The Pros and Cons of Building a TIPS Ladder for Retirement Income

[@AnicaEmbregts-j3e]

Hit 240k today. Appreciate you for all the knowledge and nuggets you had thrown my way over the last months. Started with 24k in September 2024

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[@AnicaEmbregts-j3e]

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As a beginner in this, it’s essential for you to have a mentor to keep you accountable. Jihan Wu is also my trade analyst, he has guided me to identify key market trends, pinpointed strategic entry points, and provided risk assessments, ensuring my investment decisions align with market dynamics for optimal returns.

[@HollyGarwell]

Jihan Wu Services has set the standard for others to follow, we love him here in Canada 🇨🇦 as he has been really helpful and changed lots of lives

[@ElliGConcepcion]

His guidance allowed me to restructure my retirement plan, resulting in an estimated $700 thousand more by the time I retire.

[@VisitorsWelcome]

I followed your instructions in a previous video to buy a TIPS ladder paying $10,000 per year, increasing with inflation. Then I bought an annuity through Fidelity paying $10,000 per year, increasing 3% annually to offset inflation. If I die before getting back what I paid, the insurance company pays my heirs the difference. If the company goes bankrupt, my state guarantees all annuities up to $500,000. Thanks Rob!

[@RogerMKE]

We did this last fall when real rates were above 2.5%. It is comforting to know that our basic expenses are guaranteed for 30 years. Discretionary spending will be covered by the risk portfolio.

[@mrb552]

Fantastic video Rob. It offered just the TIPS I needed. 😉

[@MDE123]

You did a TIPS presentation only a year ago. Nice way to address concerns about likely inflationary policies of the next administration without getting into politics.

[@davidpeters9675]

What about using TIPs for a sizable part of the bond portion of a 60/40 portfolio? Nominal bonds underperform in inflationary environments. It seems you could reduce risk compared to 100% nominal bonds for the bond portion of your portfolio.

[@cathya222]

My question as well!

[@coltondotdev]

TIPS funds like VAIPX do great in an ordinary portfolio. They are just about the only asset that does well during stagflation. I'd recommend everyone have at least some so your fixed income is insulated from inflation. I think good rule is the."bonds squared" rule. Take the total % of bonds in your portfolio. So if you're doing 60/40 stocks/bonds, that's 40%. According to the rule, the percentage of your bonds that should be TIPS is 40%. Of the total portfolio it's this 0.4^2=16%. I like this rule because equities traditionally offer some inflation protection, so if you have more equities you need fewer TIPS. TIPS are less important during accumulation but more important during retirement, where you're looking for safer investments. Nominal bonds are subject to asymmetric risk. If inflation is low they outperform TIPS very slightly. If inflation is high they underperform greatly. Since inflation can go as high as it wants to, the risk is very asymmetric.

[@momhouser]

Me, too

[@jwilli1898]

Another idea I've seen that strikes me as reasonable is to build a TIPS ladder matched to projected RMDs. That way you are taking the RMDs using guaranteed returns. Put the remaining assets in qualified plan into stock/bond portfolio as your risk portfolio.

[@cathya222]

Great and timely video! Could you look at another scenario? I am not concerned with longevity risk. What if I replaced all of my bonds in a 75/25 portfolio with a Tips ladder? How do those returns look versus just leaving in a bond fund? Does this answer change with a 60/40 portfolio?

[@fishynut8252]

Another very informative thought provoking discussion! Thanks

[@bobby350z]

My case I bought a 8 yr TIPS ladder to my minimum expenses from yr 62 to 70. I plan to claim SS at 70. The rest of the money I can invest more aggressively (if needed) as I don't need it till age 70.

[@jodor6]

I’ve been buying ishares tips etfs maturing in 3-7 years in my Ira

[@jeffh9071]

Thank you Rob, but after you discussed a 5-year ladder to bridge retiring until SS, I was expecting the equivalent SPIA period-certain comparison, similar to earlier when you compared to lifetime annuity. I went with a bridge SPIA starting last year and was hoping for your take.

[@steveclarke8169]

TIPS rookie question here. When buying TIPS, will you have to pay accrued interest charges for bonds that are not new issues (most of them I suspect). That would raise the purchase price of the ladder, would it not?

