TIPS Ladders

[Cheyenne]

I was wondering if someone could answer this question for me. I have been unable to find an answer.

With a 30-year TIPS ladder, instructions state that the 30-year bonds should be purchased first, then one should work forward to year 1. Why is that significant? What would be the result of starting the ladder with the 1st-year bonds and working backwards to the 30-year?

Thanks in advance.

[Prokofiev]

What "instructions" are you referring to?

You can start with any maturity you like.

Long maturities are more volatile, so if you feel that long term rates are very attractive,
I would buy long. It will make a larger difference in total wealth. A 1-year bond has
little room to move and will make little difference in the long run.

Of course, if rates continue to rise, you may regret buying a 30 yr. maturity. My usual
advice is to see if the present real yield curve works for your LT spending needs. If so,
maybe pull the trigger while you can. If rates move back down in several months, you
could be kicking yourself for missing out on an important opportunity. (FOMO)

[Svensk Anga]

You will be getting twice per year interest payments from every bond in the ladder. In the first year of a long ladder the interest payments will be fairly significant, depending on the coupon rates of the bonds you choose for the ladder. The larger the coupon payments you get in any of the earlier years, the fewer bonds you would need to mature that year. The best ladder building technique will take into account the interest income when sizing the earlier ladder rungs. You need to know the later rung coupon rates before you can size the first rungs. There is a pretty broad span of coupon rates on existing TIPS, from 0.125% (many issues) to 3.875% (April 2029)

[Cheyenne]

What "instructions" are you referring to?

The Kaesler Tips Ladder, tipsladder (dot) com.

That's for the reply. It was very informative.

[Cheyenne]

You will be getting twice per year interest payments from every bond in the ladder. In the first year of a long ladder the interest payments will be fairly significant, depending on the coupon rates of the bonds you choose for the ladder. The larger the coupon payments you get in any of the earlier years, the fewer bonds you would need to mature that year. The best ladder building technique will take into account the interest income when sizing the earlier ladder rungs. You need to know the later rung coupon rates before you can size the first rungs. There is a pretty broad span of coupon rates on existing TIPS, from 0.125% (many issues) to 3.875% (April 2029)

Thank you for that explanation.

[LilyFleur]

You will be getting twice per year interest payments from every bond in the ladder. In the first year of a long ladder the interest payments will be fairly significant, depending on the coupon rates of the bonds you choose for the ladder. The larger the coupon payments you get in any of the earlier years, the fewer bonds you would need to mature that year. The best ladder building technique will take into account the interest income when sizing the earlier ladder rungs. You need to know the later rung coupon rates before you can size the first rungs. There is a pretty broad span of coupon rates on existing TIPS, from 0.125% (many issues) to 3.875% (April 2029)

This is good information.
Is there an online calculator that would project the interest payments for the entire ladder for each year, so that income could be estimated?

[frugalNOTcheap]

tipsladder.com

[#Cruncher]

Is there an online calculator that would project the interest payments for the entire ladder for each year, ...

As frugalNOTcheap says above, the tipsladder.com tool does this. After creating the ladder, click [Show Details] at the top of the page. The three columns on the right break down yearly proceeds between principal and interest. The "Yearly" sheet of my TIPS Ladder Builder Excel workbook, shows a similar breakdown. Here it is using the default selections. Note that in 2034-2039, when no TIPS currently mature, coupon interest payments from bonds maturing 2040-2053 are the only proceeds.

