10 year TIPS Ladder to SS or ????

[SJhawkins]

Goal:
Create a somewhat predictable cash flow for the next 10 years until SS FRA. My first thought was to make a 10 year TIPs ladder which seems simple. I’m now thinking do I really need a 10 year ladder with what we currently have, maybe just a slight adjustment will be “good enough”

10 year ladder thought process (my personal rabbit hole):

• Started with take our yearly spending * 10X years and build a 10 year ladder, this was my first thought.
• The fixed 10 year ladder sounded great but then I think, in my not so perfect world spending can be a little bit lumpy at times. Being we have 3X in Ibonds currently that could/may help smooth things out if needed so I may as well include them as part of the ladder.
• My next thought was, do I really need TIP bond(s) for years 1 and 2? I’m willing to roll the dice with some short-term bond funds for a year or two over TIPS, really just year 2 as year 1 is already fairly liquid (MM, 0-3 month T-Bills, etc.). Protecting inflation more in the longer end of the ladder is where I see TIPS more valuable.

Given the above I’m now looking at finding a home for 5X, I’m half thinking about adding a TIP’s fund and calling it a day.

Based on our current AA of 35% fixed we are looking at X years.
1X, checking, money market fund, etc.
3X, IBonds.
9X, Nominals, Intermediate Total Bond Fund (BND/VBTLX).

The remainder is in equites, 24X

If I split my Nominals in half to TIPS that gets me just about at the 10 year window, pump up the short term a bit and I’m there.

Does the above seem reasonable?

Step Two:
If it does seem reasonable I need to come up with a plan for at least the next 10 years prior to SS, update our investment policy statement, etc.

I think the biggest change compared to what we have been doing is how or if to rebalance. Maintain a minimum 10X in spending or 35%, whatever is larger is my current working theory. Maybe change to 40% fixed, something I may do too.

Then what TIPs to hold:

• First blush was 1/2 Nominals and 1/2 Short Term TIPS.
• 2/3 Nominals and 1/3 Short Term TIPS kind of matches Vanguard's thinking, seems reasonable.
• Then I was thinking 1/2 Nominals, 1/4 Short Term and 1/4 Medium Term TIPS, this seems more complicated then it needs to be.

One wild card is the Ibonds and how those get used/included as they are not a marketable security. The best framework maybe, do what you feel is best each year (spend, don’t spend, buy more)! I need to work on this part a bit more!

In Closing:
In the end how much any of this will make a difference who knows, probably little. It's probably more of a question of what makes one sleep better.

Knowing many of you before me have gone through this exercise, any good pointers and or other threads you can toss my way would be much appreciated.

The question for the group, does this seem remotely reasonable?

Thanks in advance.

 

[Al18]

It’s a good plan, but too conservative in my opinion. I would do a 5 year ladder of TIPS or CD and put the other 5 years in a balanced fund such as Fidelity Balanced or Vanguard Wellington.

 

[TickTock]

Goal:
Create a somewhat predictable cash flow for the next 10 years until SS FRA. My first thought was to make a 10 year TIPs ladder which seems simple. I’m now thinking do I really need a 10 year ladder with what we currently have, maybe just a slight adjustment will be “good enough”

Depending on how much predictability you want, I'd tend to stick with individual bonds (TIPS or otherwise) and plan to hold them to maturity rather than going to bond funds.

You're looking at 35-40% in FI and 65-60% in equities. IMO, that is not too conservative for your AA.

 

[tulak]

If you do a search here, you’ll find a few threads where TIPS are discussed.

I’ve mentioned my plan here before, but I did a lot of modeling and planning around using TIPS for FI to the point where I’m comfortable with that approach. I don’t own anything else for fixed income, except for some cash (MM) and a 5-year treasury. I bought most of the TIPS at auction and will hold until maturity. I was originally planning on an 8 year ladder, but I added a year with last month’s 5-year TIPS auction. I might go to 10 if equities keep going up.

I don’t hold any bond funds. I’m not a fan and have a high tolerance for equities. With an 8-10 years TIPS ladder for basic income, I feel confident enough that I could ride out any downturn in equities.

As for why TIPS, what other investment gives you a guaranteed inflation adjusted return of principal? I’m not investing in TIPS to make money, but for that guaranteed inflation adjusted income in future years. I take my risk with equities.

Regarding the ladder, keep in mind that you could limit how much you need per year based on future social security. If you are 5 years from 62 and SHTF, you could take SS at 62 reducing the amount you need invested in fixed income.

