Handling distributions from iShares TIPS ladder

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
jjunk
Posts: 1132
Joined: Fri Aug 24, 2012 9:52 pm

Handling distributions from iShares TIPS ladder

Post by jjunk »

I'm using the iShares defined TIPS ETFs in a 9yr ladder using Allen Roth's article on ETF.com to build out the ladder (tickers IBIB through IBIK). The ladder should supply 90k/yr inflation adjusted if I did it correctly, time will tell. When I built the ladder, I did so with dividends being reinvested. I am basically retired at this point (51) as I lost my job last year, unemployment is coming to an end and I havent had much luck in the market. The 90k/yr from the ladder should pay for my expenses almost completely, we also have ~3yrs in cash for expenses as well.

In a TIPS ladder built with individual bonds, my understanding is that you take the distributions from the ladder as cash and that is how the ladder provides the inflation protected income over the course of the ladder term. I have the current ETF based ladder reinvesting the dividends per the article and some other podcasts I've listened to on the matter because apparently thats how to most closely mimic individual bonds.

Here's my question. Should I be actually taking these distributions to pay for bills now that I am effectively retired and just treat it as a "normal" TIPS ladder? Or is leaving the distributions reinvested the proper way to do this? TYIA.
User avatar
sycamore
Posts: 7649
Joined: Tue May 08, 2018 12:06 pm

Re: Handling distributions from iShares TIPS ladder

Post by sycamore »

jjunk wrote: Tue Feb 04, 2025 7:26 am In a TIPS ladder built with individual bonds, my understanding is that you take the distributions from the ladder as cash and that is how the ladder provides the inflation protected income over the course of the ladder term. ...
You say "take the distributions". To be clear, do you mean not just the coupons but also maturing rungs?
jjunk wrote: Tue Feb 04, 2025 7:26 am ... I have the current ETF based ladder reinvesting the dividends per the article and some other podcasts I've listened to on the matter because apparently thats how to most closely mimic individual bonds.
IMO, reinvesting coupon payments back into individual bonds is not necessarily what most people do. For one thing, you can only trade a whole bond (no fractions) and assuming a typical bond price around $1000, you'll end up with unused cash hanging around. Also, I don't think there's an automated brokerage tool to reinvest coupon payments into individual bonds. I think you'd have to pay for that (like in a SMA account) or DIY.

But that doesn't mean you shouldn't reinvest your ETF ladder dividends. Whether most people (who build individual bond ladders) take coupons in cash or buy more bonds is neither here nor there. Do what make sense for you.
jjunk wrote: Tue Feb 04, 2025 7:26 am Here's my question. Should I be actually taking these distributions to pay for bills now that I am effectively retired and just treat it as a "normal" TIPS ladder? Or is leaving the distributions reinvested the proper way to do this? TYIA.
It sounds like you can live off just the dividends and don't need to consume the maturing rungs, is that right? What did you do with 2024/last year's maturing ETF? Did you buy the 2034 ETF?

If that's what you're doing, you've essentially built your own rolling ladder, aka a bond fund.

If you did reinvest, you would eventually need to sell some shares to raise cash for spending, correct? So you're asking the same question that others often ask in a more general context: should I reinvest distributions or take in cash. And the usual answer still applies: take distributions in cash if you're going to need the money for spending anyway.
User avatar
Topic Author
jjunk
Posts: 1132
Joined: Fri Aug 24, 2012 9:52 pm

Re: Handling distributions from iShares TIPS ladder

Post by jjunk »

sycamore wrote: Tue Feb 04, 2025 8:23 am
jjunk wrote: Tue Feb 04, 2025 7:26 am In a TIPS ladder built with individual bonds, my understanding is that you take the distributions from the ladder as cash and that is how the ladder provides the inflation protected income over the course of the ladder term. ...
You say "take the distributions". To be clear, do you mean not just the coupons but also maturing rungs?
jjunk wrote: Tue Feb 04, 2025 7:26 am ... I have the current ETF based ladder reinvesting the dividends per the article and some other podcasts I've listened to on the matter because apparently thats how to most closely mimic individual bonds.
IMO, reinvesting coupon payments back into individual bonds is not necessarily what most people do. For one thing, you can only trade a whole bond (no fractions) and assuming a typical bond price around $1000, you'll end up with unused cash hanging around. Also, I don't think there's an automated brokerage tool to reinvest coupon payments into individual bonds. I think you'd have to pay for that (like in a SMA account) or DIY.

