Do I want a TIPS ladder? Not sure.

[OldShooter]

I have told this story before here: In 2006/7, a few years into retirement, DW and I had plenty of money but agreed that by far the major risk to our retirement would be a strip of high inflation a la 1979/80. So we bought very serious six figures in TIPS, specifically the lowest interest rate available then to minimize reinvestment risk and the longest term available. We ended up with the 2s of 26. When interest rates went to zero the TIPS appreciated by 50% or so and we looked like geniuses. So, about 10 years in we sold a chunk of the TIPS, but not as much as half. So the remaining TIPS will mature in about a year and I have been noodling about what to do with the cash. (We are 77 YO this year. And yes, we have been stunningly lucky financially.)

With the election results and seeing the names and qualifications of appointees scrolling down my screen I am deciding that higher inflation is probably a pretty safe bet and that staying in TIPS would probably be wise. At this point the TIPS are about 20% of our 70/30AA and if our equity tranche went to zero we would still have adequate money to live out our lives.

So (finally) the question: I am a lazy guy and, given that TIPS really don't have a conventional yield curve, it is not obvious to me that just spending 100% of the coming maturity on one issue of TIPS would not work just fine. Our practice is to withdraw funds when we need money, taking the amounts from the equity and fixed tranches in a rebalancing sort of way. In the future, if we get into a SORR situation, we would just draw from the fixed income side. TIPS are easy and economical to sell, so I don't see a problem there. I haven't tried to figure out how a TIPS that is ten years from maturity (which would probably outlast at least one of us) will yield compared to a ladder of some sort. So ... how say you ladder enthusiasts?

(DW is entirely capable of managing whatever we decide to do. That's not an issue. She passed her Series 7 exam in the early '70s and retired from her megabank about 20 years ago as an SVP and business unit manager.)

 

[Closet_Gamer]

I think you know as much or more about TIPS than anyone else here, so you’ve probably know best. I’d only offer two questions:

1 - given the how TIPS work, would there be value in having money mature over time so as to re-invest under different inflation situations/expectations over time? Sort of “Inflation expectation averaging” in the same way people do dollar cost averaging.

2 - if you really don’t need the money, perhaps just add to the equity allocation to benefit heirs/estate charities or perhaps do more gifting now? TIPS may be too conservative.

Just two thoughts.

 

[OldShooter]

Thanks for the flowers @Closet_Gamer but I'm sure there are plenty here who know more about TIPS than I do and, especially, about TIPS ladders.

I'm not sure I understand your point #1. If the TIPS matures, the market will tell me what my options are with TIPS. If I sell before maturity, it's really the same, no? The only game I see there is if either the sold side or the bought side is mispriced.

Re #2 we are actually going through an estate plan update right now. I am kind of greedy about holding onto our money until we are sure we won't need it, but yes, our AA is 70/30 for just the reasons you say. Heirs and charity.

 

[GravitySucks]

I’m around 60% TIPS in my overall FI and over 80% on my bond ladder. I was going to add regular Treasuries moving forward but now I’m going to keep adding TIPS as long as the expected inflation factor doesn’t go to high.
I like a ladder even though chances of having to sell into a bad bond market usually doesn’t coincide with a bad stock market but 2022 did show it can happen.

 

[kevink]

I can't think of anyone on these boards I've learned more from when it comes to investing generally and TIPS in particular than you OldShooter - and I'm most grateful.

It does occur to me though that just keeping things simple and going with all VTIP, or adding in a bit of SCHP if you feel like you really need the added duration, might be a worthwhile bit of minimalist simplicity. I've been looking at DFA's target date and retirement income funds, which are the only ones that have a LMP rather than probabilistic approch and they start off heavy in 15 year+ TIPS in early retirement but are down to 6-7 year duration plus 1-2 years in nominals by about your age. But you probably already thought of something better than this!

 

[OldShooter]

Hmm ... more flowers. Thanks @kevink. I am flattered.

Thanks for bringing up the point on duration. I'm not much of a bond guy and didn't realize that this new TIPS phase for us should probably consider duration. I generally just think about bonds as a buy and hold sort of thing. But at 77YO we may not be in buy and hold mode any longer. At least we can't assume that.