For example, if you need 80k/year, instead of building an 8-year ladder with 80k/year, you could build a 5-year ladder with 80k/year, and 3 years with 50k/year, assuming you’d get 30k/year for SS. Numbers are made up, but you get the idea.

 

[FD1000]

Many forget you can create cash flow using many mutual funds.
Suppose you own FBALX at Fidelity. You can set up a monthly sale on a specific date for a specific amount, and it will run for years until you stop it.

Never in my life have I invested in CD or index bond funds, or single bonds because I can make so much more with other bond funds, lower SD, and use trading.

 

[SJhawkins]

Many forget you can create cash flow using many mutual funds.
Suppose you own FBALX at Fidelity. You can set up a monthly sale on a specific date for a specific amount, and it will run for years until you stop it.

This is true but does not quite fit my needs as I hold no fixed income in taxable and not not enough room in deferred to hold such a fund. The fund does not include TIPS, something else I'm looking for as well.

 

[SJhawkins]

If you do a search here, you’ll find a few threads where TIPS are discussed.

I’ve mentioned my plan here before, but I did a lot of modeling and planning around using TIPS for FI to the point where I’m comfortable with that approach. I don’t own anything else for fixed income, except for some cash (MM) and a 5-year treasury. I bought most of the TIPS at auction and will hold until maturity. I was originally planning on an 8 year ladder, but I added a year with last month’s 5-year TIPS auction. I might go to 10 if equities keep going up.

I don’t hold any bond funds. I’m not a fan and have a high tolerance for equities. With an 8-10 years TIPS ladder for basic income, I feel confident enough that I could ride out any downturn in equities.

As for why TIPS, what other investment gives you a guaranteed inflation adjusted return of principal? I’m not investing in TIPS to make money, but for that guaranteed inflation adjusted income in future years. I take my risk with equities.

Regarding the ladder, keep in mind that you could limit how much you need per year based on future social security. If you are 5 years from 62 and SHTF, you could take SS at 62 reducing the amount you need invested in fixed income.

For example, if you need 80k/year, instead of building an 8-year ladder with 80k/year, you could build a 5-year ladder with 80k/year, and 3 years with 50k/year, assuming you’d get 30k/year for SS. Numbers are made up, but you get the idea.

Agreed on the ladder amount difference before SS and the start of SS.

In our case SS should cover about 70% of our needs (this is 10 years out so who really knows), the hope is we can settle/keep the AA we are looking at today in some form and run with it.

Going to error on the side of my older self will need some help, if I can keep this simple enough with a 4-6 funds my spouse and kids will have no problem keeping up with it.

 

[SJhawkins]

Depending on how much predictability you want, I'd tend to stick with individual bonds (TIPS or otherwise) and plan to hold them to maturity rather than going to bond funds.

You're looking at 35-40% in FI and 65-60% in equities. IMO, that is not too conservative for your AA.

I get the whole individual bonds vs funds, I am giving up something that is known for a tad of unknown for the sake of simplicity. The question in the back of mind is how much can I get smacked in the end.

I agree on my AA take, it does not seem to conservative to me anymore giving what I want it to do. I may dial it back just a tad for the next few years.

 

[Al18]

My comment about being too conservative is in reference to your next 10 years of spending. The chances of the stock market being down 10 years in a row is very slim. Instead, I recommended spending equal amounts of TIPS or CD and Fidelity Balanced/Wellington each year.

 

[pb4uski]

It depends on how anal you want to be about liability matching.

You don't need to TIPS ladder your total spending. What is more typical as a SS bridge is to base it on your age 70 SS benefit. Perhaps your spending is the same as your age 70 SS benefit and I'm misinterpreting.

Also, your SS bridge TIPS ladder doesn't need to be in your taxable account. Due to phantom income, your TIPS ladder is best in tax-deferred or tax-free accounts. When the TIPS rung matures for 100, sell 100 of equities in the taxable account and use the proceeds for spending and use the maturity proceeds to buy the stock (being careful not to trigger wash sale).

Another option is to just use a money market account for year 1 and a 10 year bond ladder and use the interest on the ladder to provide increasing annual payouts to provide for inflation.

 

[SJhawkins]

My comment about being too conservative is in reference to your next 10 years of spending. The chances of the stock market being down 10 years in a row is very slim. Instead, I recommended spending equal amounts of TIPS or CD and Fidelity Balanced/Wellington each year.

