Rolling out of a Ladder?

[SJhawkins]

Rolling out of a Ladder?

I have been on the struggle the bus for bit on how to deal with our ladder going forward. I want to get our IPS buttoned up for the next chapter (I try to make the IPS look at the next 10 years).

Background:
Mid 50s’, Retired this month, yeah!

Ladder built to get to FRA, age 67, may add to this to get to 70. Rungs match my FRA SS amount. This covers about 75-80% of our great life expenses (basics + some fun). Toss in half the dividends from the portfolio life is good. If I’m still around at my SS FRA and include my spouses SS demand on the portfolio will be little.

Ladder is built half with Individual TIPs and Ibonds (been buying Ibonds for the past 12 years). The Ibonds give us a little wiggle room, guess its a rubber ladder.

For right or wrong I have the ladder accounted for in our overall AA (been at 65/35 the past 15 years). I know many people keep the ladder outside of their overall AA too, I see the benefit of both approaches. I’m so used to keeping a static AA to maintain our risk profile so have included it for now. Not that cant be convinced to take it out of the overall AA, that just seems odd at this point after all these years.

Current Fixed Income AA:
2.5% MM/Short Term/Cash/Etc.
7.5% Ibonds (Ladder)
7.5% Individual TIPs (Ladder)
17.5% (Intermediate bond fund VBTLX/BND)

Total Fixed Income = 35%

Thoughts/Questions:

I know you can’t have your cake and eat too but…… want to add some verbiage to our IPS that can’t re-balance out of the ladder for at least the next 5 years (I just pulled the 5 years out of my back side, spouse and I will both be 62 at that point so some options starting coming onboard). I guess that puts the ladder out of the AA when the market tanks, my personal struggle bus

As the rungs sell off replacing the Ibonds with a Short Term TIPs fund or Ibonds and replace the Individual TIPs with an intermediate TIPs fund. I would not mind being all Ibonds for this position as my spouse, kids and myself know the “system”. On the other hand getting rid of 2 TD accounts has some appeal too. Now I have a rolling ladder I guess or creating a rolling ladder in some regards (second seat of the struggle bus!).

The above would look like at SS FRA:
2.5% MM/Short Term/Cash/Etc.
7.5% Short Term TIPS Fund
7.5% Intermediate TIPs Fund
17.5% Intermediate bond fund (VBTLX/BND)

Played around getting to something like this at SS FRA:
10% MM/Ibonds/1 year bills/etc. (this covers about 3X-4X pre SS for reference).
10% Intermediate TIPs Fund
15% Intermediate bond fund (VBTLX/BND)

Things have been on auto pilot for so long during the accumulation phase its seems odd to be looking at from the other direction, sure that is normal. Updating the IPS will be easy after I come up with a “plan”. Just need something to click in my little noggin.

The good news is we have zero debt, paid for home, newer paid for cars, live in the mid-west with what I think is a low burn rate.

With 65% being in equites what I do on the fixed side will probably make little difference. On the other hand what I do on the fixed side is what I need to feel the most comfortable with for the "sleep at night" factor.

Know many have gone thru this exercise before me, your thoughts and suggestion are welcome. I’m probably making it more complicated then it needs to be.

If you read all this I thank you, tried to keep it short, my apologies.

 

[SecondCor521]

I'm not really very knowledgeable about laddering; others here are much better at it than me.

However, I've read through your post twice and I actually don't see a question anywhere. What is it that you actually want help with specifically?

 

[SJhawkins]

I'm not really very knowledgeable about laddering; others here are much better at it than me.

However, I've read through your post twice and I actually don't see a question anywhere. What is it that you actually want help with specifically?

Guess what I'm looking:

If one is moving from using a ladder to funds as the rungs mature is what I'm rolling into (AA) seem reasonable? I'm basically changing a ladder from LMP to Rolling.

Many people hold ladders outside of their AA, I'm looking at it from a total AA. Think that maybe a little difference than most. Looking for more a general feeling about the approach? I'm basically changing a ladder from LMP to Rolling at this point.

I was thinking of adding a little one way stop to rebalance, can’t re-balance out of the ladder for at least the next 5 years if the market takes a dump. The answer maybe don't re-balance out at all going down?

The last question I'm having a hard time asking, realize you can't have both LMP and a rolling at the same time so I guess its a fixed AA until its not and turns into a rolling ladder when the market goes down. Sorry for the wishy washy way around this. As I noted think I'm asking for my cake and eat too here. Think is where most my agist is coming from.

 

[Al18]

Congrats on your early retirement!