Re funds, I think I have some kind of genetic resistance to paying someone for doing such a simple task as buying govvies. I'm also not inclined towards abdicating my AA control to some target date algorithm. But I hadn't thought about either lately so it's good you bring them up.

Still hoping to hear arguments for a ladder.

 

[MichaelB]

Still hoping to hear arguments for a ladder.

A ladder is less risky than a fund or a large lump sum into one maturity date. TIPs market value can decline, and if you have to sell you run the risk of a loss. One way to ameliorate the risk is with a ladder built around your expected point in time future liquidity needs.

A ladder also reduces reinvestment risk compared with a lump sum.

 

[Closet_Gamer]

I'm not sure I understand your point #1. If the TIPS matures, the market will tell me what my options are with TIPS. If I sell before maturity, it's really the same, no? The only game I see there is if either the sold side or the bought side is mispriced.

What I was thinking is that if it all matures simultaneously in a market where TIPS are priced expensively you sort of have to reinvest all in that environment.

Building a ladder gives you maturities across years. More likely to find some good re-investment points, average points and mediocre points. But you get to average all of those out.

 

[tulak]

I'm a big fan of TIPS. I don't know of any other investment where if I buy 50k today, I'm guaranteed it'll be worth 50k in the future. That's why I buy TIPS. They might not perform as well as other investments, but that's ok. I'm buying them for guaranteed future income.

At 77 and not needing to worry about income, I'm not sure what I would do. If my WR rate is low enough, I'm inclined to leave more in equities and use the yield for income (if needed). In other words, increase my equity allocation. But that's probably not what you want to do.

I see that funds were mentioned, but I'm not a fan. My one requirement for FI is no loss of principal, so that eliminates funds.

That leaves me with ladders. I'm not a big fan of chasing yield, mostly because I'm busy and somewhat lazy. So I'd build a 10+ year ladder of either treasuries or TIPS and forget about it. When I bought TIPS, I looked at the break-even point between treasuries and TIPS to see which would be better, and I gave TIPS the advantage at the time, with 2%+ real yields.

One question I have, what are you planning to do with the ladder?

It sounds like you are willing to trade if the opportunity arises, which is leads me to think that you are somewhat active in managing your FI?

If that's not the case, then more reason to build a ladder and forget about it. And if you want to decide on TIPS vs treasuries, compare the treasuries nominal yield with the TIPS's real yield + your best guess of inflation and see how they compare. The difference shouldn't be large, unless that inflation rate is higher than we expect. And even if you're wrong, does it matter?

With the election results and seeing the names and qualifications of appointees scrolling down my screen I am deciding that higher inflation is probably a pretty safe bet and that staying in TIPS would probably be wise. At this point the TIPS are about 20% of our 70/30AA and if our equity tranche went to zero we would still have adequate money to live out our lives.

Interesting that your crystal ball is working better than mine (and I mean this in jest! ). I tend to agree that higher inflation seems possible, but there haven't been any policy changes and we really don't know how this will play out. I'm wondering, what is the market doing? If inflation is likely, then is it not already priced in?

 

[big-papa]

TIPS fan here. I started out with TIPS funds as well, but as you know, TIPS fund values move in the opposite direction of yields. So you have a choice - you can care about the returns of your TIPS and treat it like you would a stock fund and rebalance, etc. Or you can care about the income it produces. But it's hard to care about both simultaneously because of the opposing nature of returns vs. yields, at least in shorter time horizons.

With that in mind when I retired, I switched to a TIPS ladder. For us, it's composed of 3 parts
- an SS bridge for me
- an SS bridge for she
- and a segment that lasts until we're in our mid 90's and which, essentially, augments SS.

No plans at all to dump any of these before maturity. In fact, if what we have besides TIPS (stock) does better than expected, we will likely peel some of that off to augment the TIPS ladder, either to increase the magnitude of the income from it or to extend the length of time that TIPS produces income.