Ah got it, that makes sense and I agree.

When I first was looking at the ladder I did not include anything from the equity side, even with just a 1.5% divided (not guaranteed obviously) makes up a good 1/3 of my spending. Have a tendency to add on to many boots and suspenders!

 

[Al18]

Check out the recent Wellesley vs Wellington thread that I commented on earlier today. Balanced funds hold up well, even if the stock market is down.

 

[SJhawkins]

It depends on how anal you want to be about liability matching.

You don't need to TIPS ladder your total spending. What is more typical as a SS bridge is to base it on your age 70 SS benefit. Perhaps your spending is the same as your age 70 SS benefit and I'm misinterpreting.

Also, your SS bridge TIPS ladder doesn't need to be in your taxable account. Due to phantom income, your TIPS ladder is best in tax-deferred or tax-free accounts. When the TIPS rung matures for 100, sell 100 of equities in the taxable account and use the proceeds for spending and use the maturity proceeds to buy the stock (being careful not to trigger wash sale).

Another option is to just use a money market account for year 1 and a 10 year bond ladder and use the interest on the ladder to provide increasing annual payouts to provide for inflation.

I did figure my total spending and not my age 70 SS amount, so I did over state it. Using that metric as an example our current Ibonds goes from 3x that I previously calculated to 4.5x, so darn near half way there!

No worries on keeping bonds in taxable, I been planning on do exactly as you mentioned.

The more I vet this out the more comfortable I'm becoming using a fund but the ladder looks like a good option too. I think it has to do with the way I'm starting to look at the Ibonds we have.

The Ibonds kind of grew organically, first they were bought as a place to park an emergency fund, later to build more tax advantage space. I'm starting to see more value in them for reasons other then I originally bought them for. Took many years to build them but saying they cover about half of a 10 year ladder seems a little crazy.

Thanks for the input.

Edit to add, we have some fluff in that spending. We have 2 newer cars (paid cash), home was paid off years ago, live a simple life in the mid-west. Probably more suspenders!

Only got one whack at this, would guess I'm over thinking this!

 

[pb4uski]

....The more I vet this out the more comfortable I'm becoming using a fund but the ladder looks like a good option too. I think it has to do with the way I'm starting to look at the Ibonds we have. ...

Where you say fund I presume that you mean a bond fund or TIPS fund, but there is a middle ground that I think is worthy of consideration. There are target maturity bond ETFs available where you own a part of a portfolio of bonds that all mature in a stated year and they can be laddered. They come in Treasury bond, investment grade corporate bond, high yield corporate bond, municipal bond and TIPs versions and they can be laddered. You receive monthly interest distributions and a big terminal distribution in December of the target maturity year.

Check out Invesco Bulletshares, BlackRock iBonds and StateStreet SPDR SSGA My(yyyy). I have a portfolio of about 25 bonds in my IRA that I wanted to simplify in case I get hit by a beer truck, so when some bonds recently matured and were called I used the target maturity bond ETF instead of buying a few 2030 corporate bonds. I'll continue this as bond mature or are called and will eventually end up with 5-10 target maturity bond ETFs rather than 25-35 individual bonds. The yield is perhaps a smidgen less than what I could do myself but the added diversification and simplicity is worth it for me.

I think these make sense for corporate, high yield and municipal bonds, but less so for Treasuries and TIPS where diversification is less important.

As an aside, I have been using IBHF, the iBonds 2026 High Yield ETF as a high yield holding for dry powder. A little credit risk but less so given the short term and the 5.89% yield is too good to pass up compared to 3.88% for SVWXX money market fund.

 

[SJhawkins]

Pb4uski,

Thanks for the above post.

I do like the idea of the ishares ibond ETF, wrong name for the fund but.....its definitely and option.

At a cost of $100/$100,000 is it worth it, like you noted maybe not much of an appeal for TIPs but the appeal for me it keeps it simple for my spouse, assume you can track it easier (have a simple Google Sheet), adding to a rung and or selling a portion of a rung if needed probably simpler. Compared to a Vanguard TIPs fund it's the same ER for what that's worth.

I wonder if the ibond ETF folks can buy better than I, assume they are buying bigger lots, less spread? This could be another plus or negative if I can buy better!

Thanks again, more to think about

 

[SJhawkins]

A follow up, ended up creating a TIPs ladder this week to get us to SS, the rungs as of today are a tad over my SS. Have a couple of levers that could be pulled if needed, turn on my spouses SS early (current plan is age 65), turn on mine early (current plan is 70), if the market is positive pull some funds and extend the ladder, will hopefully have some dividends.

