Do I want a TIPS ladder? Not sure.

[Trailwalker]

I didn't buy my TIPS ladder as an investment. I bought it for sleep at night insurance. The stock market and other kinds of bonds may perform better. I hope they do because my long term money is there. I think of my TIPS ladder as a no fee, inflation-protected annuity that gets me to age 73.

 

[big-papa]

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?

A lot of this stuff is no more than personal preference.

I'm not a market timer so I don't make investment decisions based on what I think might happen in the future because I'm almost certain to be wrong about it. Concerns about stagflation are not why I own TIPS, for example.

For me, employing TIPS not just for a bridge to SS but also for additional, inflation adjusted income out to the end of my planning horizon is because I simply wanted the majority of our non-discretionary income to come from the safest possible sources I could consider. Also to me, over the years, I've decided that the entire concept of bond funds makes little sense. Underlying bonds themselves are income producing vehicles. Before bond funds came around, the only people who cared about the "returns" of bonds were most likely active traders. Bond funds take something that bonds are (income producing vehicles) and puts them into a wrapper that makes people think of them as returns producing vehicles, despite what's under the hood. As I've aged, that makes less and less sense to me.

Put another way, I want that income to be more deterministic than probabilistic. TIPS + SS (despite the unknowable future of it) are more deterministic sources of income than stocks are. I did not put this together with the idea that 100% of our nondiscretionary income would come from these sources, but it's a sufficiently large portion that I'm comfortable with the remaining amount coming from a more risky source (stocks).

A lot of people call this LMP (Liability Matching Portfolio). For my case, I won't call it that. It's not like I pulled out a spreadsheet and listed all of my expenses that are subject to some sort of inflation and put those in one column and all those that are not and put them into another column. I simply wanted a certain amount of inflation adjusted income and a certain amount of my portfolio that had the potential for higher returns. That's it.

No, nothing is truly "safe". We all know the current issues with SS. The treasury could decide to stop issuing TIPS some day or the politicians could make them callable, etc. The possibilities are endless.
No, the inflation adjusted income from SS and TIPS probably will not match my own personal inflation rate, but I don't know anything that will or even could.

Cheers.

 

[bmcgonig]

If you are going to buy a ladder IShares has 10 etfs that buy tips for each do the next ten years. First ticker symbol is IBIA for this year, IBIB for next year IBIC etc etc.

 

[big-papa]

If you are going to buy a ladder IShares has 10 etfs that buy tips for each do the next ten years. First ticker symbol is IBIA for this year, IBIB for next year IBIC etc etc.

These might be a lot more interesting if they went all the way out to 30 years.

LifeX has a series of individual funds that provide monthly income with the first fund having an end year of 2048 and the last fund having an end year of 2063. They're not annuities but they have a couple of similarities. However, their expense ratios are high and you have to work with an advisor to access them, so more money out of your pocket.

https://lifexfunds.com/

Cheers.

 

[OldShooter]

If you are going to buy a ladder IShares has 10 etfs that buy tips for each do the next ten years. First ticker symbol is IBIA for this year, IBIB for next year IBIC etc etc.

Thanks. I just sent my Schwab guy an email asking about these and any similar product. At first glance they look like a good idea.

Re LifeX fortunately we have no need for 30 years and definitely no need for an advisor or high fees.

 

[bmcgonig]

Thanks. I just sent my Schwab guy an email asking about these and any similar product. At first glance they look like a good idea.

Re LifeX fortunately we have no need for 30 years and definitely no need for an advisor or high fees.

Question …I’m assuming that the only reason we buy ladders is that we need the money at every rung of the ladder. If we don’t need the money and we just want to take advantage of the inflation benefit, then would it make sense just to buy one ETF? E.g., the 10 year or the 5 year?

 

[big-papa]

Question …I’m assuming that the only reason we buy ladders is that we need the money at every rung of the ladder. If we don’t need the money and we just want to take advantage of the inflation benefit, then would it make sense just to buy one ETF? E.g., the 10 year or the 5 year?