My comments: I would not invest in a bond fund - period. The past five years cumulative performance is terrible. If you invested $10K in VBTLX five years ago, you now have $10,088. If you invested $10K in BND five years ago, you now have $10,094. You can see the results here https://www.portfoliovisualizer.com/fund-performance?s=y&sl=4Hh5iBM6geABKEw0MBMo6M

I'm a long-time CD investor, but you could achieve similar results by buying individual treasuries or bonds. When I invested $10K five years ago, I now have $12,088. I used my actual, average CD interest rate from all my CD's. My result with CD's comes very close to keeping up with the inflation rate. I have multiple, yearly CD ladders, so a CD is maturing every few months.

 

[Al18]

I don't understand your statement that you have an iBond ladder. Once you deposit up to $10K per year in a Treasury Direct iBond, you can cash it in anytime after 1 year thru 30 years from now. Tax on the interest is due when you cash in the iBond.

 

[foxfirev5]

Long time LMP ladder guy here. Right now my LMP of TIPS and Strips runs out to 2042. That takes me to age 87. Meanwhile I'm dumping excess Cash from the ladder into Bond funds. Why, you might ask, because it really doesn't matter. The duration and maturity of my individual holdings results in nearly an identical return of a similar duration Bond fund.

The biggest reason for this shift is consideration of my DW and heirs. Also the stupid easy equity returns of the last 15 years have made the debate a moot point. Maintaining a 50/50 allocation, in spite of my rising equity glidepath plan (in $ not %), has thrown off plenty of extra funds for Bond funds at nearly 5% return. Sometimes good enough is.

 

[SJhawkins]

I don't understand your statement that you have an iBond ladder. Once you deposit up to $10K per year in a Treasury Direct iBond, you can cash it in anytime after 1 year thru 30 years from now. Tax on the interest is due when you cash in the iBond.

The ibonds are not a ladder per se. I just happen to have collected a pile of them while working (to provided more tax advantage space.

When I built the ladder I made it using half individual TIPs and ear marked my Ibonds as the other half of the ladder, each rung is 1/2 Individual Tip and 1/2 Ibond. Fiquired its give me a little room to maneuver, If I don't need a whole rung will just sell what I need form the Ibond pile and let it roll.

 

[COcheesehead]

I don’t think I have ever heard that people keep a ladder outside of their AA. Why would someone do that?

 

[Al18]

I have some invested in iBonds also, but with a maximum $10K deposit limit per year, you can’t make big changes. I think iBonds are good for lumpy expenses like a new car.

 

[SJhawkins]

I don’t think I have ever heard that people keep a ladder outside of their AA. Why would someone do that?

Only reason I'm thinking about is trying to maintain the risk profile I'm used to, for right or wrong.

It certainly would be easier to not include it in the AA and have rising glide plath as the ladder is spent.

 

[SJhawkins]

I have some invested in iBonds also, but with a maximum $10K deposit limit per year, you can’t make big changes. I think iBonds are good for lumpy expenses like a new car.

Agreed, Ibonds can play a number of rolls, not sexy but nice to have.

I can see at some point may want to ditch the TD account. Have enough in IBonds for 5-6 new cars, so married to them for bit!

 

[COcheesehead]

It certainly would be easier to not include it in the AA and have rising glide plath as the ladder is spent.

But that would happen organically if you included the ladder in your AA

 

[Koolau]

Agreed, Ibonds can play a number of rolls, not sexy but nice to have.

I can see at some point may want to ditch the TD account. Have enough in IBonds for 5-6 new cars, so married to them for bit!

Very nice! You could simply call your I-Bonds your emergency fund - though I hear that actually cashing them out can take some time.

 

[SJhawkins]

But that would happen organically if you included the ladder in your AA

True

 

[SJhawkins]

Very nice! You could simply call your I-Bonds your emergency fund - though I hear that actually cashing them out can take some time.

When we first started buying them they started life out as an emergency fund. Now not working think all our assets are an emergency fund

 

[SnowballCamper]

What is LMP vs Rolling?

 

[Lorenzo]

What is LMP vs Rolling?

I had to look up "LMP." Aha! Liability Matching Portfolio. I see some definitions, but as I understand it, it refers to a portfolio that produces income in amounts and at times that match your spending needs. So, if your spending needs are constant over a number of successive time periods, such as years, spending each ladder rung as it matures could achieve that. Thus, a non-rolling bond ladder would be a type of LMP. A rolling ladder would be where a new rung is added to replace one that matured.

