Question for those using a TIPS ladder + equities

[kevink]

I've been considering switching from a fairly conservative plain vanilla stock:bond portfolio to a TIPS ladder for several years now and am about ready to pull the trigger.

What I'm looking at is this: 50% of our assets (which conveniently = all of our tax-deferred) in a 20 year TIPS ladder, 10% in T-Bills in the form of SGOV and Treasury MM account and 30% in equities (80% VTI, 20% VXUS). Other than not going out a full 30 years, it's essentially the same allocation suggested by Morningstar's John Reckenthaler in this artilce from last year:

https://www.morningstar.com/columns/rekenthaler-report/high-tips-yields-are-retirees-best-friend

I know there are several regular posters here who have expertise and experience with TIPS ladders and would be grateful for any thoughts.

 

[tulak]

TIPS are great alternative to bonds for FI. You can build yourself a ladder today for 50k and know in 20 years from now, that you’ll have the same 50k (inflation adjusted). I can’t think of any other investment that offers that guarantee.

I’m not retired yet, but have built a TIPS ladder in anticipation of retirement and to deal with SORR. My use of TIPS is more aggressive than yours and I only have a 6 year ladder. It’s to create a floor of minimal income needed, otherwise I invest the balance in equities. I might become more conservative in the future.

I spent some time building models of TIPS + equities allocations and found that the optimal historical portfolio was about 5-6 years in TIPS, with the rest in S&P500. I used S&P500 since there’s more historical data to work with, but like you, I invest in VTI/VXUS, 85/15, but thinking of ditching VXUS (it’s been getting smaller since I don’t rebalance to VXUS and still buy VTI). S&P500 is close enough that it’s good enough for modeling. I also found that using TIPS for FI had better portfolio survivability than a standard stock/bond allocation.

I’ll eventually keep a year or two in treasuries/mm funds once I retire for a buffer and spending money. And I haven’t decided if I’ll roll the TIPS once they mature, assuming I don’t need the money.

Here’s a thread I started last year:
Thread 'AA with TIPS for FI'
AA with TIPS for FI

I only skimmed the thread, but should re-read it later to see what I wrote. It’s been a while…

 

[Trailwalker]

I have a five year TIPs ladder with about 100k at each rung. The first step will mature in about four years. I have Treasuries in the short term and all equities for the long term. I bought mine on the secondary market when rates were about 2.5 real. Each year, I will look at the real yields to determine whether to add a rung. There are many ways to do it. I was mostly concerned about SORR also. We are retired and 63.

 

[kevink]

Thanks very much to both of you for these helpful responses.

 

[Bikechuck]

My wife and I are in our early 70s and we built a 17 year TIPS ladder (for now excluding the 5 years where TIPS are not available). Our ladder represents 16% of our portfolio and in conjunction with SS and a TIAA annuity it provides enough income to meet all of our annual spending needs with some extra money for discretionary costs.

We maintain a 50/50 stock and fixed income allocation. The fixed income consists of the TIPS ladder, guaranteed funds, a MM fund and Vanguard BND. As the TIPS rungs mature we will initially purchase additional amounts to fill in the missing years.

 

[Out-to-Lunch]

Upon retirement, I bought a 12-year TIPS ladder as a bridge to SS. I also have a pension, so the (TIPS + pension) represent a baseline comfortable standard of living. The rest of the portfolio is invested at a 70/30 AA. I think of this as a LMP/RP (liability matching portfolio/risk portfolio) arrangement (but of course the portfolio doesn't care how I think about it!). We do spend a bit more than this base, which we fund by withdrawals from the RP. The rungs of the ladder are less than our expected SS, i.e., I was not seeking a one-for-one SS replacement; rather, I just wanted to guarantee a comfortable base income, and keep the rest invested. Once we hit SS, our WR will drop substantially (and the TIPS ladder will be no more).

 

[BackcountryMe]

I have a five-year treasury ladder. At such a short duration, I don't worry whether its TIPS or treasuries. Many are ZCBs. If you're going out to 20 years, then I'd probably switch to TIPS, but at that timeframe, it's likely you'll be better off with equities.

I consider these treasuries to be the first leg of my FI stool. The second leg is high quality, dividend paying stocks with sufficient income to replenish my expiring treasuries. E.g., if my oldest (five-year) note matures for $100 this year, then I also have about $80 in dividend income to replace that note.

This should provide sufficient buffer to live off the dividends, but also not worry about GFC-type dividends cuts should they occur. Five years is plenty of time for the companies to recover and restore their dividends.

For my third leg, I can take on more risk, perhaps with VTI, or anything else really. I can then use the capital gains as discretionary spending when they are available.

 

[Red Rover]

I am doing something similar OP. I haven't pulled the official trigger yet but I'm close. I am building a bridge to SS with TIPS in my IRA for the next 12 years of basic expenses to help combat SORR, with 8 rungs covered so far. I have about 45% in a couple of VG Funds and 45% in TIPS with 10% in MM.

My plan is to fund expenses from taxable each year as the TIPS come due then convert the TIPS that come due to a ROTH and put that money into VTSAX. That way I will always be replenishing the stock bucket until I collect SS. Any year when everything is way down I won't withdraw from the taxable but will draw from the cash bucket.