You could do that. You would still get the inflation adjusted coupon every 6 months until maturity, though.

Cheers.

 

[OldShooter]

Question …I’m assuming that the only reason we buy ladders is that we need the money at every rung of the ladder. If we don’t need the money and we just want to take advantage of the inflation benefit, then would it make sense just to buy one ETF? E.g., the 10 year or the 5 year?

That is kind of my dilemma. Our need for cash from the FI side is unpredictable. We use the money more for things like cars, etc. and it would be easy enough to sell a bit of a longer TIPS position when we needed the cash.

RE TIPS ETF we would never even consider that. We'd just buy TIPS. It's easy enough and there's no reason to pay someone for the service of buying the world's most liquid assets.

 

[SnowballCamper]

I started bond (actually just treasury) laddering after BND dropped this last cycle. To me it is a way to avoid market risk because I'm holding to maturity. Lately I've ben chasing yield, and so lots of short term, but always holding to maturity.

If you built a TIPS ladder to provide a base income stream, it's basically a govt guaranteed COLA pension. Then when it kicks out your income (by some TIPS maturing) you can do whatever with it, and the remaining income stream remains in place.

Setting this up gets you guaranteed income for your life (or however long you make it... but you've made clear you have enough to fully fund the rest of your lives). Then you have the security that gives the freedom to do what you want with what's left before you kick the bucket... so you can see some of the results of gifting, etc.

Just my thoughts on your situation...

 

[RetMD21]

I was happy to get 2.071 real yield on the 10 year TIPS at auction today. IDK if I would really be buying if the real yield gets into the 0% range again.

 

[hotwired]

The fact that you know that using low coupon lowers (or eliminates) reinvestment risk immediately flags you as a 2nd level thinker. Great job. This is something I figured out when assembling my ladder. Accumulating, I never worried about reinvestment risk, now that rates peaked and have started descending, I'm thinking. Shoot! Why didn't I select zero coupons only when assembling the nominal bond portion of my ladder? What I did was to (kind of sloppily) assemble a 10 year ladder, each rung representing at least 50% of our needs, up to 100%. (Our "core" expenses are 52K per year, and even with that, DW manages to squirrel away 5K a year. The numbers say it's impossible. Yet she does it. But I digress...). I have the same inflation fears, but I wanted to diversify, so I put half of each rung in TIPS with lowest coupon choice, then the other half I used nominal, zero coupon, agency and BulletShares IG corporate and high yield corporate. (15/5 ratio though). Then I've got 1.5 years in iBonds at the 1.3% inflation factor, then a few higher yield picks like JAAA, JBBB, BKLN, ANGL. I did what you did too, and picked a few "way out" maturities. So even though my ladder is 10 years, I put 70K ish in 3 different 25-30 year picks. 2 TIPs and one zero. Figuring if rates drop, I've got a cap gain pop. If they don't, I've got 1.5 years worht of living expenses sitting at 4.75% interest with little reinvestment risk for 25-30 years. A win-semi-win.

So my point is, don't be afraid to diversify at every level. Not just asset allocation, but inflation assumptions, etc. Most first level thinkers will try to decide between A and B. You're definitely a second level thinker, so you can use risk reward thinking and decide which blend of A and B (with maybe a smattering of C) might stand the highest chance of working the best.

 

[OldShooter]

The objective of classical diversification is to hold minimally correlated assets so that when one zigs the other one zags. I'm not sure I consider different flavors of govvies to be minimally correleated. But as you like.

Re being afraid to diversify, actually what I am avoiding is to turn running this FI tranche into some kind of time consuming job. I am mildly interested in the iShares target year ETFs because it doesn't look much more difficult that just buying and holding a single issue as we did in 2007. Beyond that, probably no interest in chasing a few basis points one way or another. We have been stunningly lucky in life and we don't have to do that.