[@mikephilpot9857]

We (my wife and I) went with the annuity (SPIA) instead of a TIPS ladder for our retirement. For us, the TIPS ladder could only last ~16 years for the initial investment vs a joint lifetime SPIA. We also got a cash refund rider to return any unused principal to our kids if we both pass before the payouts exhaust it. The TIPS ladder sounds great with inflation adjustments, but all that means is we are just guessing at how big inflation will be to carry our budget out over the most years possible at the income level we are targeting. If we guess wrong, (and we will), we end up with a shortfall or an overage that we didn’t count on and could have used earlier in retirement. With the annuity, the income is guaranteed and perfectly hedged to our lifetimes. And if or when the amount becomes too low and we don’t feel Social Security and our equity portfolio aren’t keeping us funded for our goals, then we can purchase another SPIA to “rebalance”. Anyway. Great video as always Rob. Thx. ❤

[@coltondotdev]

Did you get a COLA on your annuity? If so, was it CPI or a fixed rate? It should be noted that since CPI adjusted annuities are basically not offered anymore, you are still "guessing how at how big inflation will be" when you buy a SPIA. Without a COLA on the annuity, your purchasing power is steadily declining and you might find that after 5-10 years your purchasing power is significantly diminished. Even if you buy a fixed rate COLA, it might get lapped by high inflation and you will not have any flexibility since you have signed away the money and can't "sell" the asset now. It'll last longer than a TIPS ladder if you live long enough, but eventually the payouts may become insignificant in real terms.That's by definition guessing at inflation, guessing it will be low if you have no COLA and guessing it will be lower than your fixed rate if you have a fixed rate COLA. Not trying to say you did wrong, SPIAs still make a lot of sense for a lot of people, but you always need to look past "which offers a better yearly payout, a TIPS ladder or SPIA?", since one is dealing with real numbers and another is dealing nominal numbers. Even a fixed rate COLA is still dealing with nominal numbers that do not track actual inflation. Sometimes you win, sometimes you lose.

[@mikephilpot9857]

@coltondotdev No. CPI adjusted annuities are no longer available in the public market and a COLA is just another “guess” at inflation. For our plan, it was more efficient to go with a fixed SPIA and if our personal inflation erodes our guaranteed income too much at some future time, we will simply “rebalance” by acquiring another SPIA to make up the difference we need. (Effectively, this manufactures a personalized, exactly sized COLA.) It is possible that by maximizing our SS and having a sizable globally diversified, total market equity portfolio, we may never need to buy another annuity. We recognized that bonds (TIPS/Nominal/Funds) just are best suited for shorter, known horizons. With retirement we are faced with a (hopefully) long, unknown horizon. So, bonds, for us, in any form, are simply not useful for us. We are thrilled with our equity/pension/annuity/SS combination for retirement. 👍

[@roundabout1419]

@@coltondotdev just a note of thanks to say how much this comparison helped - thanks!

[@Jaws-3]

Great video, love your channel, Rob. What are your thoughts on just investing in VTIP ETF?

[@sixstringsdaddy2477]

A good happy medium for ladders used as a bridge to social security: match your expected SS amount even if for many, you expect to spend more than SS alone.

[@josh9231]

What should we do if we are in scenario 3 with most of the money in taxable accounts?

[@gayraw]

Thank you

[@CarlZ993]

Great video. Very informative as per usual. Question: Buckeyes football in the foreground. Did you play for them?

[@kw7292]

He lived in Columbus, dad was a fan. Used to go to the horse shoe. We lived there for 29 years

[@JJJ5.7]

Good info...

[@mashiniwami]

How does the comparison change if you do not have sufficient funds in a tax deferred account? What if your TIPS are taxable? Also, pro and cons of a TIPS ladder vs. a TIPS mutual fund or ETF?

[@coltondotdev]

Taxes on TIPS are somewhat overblown. You pay taxes on principal increases, yes, but the increase in the value of the bond will be more than the taxes. It's almost like an unrealized capital gains tax. But this isn't much different from a normal bond or money market, which pays yearly interest that is also taxed as income. It's mostly a big inconvenience during accumulation phase, when you are not actively selling so you're just paying taxes on an asset that you're not selling so you need the funds to pay the taxes to come from elsewhere. There's a lot of complexity in the TIPS ladder vs TIPS fund depending on things like average maturity. I'll try to keep it really short and sweet. A TIPS ladder provides guaranteed inflation adjusted yearly income. This is what it should be used for. It is designed to completely ignore interest rate risk because you are planning to hold to maturity on every bond. TIPS ladders are largely designed to work outside your porfolio. Since you hold everything to maturity, you don't care about things like correlation to equities. TIPS funds involve a constantly rolling cycle of TIPS, usually targeting a particular fixed average maturity. Unlike the ladder, the fund is constantly selling young maturities and buying longer term ones to keep the average maturity at a certain value, like 7 years from today for a fund like VAIPX. TIPS funds and ETFs are thus good as an uncorrelated asset to equities held in a specific percentage allocation integrated into your portoflio. They offer returns somewhat uncorrelated to equities, like normal bonds, but without the risk of inflation crushing their purchasing power. Broadly, retirees are usually using one of two strategies. Either they are trying to guarantee yearly income via annuities, ladders, and pensions, or they are trying to live on a portfolio using safe withdrawal rates. Ladders fit great into the former, funds fit great into the latter (pun!). Which makes sense for you depends on your circumstances. The SWR approach offers a higher maximum return and the freedom to annuitize/ladder later on, but has more exposure to sequence of returns risk. The annuity/ladder approach largely eliminates sequence of returns risk, but will likely have a lower return on average and will lock you in to some extent. Annuities will protect longevity risk, but TIPS ladders won't.