Code: Select all

                        -- Proceeds in Oct 23 2023 Dollars --
         Nbr                        Final    Coupons     Total
 Year  Bonds      Cost  Principal  Coupon  Oth Bonds  Proceeds

Code: Select all

 2024     18    20,909     21,513      27      8,015    29,555
 2025     19    21,325     22,454      28      7,987    30,469
 2026     19    19,842     21,321      27      7,960    29,308
 2027     22    22,048     22,773     370      7,590    30,733
 2028     22    21,969     22,025     523      7,067    29,615
 
 2029     19    20,187     22,777      57      7,010    29,844
 2030     19    19,515     22,724      28      6,982    29,734
 2031     20    19,200     22,882      29      6,953    29,863
 2032     22    19,964     23,218     145      6,808    30,172
 2033     78    71,762     78,753   1,083      5,725    85,561
 
 2034                                          5,725     5,725
 2035                                          5,725     5,725
 2036                                          5,725     5,725
 2037                                          5,725     5,725
 2038                                          5,725     5,725
 2039                                          5,725     5,725
 
 2040     82   109,381    116,334   1,236      3,253   120,823
 2041     19    24,948     26,604     283      2,688    29,575
 2042     20    19,681     27,141     102      2,484    29,727
 2043     21    19,446     28,008      88      2,309    30,405
 2044     21    22,175     27,630     190      1,929    29,749
 
 2045     22    19,879     28,648     107      1,714    30,470
 2046     22    20,659     28,471     142      1,430    30,043
 2047     22    19,451     27,946     122      1,185    29,254
 2048     24    21,170     29,844     149        887    30,879
 2049     24    20,600     29,246     146        594    29,986
 
 2050     24    15,954     28,625      36        523    29,183
 2051     25    15,493     29,445      18        486    29,949
 2052     27    15,426     29,741      19        449    30,209
 2053     29    23,456     29,916     224          0    30,140
         ---   -------    -------   -----    -------   -------
Total    640   624,441    768,038   5,179    126,381   899,598

... so that income could be estimated?

If the ladder is held in a taxable account, "income" will consist of more than just the interest payments. Currently most TIPS are trading at a discount to par. This means that when they mature, some of the principal will be that discount and will be taxable.

Also, both tipsladder.com and my Excel workbook (see top line of header section above) show both principal and interest in constant dollars at time of purchase. They do not show the increases that will occur over time due to inflation. This will be taxable if the ladder is held in a taxable account. If the ladder is held in a tax deferred account, it may also be taxable indirectly, since it will increase the year end value upon which Required Minimum Distributions are based.

[Lxw3]

Is there an online calculator that would project the interest payments for the entire ladder for each year, ...

As frugalNOTcheap says above, the tipsladder.com tool does this. After creating the ladder, click [Show Details] at the top of the page. The three columns on the right break down yearly proceeds between principal and interest. The "Yearly" sheet of my TIPS Ladder Builder Excel workbook, shows a similar breakdown. Here it is using the default selections. Note that in 2034-2039, when no TIPS currently mature, coupon interest payments from bonds maturing 2040-2053 are the only proceeds.

Code: Select all

                        -- Proceeds in Oct 23 2023 Dollars --
         Nbr                        Final    Coupons     Total
 Year  Bonds      Cost  Principal  Coupon  Oth Bonds  Proceeds

Code: Select all

 2024     18    20,909     21,513      27      8,015    29,555
 2025     19    21,325     22,454      28      7,987    30,469
 2026     19    19,842     21,321      27      7,960    29,308
 2027     22    22,048     22,773     370      7,590    30,733
 2028     22    21,969     22,025     523      7,067    29,615
 
 2029     19    20,187     22,777      57      7,010    29,844
 2030     19    19,515     22,724      28      6,982    29,734
 2031     20    19,200     22,882      29      6,953    29,863
 2032     22    19,964     23,218     145      6,808    30,172
 2033     78    71,762     78,753   1,083      5,725    85,561
 
 2034                                          5,725     5,725
 2035                                          5,725     5,725
 2036                                          5,725     5,725
 2037                                          5,725     5,725
 2038                                          5,725     5,725
 2039                                          5,725     5,725
 
