helpful. That would be very sensitive to where the locked in real yield lies on the spectrum of future real yields. Real yields of 2% might be attractive and real yields of 0% not so much.

Another consideration is the magnitude of the spending. Running a 5% withdrawal rate until reaching SS and then dropping to 3% is very different from running 10% and then dropping to 3%. The avoidable sequence of returns risk is very different in the two cases, especially if the ladder can be bought at a higher level of real returns.
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vineviz
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Re: TIPS Ladder instead of Bond Funds

Post by vineviz »

Dfgdfg wrote: Thu Sep 22, 2022 10:52 am
vineviz wrote: Thu Sep 22, 2022 10:31 am

Seems like a decent plan to me.

You might consider building the ladder slightly smaller (maybe $45k/year) to allow for some flexibility to take modest withdrawals from equities as well. I’d have no issue with a plan to take 2% from equities each year almost indefinitely , for instance , and it will help somewhat with keeping your asset allocation where you want.

I’d also consider adding a few longer TIPS to the ladder ( maybe $45k each in 15, 20, and 25 year TIPS) just to keep your average duration closer to what it should be.
Thank you. Good thoughts. Not sure I understand your last comment though. Are you saying to add some longer TIPs in addition to the ladder. The ladder had to have 2 years of 2032s to handle the 2033 payment to account for the gap. I could take that last rung out to 2040 instead.
I was imagining equal amounts of the (say) January TIPS from 2024 through 2032 and the extra July 2032 TIPS to cover 2033. And then also purchasing some 2040, 2044, and 2048 TIPS as well.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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