But that doesn't mean you shouldn't reinvest your ETF ladder dividends. Whether most people (who build individual bond ladders) take coupons in cash or buy more bonds is neither here nor there. Do what make sense for you.
jjunk wrote: Tue Feb 04, 2025 7:26 am Here's my question. Should I be actually taking these distributions to pay for bills now that I am effectively retired and just treat it as a "normal" TIPS ladder? Or is leaving the distributions reinvested the proper way to do this? TYIA.
It sounds like you can live off just the dividends and don't need to consume the maturing rungs, is that right? What did you do with 2024/last year's maturing ETF? Did you buy the 2034 ETF?

If that's what you're doing, you've essentially built your own rolling ladder, aka a bond fund.

If you did reinvest, you would eventually need to sell some shares to raise cash for spending, correct? So you're asking the same question that others often ask in a more general context: should I reinvest distributions or take in cash. And the usual answer still applies: take distributions in cash if you're going to need the money for spending anyway.
Thanks for the reply. I didnt have a rung in 2024, my first matures in 2025 which is what prompted the question. What I was saying about about the distrbutions for individual bonds is that I believe part of the calculation for effectively ensuring a specific inflation adjusted amount came in the form of spending the interest payments when it occurs. The way I understand the ETF is that reinvesting these interest payments, alongside the principal adjustment, is how to mimic the individual bonds.

You are correct, I dont need the distributions to live off of, but I will use the maturing ETF (in this years case, Oct 2025) to pay for my expenses in 2026. It will not roll unless I don't need the money for some reason.
miket29
Posts: 1224
Joined: Tue Jun 20, 2017 9:07 pm

Re: Handling distributions from iShares TIPS ladder

Post by miket29 »

jjunk wrote: Tue Feb 04, 2025 7:26 amHere's my question. Should I be actually taking these distributions to pay for bills now that I am effectively retired and just treat it as a "normal" TIPS ladder? Or is leaving the distributions reinvested the proper way to do this? TYIA.
In the ETF article Roth wrote
By letting dividends reinvest, I could get a good approximation by dividing $1,000 by the real yield to the number of years until maturity. For example, the 2029 maturity (IBIF) was yielding 2.36% so that meant I needed to buy $869.40 now ($1,000/1.0236^6)
And on TipsWatch they wrote
Distributing the inflation accruals in the current year means that at maturity you will be receiving only the original par value and final coupon payment, since all the inflation accruals would have been distributed. So to get the full benefits of compounding and true inflation protection you would need to reinvest all inflation-accrual distributions back into these TIPS ETFs or another similar product.
https://tipswatch.com/2023/12/03/lets-l ... tips-etfs/
User avatar
Topic Author
jjunk
Posts: 1132
Joined: Fri Aug 24, 2012 9:52 pm

Re: Handling distributions from iShares TIPS ladder

Post by jjunk »

miket29 wrote: Tue Feb 04, 2025 11:57 am
jjunk wrote: Tue Feb 04, 2025 7:26 amHere's my question. Should I be actually taking these distributions to pay for bills now that I am effectively retired and just treat it as a "normal" TIPS ladder? Or is leaving the distributions reinvested the proper way to do this? TYIA.
In the ETF article Roth wrote
By letting dividends reinvest, I could get a good approximation by dividing $1,000 by the real yield to the number of years until maturity. For example, the 2029 maturity (IBIF) was yielding 2.36% so that meant I needed to buy $869.40 now ($1,000/1.0236^6)
And on TipsWatch they wrote
Distributing the inflation accruals in the current year means that at maturity you will be receiving only the original par value and final coupon payment, since all the inflation accruals would have been distributed. So to get the full benefits of compounding and true inflation protection you would need to reinvest all inflation-accrual distributions back into these TIPS ETFs or another similar product.
https://tipswatch.com/2023/12/03/lets-l ... tips-etfs/
Thank you. I had not seen the tipswatch article so that answers my question. Appreciate the link!
Post Reply