Feel pretty good about this now that its done. As time marches on I could see fattening up the rungs, maybe extending it etc.

To wrap this up and give it some context. Its only been a few days but definitely can feel the difference settling in, we can pull the rip cord at anytime I feel now. I think the biggest hurdle was not so much creating the ladder and or the decision not use TIPs funds but get into mind set that we may be spending down assets rather then adding to them. It literally took me a month or two to get to this point, for whatever reason this was one of the tougher calls we have made in our investment career. Settling on a AA seemed rather simple compared to this decision, that could be that our AA was set and been the same for the past 20 years!

As you can tell, had a hard time putting this into words, sorry for the rambling, hope it helps the person in the same stage as I.

Thanks again everyone for your help.

SJ

 

[SnowballCamper]

Congrats on executing your plan! It is an adjustment to go from save to spend.

 

[pb4uski]

...I think the biggest hurdle was not so much creating the ladder and or the decision not use TIPs funds but get into mind set that we may be spending down assets rather then adding to them. ...

You might be pleasantly surprised. As long as your withdrawal rate is less than your portfolio investment earnings rate your nut should continue to grow.

It should happen more often than not.

 

[Chuckanut]

I'm a big believer in diversification so for that reason I have added some TIPS to the income side of my asset allocation. It's all in the area of 5-10 years maturity. But, I still also have fixed rate bonds and CDs. I'm not smart enough to know the future.

 

[SJhawkins]

You might be pleasantly surprised. As long as your withdrawal rate is less than your portfolio investment earnings rate your nut should continue to grow.

It should happen more often than not.

Its funny you bring this up, have run the numbers 15 ways from Sunday and by all accounts it will/should work out as you mention. The reality is if I delay SS til 70 as planned that just about covers what we spend today, at a 2% WD rate on the nut we would live like kings. One advantage of living in fly over country and being debt free for the last 15 or so years I guess

Even knowing that may be the future, its still hard to wrap my head around this mind set to spending. Having read many stories here helped a lot, now I get the struggles some folks go through. Its just a new reality, sure will look back a few years from now and wonder what all the worry was about!

 

[pb4uski]

One thing you can do that might help psychologically is to just set up an automatic redemption/withdrawal that goes to the checking account that you use to pay your bills... your monthly paycheck.

For a while I had a high yield savings account and had programmed monthly transfers to the checking account that we use to pay our bills and I would replenish it annually when I rebalanced.

 

[dickoncapecod]

With TIPs, you pay taxes on the principal adjustments ---- the bulk of your inflation compensation ---- in the year they are awarded BUT that you will not receive until sale or maturity. Further, hiding at the base of the risk-free curve or investing in Treasury floaters like TIPs to address imagined credit or inflation risks --- that are better addressed with high quality higher yielding bondish assets ---- is just trading an overestimated risk of loss for the very real risk of an underfunded retirement.

 

[pb4uski]

With TIPs, you pay taxes on the principal adjustments ---- the bulk of your inflation compensation ---- in the year they are awarded BUT that you will not receive until sale or maturity.

Correct if the TIPS are held in a taxable account but not if the TIPS are held in a tax-deferred or tax-free account.

 

[dickoncapecod]

Correct if the TIPS are held in a taxable account but not if the TIPS are held in a tax-deferred or tax-free account.

Sure. But presumably in that case, TIPs won't offer any offset to inflation-driven expenditures in real time. They're just a low yield asset offering a multi-year delayed offset to past inflation that is ultimately is distributed in a big mingle with other deferred-tax assets in annual RMDs late in life.

 

[tulak]

Sure. But presumably in that case, TIPs won't offer any offset to inflation-driven expenditures in real time. They're just a low yield asset offering a multi-year delayed offset to past inflation that is ultimately is distributed in a big mingle with other deferred-tax assets in annual RMDs late in life.

Money is fungible. Build a ladder in tax deferred. When a TIPS matures, sell that amount of stock in taxable and buy the same amount back in tax deferred. You now have the cash available to spend, if that’s your goal. All real time and no need to wait for RMDs.

TIPS are the best way to guarantee an inflation adjusted return of principal. Personally, I think that’s enough of a reason to buy them, but you also get a decent yield. If you want better performance, buy equities. That’s not the point of TIPS (IMO).