In short, we use TIPS to augment SS to provide a reasonably solid income floor and one reason we do that is that we're still young enough to remember the 1970's. It won't cover 100% of our nondiscretionary expenses, but it's large enough that we can withstand pretty much anything that stocks can do and still be just fine.

 

[kevink]

Since the OP mentioned inflation fears as one reason to extend the TIPS ladder I thought I'd share this interesting contrarian post from monetary policy expert Cullen Roche:

Could Trump be Deflationary?

File under the old Bogleheads "nobody knows nuthin'" adage I guess. I'm beginning to see the wisdom of folks like Jonathan Clements that keep equal weights of TIPS and nominals, duration-matched.

 

[Chuckanut]

I share OldShooter’s experience with the high inflation of the 70s and 80s. A couple years of low double digit inflation takes a big bite out of many fixed income assets.

I’ve settled on five to ten year Tips for the lengthier steps of my bond and CD ladder for that reason. Nothing fixed beyond five years unless I stumble upon a great deal. My common stock index funds will continue to carry the bulk of the inflation fighting load, with Tips providing some diversification in case I am wrong.

 

[tulak]

That’s a good point. I’m worried about inflation 5-10+ years out, not in the next few years. It’s not pleasant, but I can deal with a single year or two of inflation, but start compounding that over multiple years and it gets ugly.

 

[RetMD21]

IDK if you are familiar with Alan Roth's column from 2022 about how to build a TIPs ladder. https://www.advisorperspectives.com/articles/2022/10/24/the-4-rule-just-became-a-whole-lot-easier
Having a ladder reduces volatility.

I am doing a 10 year tips ladder. Originally it was mostly purchased in the secondary market but now I am just reinvesting at auction. It would provide enough money for basic expenses. I am not a purist so I also bought some long tips with favorable interest rates.

 

[Closet_Gamer]

I wonder if Treasury will stop issuing TIPS?

Even as the drunken sailors approach to federal spending has continued over the last few years, the debt to GDP ratio has actually declined a bit since 2020:
2020: 125.9% (Covid depressed GDP)
2021: 119.9%
2022: 118.6%
2023: 119.0%
2024: 120.0% (forecast)

Those high inflation years helped hold the line on the debt:GDP ratio. As inflation retreated the federal deficit spending started to once again be reflected in the ratio.

Inflating away the debt, or some portion of it, may be necessary to maintain solvency. TIPS eliminates this option for the TIPS portion of the debt.

Google Gemini tells me TIPS currently represents 8% of outstanding Treasury debt. Treasure really should stop issuing these.

 

[tulak]

I hope not!

Getting rid of them would send the message that devaluing the dollar is an acceptable part of monetary policy. Not a good message.

 

[Closet_Gamer]

I hope not!

Getting rid of them would send the message that devaluing the dollar is an acceptable part of monetary policy. Not a good message.

I very much agree with that.

 

[fosterscik]

I've been toying with the idea of setting up a TIPS ladder to guarantee maybe $30,000 of additional income above our current SS checks (mine still to be claimed at age 70). That's a very helpful article (and an even more helpful spreadsheet!)

IDK if you are familiar with Alan Roth's column from 2022 about how to build a TIPs ladder. https://www.advisorperspectives.com/articles/2022/10/24/the-4-rule-just-became-a-whole-lot-easier
Having a ladder reduces volatility.

 

[Spock]

The malfunction with TIPS is "who gets to calculate the inflation factors?"
My personal rates of inflation completely swamp the official figures. Doesn't matter which CPI-X number is quoted. In my case, the assertion that TIPS will maintain the purchasing power of my investment is false.
If you're comfy that the metrics used accurately reflect your budget, go for it.

 

[tulak]

I've been toying with the idea of setting up a TIPS ladder to guarantee maybe $30,000 of additional income above our current SS checks (mine still to be claimed at age 70). That's a very helpful article (and an even more helpful spreadsheet!)

tipsladder.com works great for building a TIPS ladder. If you haven’t used it, then I’d recommend giving it a try.

 

[OldShooter]

That’s a good point. I’m worried about inflation 5-10+ years out, not in the next few years. It’s not pleasant, but I can deal with a single year or two of inflation, but start compounding that over multiple years and it gets ugly.