 2040     82   109,381    116,334   1,236      3,253   120,823
 2041     19    24,948     26,604     283      2,688    29,575
 2042     20    19,681     27,141     102      2,484    29,727
 2043     21    19,446     28,008      88      2,309    30,405
 2044     21    22,175     27,630     190      1,929    29,749
 
 2045     22    19,879     28,648     107      1,714    30,470
 2046     22    20,659     28,471     142      1,430    30,043
 2047     22    19,451     27,946     122      1,185    29,254
 2048     24    21,170     29,844     149        887    30,879
 2049     24    20,600     29,246     146        594    29,986
 
 2050     24    15,954     28,625      36        523    29,183
 2051     25    15,493     29,445      18        486    29,949
 2052     27    15,426     29,741      19        449    30,209
 2053     29    23,456     29,916     224          0    30,140
         ---   -------    -------   -----    -------   -------
Total    640   624,441    768,038   5,179    126,381   899,598

... so that income could be estimated?

If the ladder is held in a taxable account, "income" will consist of more than just the interest payments. Currently most TIPS are trading at a discount to par. This means that when they mature, some of the principal will be that discount and will be taxable.

Also, both tipsladder.com and my Excel workbook (see top line of header section above) show both principal and interest in constant dollars at time of purchase. They do not show the increases that will occur over time due to inflation. This will be taxable if the ladder is held in a taxable account. If the ladder is held in a tax deferred account, it may also be taxable indirectly, since it will increase the year end value upon which Required Minimum Distributions are based.

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

[RyeBourbon]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

Where do you hold the TIPS? If at Fidelity, I think they have a tool for that.

[Lxw3]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

Where do you hold the TIPS? If at Fidelity, I think they have a tool for that.

Thanks for the reply. Fidelity fixed income anaysis tool does not work on the TIPS. When I called the help desk, they told me it is because the unknown inflation adjustment. Also it the yield shows as input is market yield, not the yield at the time of my purchase. I wonder if there is any other outside tool that will let me do the cash flow analysis?

[LilyFleur]

Evidently I did not understand the risks of holding a BND-like fund and that it could go down in tandem with the market.

Lesson learned, thankfully without a significant loss. I now know I do need a more assured fixed income element in my portfolio.

The links for TIPS ladders in this thread require a base level of knowledge--or more thorough explanations in the links--than I currently have. I am trying to learn.

I think I understand the basic premise of T-bills. I even did a practice ladder this year and watched it, at Schwab. On the website, I find the interest payments/earnings not as transparent as the earnings/losses in my equity funds. I find the dividends from SCHD very easy to understand. It's easy for me to understand the cost basis for my holdings and view the different lots.

I'm not a mathematician nor am I an economist. I'm a person who can easily run spreadsheets, though, for ideas that I understand (ie, estimated income for the year, estimated federal taxes for the year, estimated state taxes for the year, estimated medical deduction for the year, net worth, etc.)

I think perhaps I'll go poke around Schwab and Fidelity and see if they have articles along the lines of "TIPS Ladders for Dummies." At this point I would simply like to understand the cash flow for each year of a ladder (probably a ten-year ladder). I think inflation adjusted data would be the icing on the cake, but for now I'd like to understand just the cake.

I did find a long article in the Boglehead Wiki that I will study.

P.S. Is a TIPS ladder different than a T-bill ladder?

[dbr]

P.S. Is a TIPS ladder different than a T-bill ladder?

Given that T bills have no maturities past 52 weeks and TIPS maturities reach out to 30 years, that would be a huge difference. I'm not sure a ladder of T bills makes a lot of sense. Another difference, of course, is that one is inflation indexed and the other is not.

[RyeBourbon]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

Where do you hold the TIPS? If at Fidelity, I think they have a tool for that.

Thanks for the reply. Fidelity fixed income anaysis tool does not work on the TIPS. When I called the help desk, they told me it is because the unknown inflation adjustment. Also it the yield shows as input is market yield, not the yield at the time of my purchase. I wonder if there is any other outside tool that will let me do the cash flow analysis?

