For those with all/most of their nestegg in TIPs

[RationalWalk]

For those of us in the income/liability-matching camp, who have a large position - or all - of our investment in a TIPs ladder, what could go wrong? While I'm a fan of this approach, I also worry about an investment portfolio being so concentrated in one asset. Perhaps you can help me "what if" to critically examine the downside and what to do about it.

[Hebell]

We are 84% fixed income and 16% stocks, with 55% of that in TIPS. I do not worry about these AAA rates assets. Could I worry about the ability of the government to honor its obligation to pay out its inflation adjusted amount? I guess I could, but there's nothing I can do to avert that risk. My nominal assets (with a healthy slug in corporate and high yield defined maturity bond etfs) are my hedge, in essence. I like having Bond ETFs that mature in specific years to fill out my ladder.

The best thing to do, to put your mind at ease on these, is to make sure you fully understand them. I built Excel spreadsheets, and gained some assistance from #cruncher and #vineviz (and others whose names I don't recall), and Harry Sit's excellent book, to make sure I fully understood what I was buying and how they paid out, and how they were priced by the market, before buying a single one.

[retired@50]

For those of us in the income/liability-matching camp, who have a large position - or all - of our investment in a TIPs ladder, what could go wrong? While I'm a fan of this approach, I also worry about an investment portfolio being so concentrated in one asset. Perhaps you can help me "what if" to critically examine the downside and what to do about it.

Do you already own all the TIPS you're going to need?

Regards,

[WoodSpinner]

OP,

What happens if:

- You have an unexpected Cashflow Need?
- Your Personal Inflation Rate is greater than the rate TIPs use?

I have implemented a TIPs ladder while delaying for SS but would not be comfortable holding more than 70% in TIPs if I went out longer. 30/70 is a reasonable lower bound for many investors in Retirement.

WoodSpinner

[er999]

To me the biggest risk is that your personal inflation rate doesn’t match the inflation adjustment for tips with the cpi. It’s much better than nominal bonds but it doesn’t seem guaranteed. I don’t think default or failure to pay the inflation adjustment is likely since tips are about 10% of total U.S. government debt.

Also I think you need some assets outside of tips for longevity protection. After 30 years you have no money left with a tips ladder compared to a conventional probability based withdrawal of a mixed stocks/bonds portfolio.

That’s why a tips ladder should be to guarantee barebones living expenses (and might not be much maybe $20k if you have a good social security benefit) and not to guarantee more luxury living as you give up a lot of upside. That means you either worked longer than you had to or are spending much less than you could otherwise.

[JD7]

I have about 15% in a tips ladder and was wondering the same. The biggest risks I see are default which is unlikely but not impossible. The need to sell before the tips mature if interest rates are higher than when the tips were purchased. Deflation could also be a risk, but only if you paid over face value. I'm probably missing others though.

[makeitcount]

Three come to mind:
1. incorrect matching of one's yearly needs to the ladder (e.g. need more per year, or you live longer than expected)
2. a need for a large one-off expenditure necessitating breaking of the ladder
3. government fails to pay bond holders
I would think hard about 1 and 2. Not sure I'd worry too much about 3 since rumor has it the people that issue the bonds can also print more money.

[Stormbringer]

We have a pretty hefty chunk in a TIPS ladder, but it isn't "all" or even "most" -- more like about 20%. We wanted to make sure that our basic expenses were covered deep into retirement, and we used Social Security plus a TIPS ladder for that purpose.

As for things that could go wrong, TIPS are tied to CPI-U, a measurement that the government changes from time-to-time. It is possible that the actual inflation we observe in retirement won't match this in a way that adds up over the years.

Also, CPI-U is measured monthly. In a period of Venezuela-style hyperinflation where prices are increasing at an extremely fast rate, that lag between actual prices and prices being measured might be problematic.

[hudson]

For those of us in the income/liability-matching camp, who have a large position - or all - of our investment in a TIPs ladder, what could go wrong? While I'm a fan of this approach, I also worry about an investment portfolio being so concentrated in one asset. Perhaps you can help me "what if" to critically examine the downside and what to do about it.

If you bought at auction, you're OK
If you bought on the secondary market, deflation could cause problems. Deflation isn't likely.