Yes, guys. That is more where I am. I've always viewed TIPS like I view fire insurance -- bought to cushion the portfolio if the worst days come. 3-4% compounds to some big numbers, but it is the two-digit numbers compounding that are the worry. No one knows what crazy things will soon be done and what will happen, but one cannot (IMO) overlook the fact that a burst of big inflation is a possibility.

 

[OldShooter]

The malfunction with TIPS is "who gets to calculate the inflation factors?"
My personal rates of inflation completely swamp the official figures. Doesn't matter which CPI-X number is quoted. In my case, the assertion that TIPS will maintain the purchasing power of my investment is false.
If you're comfy that the metrics used accurately reflect your budget, go for it.

False/won't maintain purchasing power. Of course. If for no other reason than that the inflationary adjustments are taxable income. But to complain about the metric used is pointless as there is no alternative investment (AFIK) that uses a better metric.

 

[Lorenzo]

TIPS fan here. I started out with TIPS funds as well, but as you know, TIPS fund values move in the opposite direction of yields. So you have a choice - you can care about the returns of your TIPS and treat it like you would a stock fund and rebalance, etc. Or you can care about the income it produces. But it's hard to care about both simultaneously because of the opposing nature of returns vs. yields, at least in shorter time horizons.

With that in mind when I retired, I switched to a TIPS ladder. For us, it's composed of 3 parts
- an SS bridge for me
- an SS bridge for she
- and a segment that lasts until we're in our mid 90's and which, essentially, augments SS.

No plans at all to dump any of these before maturity. In fact, if what we have besides TIPS (stock) does better than expected, we will likely peel some of that off to augment the TIPS ladder, either to increase the magnitude of the income from it or to extend the length of time that TIPS produces income.

In short, we use TIPS to augment SS to provide a reasonably solid income floor and one reason we do that is that we're still young enough to remember the 1970's. It won't cover 100% of our nondiscretionary expenses, but it's large enough that we can withstand pretty much anything that stocks can do and still be just fine.

I'm considering whether a TIPS ladder between now (age 62) and SS (say 70) would be a good fit for me. Fixed income investing is totally new to me--indeed, I'm a fairly inexperienced investor overall. The following is my thought process, which I'm sure reflects my poor grasp of all this.

Inflation is always a concern, so the time-honored and perhaps overly simplistic strategy I have read about seems to have been to rely on the equity portion of one's portfolio for inflation protection: When stocks are up, sell those for income, and when stocks are down, sell bonds for income, because stocks and bonds presumably move in opposite directions--which is not always the case, as recent years (as well as the infamous 1970s) have demonstrated. So is it the possibility of these periods of stagflation that is some people's motivation for employing a TIPS ladder?

In my case the TIPS ladder would serve as a bridge to SS--for me, that's 8 years--to cover most essential (non-discretionary) expenses. Should my decision whether to employ a TIPS ladder be related to what I foresee as the likelihood of stagflation in those 8 years? Or am I totally not understanding the considerations?

 

[Chuckanut]

False/won't maintain purchasing power. Of course. If for no other reason than that the inflationary adjustments are taxable income. But to complain about the metric used is pointless as there is no alternative investment (AFIK) that uses a better metric.

I recently bought a TIPS that yields 2% over the inflation rate. I believe that the 2% will be enough to cover taxes when I pull the money out of my tIRA account since two percentage points yields a relatively big increase of the total interest earned. Of course if my tax bracket went up a lot that could eat up a much bigger chunk of my earnings.

Ideally I would buy TIPS in a Roth IRA. But there are no available funds there at the moment.

 

[Chuckanut]

The malfunction with TIPS is "who gets to calculate the inflation factors?"
My personal rates of inflation completely swamp the official figures. Doesn't matter which CPI-X number is quoted. In my case, the assertion that TIPS will maintain the purchasing power of my investment is false.
If you're comfy that the metrics used accurately reflect your budget, go for it.

Sadly nobody offers TIPS based on one’s personal inflation rate. . That sucker hasn’t been born yet.