 

[SnowballCamper]

I expect inflation pressures to continue, and as a result would avoid bond funds, because I think rates will rise in the next few years. Of course there are the fixed term bond funds one could use.
It looks like the question is how should I manage the transition when I don't need to spend my bond proceeds for expenses anymore...
I'd suggest that the bond portfolio becomes part of the overall AA (if it wasn't before). Every time a bond matures, it is an opportunity to rebalance to the stated AA (and to make any needed portfolio withdrawals).
So maybe I'm missing something, or OP is making this harder than it is...

 

[SJhawkins]

I expect inflation pressures to continue, and as a result would avoid bond funds, because I think rates will rise in the next few years. Of course there are the fixed term bond funds one could use.
It looks like the question is how should I manage the transition when I don't need to spend my bond proceeds for expenses anymore...
I'd suggest that the bond portfolio becomes part of the overall AA (if it wasn't before). Every time a bond matures, it is an opportunity to rebalance to the stated AA (and to make any needed portfolio withdrawals).
So maybe I'm missing something, or OP is making this harder than it is...

It's more about the transition as you noted, as more guaranteed income starts comming online in the next 5-10 years things will change.

Probably making it harder then it's is, being a total return type of investor with a fixed AA for so many years holding a ladder out of the pile just feels odd.

 

[Mulligan]

Very nice! You could simply call your I-Bonds your emergency fund - though I hear that actually cashing them out can take some time.

I dont know about paper IBonds, which I hear can be a problem if ones local banks arent willing, but the electronic ones cash within a day or so from my experiences…. If the 5 year TIPS can stay at this level, come November I may buy more if its back to 1.2% fixed.

 

[tulak]

I’m a total return investor with all my FI in a 8-10 year TIPS ladder. I don’t see any issues and will likely keep that ladder duration indefinitely. I might even add to each step depending on how markets perform, maintaining a minimum 70% equity allocation.

What’s odd to me is maintaining a ladder outside of your portfolio allocation. That doesn’t make sense to me and seems like extra work.

 

[TickTock]

I don’t think I have ever heard that people keep a ladder outside of their AA. Why would someone do that?

Tl;dr - The ladder covers expenses for a certain number of years while the remaining portfolio (hopefully) grows.

One possibility - the LMP ladder covers either all expenses or core expenses for a certain number of years, and the remaining portfolio maintains a separate AA (which could be 100% equities). Once the ladder is exhausted, if the investor is still alive then they can evaluate setting up another ladder and/or adjusting the AA. And of course, the situation can be re-evaluated periodically while the ladder shortens.

 

[SJhawkins]

I’m a total return investor with all my FI in a 8-10 year TIPS ladder. I don’t see any issues and will likely keep that ladder duration indefinitely. I might even add to each step depending on how markets perform, maintaining a minimum 70% equity allocation.

What’s odd to me is maintaining a ladder outside of your portfolio allocation. That doesn’t make sense to me and seems like extra work.

Thanks for the reply, this seems to be where I'm landing.

Think where I'm rubbing up some of my own friction, been reading up on all of this transition from working to retirement. Many people hold a ladder of X years outside of their AA to get to a Milestone like the start of SS, I get that and the sleep at night factor it brings.

In the end it does not really matter as you always have a total amount of dollars you are working with and at any givin time you will some AA mix. At least that's what I'm been telling myself.

 

[COcheesehead]

“Many people hold a ladder of X years outside of their AA to get to a Milestone like the start of SS”

I have never heard of this and maybe you are misinterpreting how people are handling a ladder. It’s fixed income, should be included and if you want to transition out of it, it happens organically.

 

[Out-to-Lunch]

“Many people hold a ladder of X years outside of their AA to get to a Milestone like the start of SS”

I have never heard of this and maybe you are misinterpreting how people are handling a ladder. It’s fixed income, should be included and if you want to transition out of it, it happens organically.

It's quite a common practice that has been discussed here and BH many times. Sometimes termed a "bridge to SS." Sometimes termed a LMP/RP approach (liability matching portfolio/risk portfolio).

You are correct, of course, that the overall AA smoothly reverts as the ladder is depleted. I have such a bridge, and I track both my overall AA and the AA of the pot excluding the bridge.

Is it mental accounting? Yes, of course. Why do it that way? Well, a great deal of research has concluded that people are happiest when they have a base income that can cover their needs, and also a pot of money that has the potential for upside growth. (See, for example the Stanford Center on Longevity.) It also allows one to conceptualize the income from the LMP and SS sources without introducing problematic notions about the SS "asset" (which is of course not an asset).

Of course, this mental accounting is more pertinent for people who are not vastly overfunded vis-a-vis their expenses.