Oh, I see. I only have T-bills and CDs there and the analysis tool works well. Of course, no tool is going to be able to tell you the nominal cash flows because the inflation adjustment is unknown, but I would have thought the Fidelity tool could give you "real" cash flow info.

I'm not sure why the yield at the time of purchase is relevant. The market moves constantly, it's the current ytm that you need to know in the event you want to sell your holdings (it tells you what yield you are giving up).

[LilyFleur]

P.S. Is a TIPS ladder different than a T-bill ladder?

Given that T bills have no maturities past 52 weeks and TIPS maturities reach out to 30 years, that would be a huge difference. I'm not sure a ladder of T bills makes a lot of sense. Another difference, of course, is that one is inflation indexed and the other is not.

Thanks.

[#Cruncher]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

On the "Ladder" sheet of my Ladder Builder Excel workbook, blank out the "Multiplier" column (N) and enter how many of each TIPS you own in the "# of Bonds - Already Held" column (O). The "Yearly" sheet will show the year-by-year summary of market value (labeled "Cost" using Ask Prices from Friday's WSJ TIPS Quotes) and principal & coupon proceeds in 11/6/2023 dollars.

[Ptarmigan]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

On the "Ladder" sheet of my Ladder Builder Excel workbook, blank out the "Multiplier" column (N) and enter how many of each TIPS you own in the "# of Bonds - Already Held" column (O). The "Yearly" sheet will show the year-by-year summary of market value (labeled "Cost" using Ask Prices from Friday's WSJ TIPS Quotes) and principal & coupon proceeds in 11/6/2023 dollars.

Thank you #Cruncher for your contributions. I have a supplementary question about entering an existing ladder into the spreadsheet.

In addition to the cashflow analysis, I'm curious to see the XIRR for the existing ladder. If I overwrite Column J (WSJ sheet) with the price I paid for each TIPS, will this be sufficient to calculate XIRR correctly, or is some other input required?

[#Cruncher]

Is there a tool that I can input the existing tips ladder that I have already, and see the cash flow analysis?

On the "Ladder" sheet of my Ladder Builder Excel workbook, blank out the "Multiplier" column (N) and enter how many of each TIPS you own in the "# of Bonds - Already Held" column (O). ...

... I have a supplementary question about entering an existing ladder into the spreadsheet. In addition to the cashflow analysis, I'm curious to see the XIRR for the existing ladder. If I overwrite Column J (WSJ sheet) with the price I paid for each TIPS, will this be sufficient to calculate XIRR correctly, or is some other input required?

I don't understand your request, Ptarmigan. Cell K17 on the "XIRR" sheet already shows the internal rate of return of the ladder's overall cash flow. It is calculated with the XIRR function and treats the cost of each TIPS as an outflow on the settlement date. If you substitute the costs you actually paid for each holding, what would you use as the settlement date?

[Ptarmigan]

It may be that what I'm asking for doesn't make sense, in which case I won't take it any further, but I'll have one try to explain it a different way.

I built a ladder using tipsladder.com. Tipsladder showed an XIRR for the ladder. I purchased the ladder, but the prices I paid for each rung were not exactly the same prices as quoted by tipsladder.com (market changing and I was buying small volumes so not getting best price). I'm assuming these different prices change my XIRR, and I wanted some reassurance that my XIRR was not too far from expectations.

I wondered if your spreadsheet could help out.
- I blanked out all the the Multipliers and entered the Already Held for each TIPS.
- I set the settlement date to the date I purchased the ladder.
- I entered the price of each TIPS I purchased in the WSJ sheet Column J.

On the XIRR tab, the numbers for each rung seem reasonable, and the overall XIRR is not too far off my expectation.

I was just looking for confirmation that what I have done makes sense. Or not.

I can envisage that for someone who has bought TIPS on various dates, they would have difficulty with the Settlement Date question, but that's not the case for me.
Thanks.

[#Cruncher]

I built a ladder using tipsladder.com. ... I purchased the ladder, but the prices I paid for each rung were not exactly the same prices as quoted by tipsladder.com ... I wondered if your spreadsheet could help out.
- I blanked out all the the Multipliers and entered the Already Held for each TIPS.
- I set the settlement date to the date I purchased the ladder.
- I entered the price of each TIPS I purchased in the WSJ sheet Column J.
...
I was just looking for confirmation that what I have done makes sense.

Yes, this makes perfect sense. In my previous post I was assuming your purchases were on separate dates. But since they were all at the same time, what you have done works fine. If you have not done so already, I suggest also doing the following:

• Set the "Real $ Base Date" (cell G1 on the "Ladder" sheet) to be the same as the settlement date (cell K1). (To be picky, the settlement date of TIPS bought on the secondary market is the business day following purchase.)
• Set the "Ref CPI on Base Date" (cell G2) and "Ref CPI on Settlement Date" (cell K2) to the correct value for that date. (Here is one source.)

Also be aware that the Ladder sheet looks up the yields as well as the ask price from the "WSJ" sheet; and these will not agree with the actual prices you've entered. But you don't need to worry about this since the workbook only uses these yields for informational purposes. They do not affect the internal rates of return calculated on row 17 of the "XIRR" sheet.

[rossington]

Hi #Cruncher,
I have a related but separate question:

If one does not want to do a TIPS ladder but would rather duration match TIPS funds,
Do you have a spreadsheet for calculating the annual percentage allocations for duration matching 2 (or 3) TIPS funds?

Thanks!
Rossington

[#Cruncher]

If one does not want to do a TIPS ladder but would rather duration match TIPS funds, Do you have a spreadsheet for calculating the annual percentage allocations for duration matching 2 (or 3) TIPS funds?

No, I do not. But I'd bet someone else does. The closest I have is a spreadsheet in this post to illustrate the transactions for withdrawals and rebalancing from two hypothetical funds. But, I'm afraid it would need major modification to be practical.

[dbr]

Hi #Cruncher,
I have a related but separate question:

If one does not want to do a TIPS ladder but would rather duration match TIPS funds,
Do you have a spreadsheet for calculating the annual percentage allocations for duration matching 2 (or 3) TIPS funds?

Thanks!
Rossington

A first approximation that may not be all that bad a choice would be to just own a single intermediate duration TIPS fund and call it good enough.

A spreadsheet that would show you how to match with 2 or 3 funds should also be able to show you how much it matters to use one, two, three, or n funds.

I confess I don't have a spreadsheet like that myself.

Note a problem of scope here is how you duration match the entirety of stocks and TIPS given that it is unlikely the portfolio is 100% TIPS.

[rossington]

Hi #Cruncher,
I have a related but separate question:

If one does not want to do a TIPS ladder but would rather duration match TIPS funds,
Do you have a spreadsheet for calculating the annual percentage allocations for duration matching 2 (or 3) TIPS funds?

Thanks!
Rossington

A first approximation that may not be all that bad a choice would be to just own a single intermediate duration TIPS fund and call it good enough.

I have to admit I agree with that idea, especially if you really are not depending on the amount invested for necessary spending.
The only concern would be what about the interest rate risk very late in life.

A spreadsheet that would show you how to match with 2 or 3 funds should also be able to show you how much it matters to use one, two, three, or n funds.

I confess I don't have a spreadsheet like that myself.

A forum member was kind enough to send me a link to a duration matching spreadsheet that appears (not 100% sure) to be created by vineviz. If you want I can PM it to you.

Note a problem of scope here is how you duration match the entirety of stocks and TIPS given that it is unlikely the portfolio is 100% TIPS.

It's like you say: If one has adequate additional sources of income then a lot of this additional wealth preservation work may or may not be as necessary as it is for others.