[@mashiniwami]

@@coltondotdev Thank you for your great reply. Another point to consider: From Vanguard VAIPX: Realized/Unrealized gains as of 09/30/2024 Realized gain -$2.31 % of NAV -9.78% Unrealized gains of NAV -$0.80 % of NAV -3.41%

[@Omar-et7sb]

Great as always. My biggest issue with TIPS ladders... is that they are pointless. I don't mind portfolio complexity if it adds value, but TIPS ladders simply don't. There's an article (yes, by Vanguard but the data is very reasonable) that explains how a bond fund held to at least the average maturity of the underlying funds, is essentially the same as owning bonds outright WITH THE ADDED BENEFITS of simplicity and diversity.

[@coltondotdev]

This is not quite correct. The re-buying of new securities that TIPS funds do means you are subject to interest rate risk, which is not a risk with a TIPS ladder. Say you need 7 years of real income. Person A builds a TIPS ladder and they get 7 years of exact real income, we know how this works so I won't re-explain it, we know they'll get exactly their required income no matter what, rain or shine. Person B wants the same same income and uses a fund with a 7 year average maturity instead. A waits for each bond to mature one by one and that's his income. Person B sells enough of the TIPS fund for their income needs each year. But in the 6th year, interest rates spike. When interest rates go up, bond prices go down. The prices go down more on bonds that are further away from maturity. With a TIPS ladder, this rate spike is of no consequence to you, you only have one bond left and it matures next year, so the yield spike on new securities will lower the value of your one remaining bond a bit, but not much, and since you intend to hold to maturity it does not matter what the current price is. In a year, it will mature to par and person A will have their 7th year income just fine. But the TIPS fund still holds an average of 7 year maturity TIPS despite the fact that person B has held it for 7 years. So the underlying bonds in their fund take a big price decline. Thus the value of the fund declines. This is a problem for person A because they need to sell this year, they can't hold to maturity. TIPS funds are a great choice in almost any portfolio, but they do function differently to a ladder and it's important to understand that.

[@alcw625]

i wouldn't call them pointless..they provide income adjusted for inflation. Not many pensions or annuities do that. Plus backed US government...if the USA defaults then the world has truly collapsed and all our money is worthless anyway. Gold bars won't help because there's been some major catastrophic event.

[@pware9643]

apples to apples comparison would be to quote a period certain spia for 30 years , not a lifetime quote. What is the payout of that vrs tips ladder? One can also get a 5 year period certain annuity also. One I saw yesterday had a 4.6% roi.. so you should be able to buy 25k of income a yr for 5 yrs with a lump sum of $114,500. Does not increase the annual payout for inflation tho. Whatever income stream you choose.. should be with your Bond allocation.. So instead of a 60/40.. you would have a 100 stock and your income stream.

[@pickinbuster]

I'm confused about the 5-year TIPS ladder. It costs $137,919 to fund a future cashflow of $25K per year for 5 years. However, 5 x $25K is only $125K. Why would I put in $137K and get back $125K ?

[@scoobedoo5243]

He actually chose 6 years but said 5 years. The math is fine once you look at the numbers at 14:46.

[@drevan1138]

I'm not very healthy, TIPS sounds great to me.

[@DavidDLee]

If I need 25K/yr for 5 years, why would I pay 138K for it? I could just put away 125K as cash. Sure, it's not adjusted for inflation, but it's only 5 years. If I adjust for inflation the last 4 years @ 3%, it still comes out as 132.7K.

[@bobby350z]

Last yr 4 yrs inflation was lot more than 3%. And trying to project inflation into the future is hard.

[@coltondotdev]

He made a 6 year TIPS ladder there, not a 5 year. So he's getting 150k real not 125K. It looks like a 5 year because the last year requires purchasing twice as many TIPS in 2034 because 2035 is a "no TIPS year", no TIPS are maturing that year. So it expects you to buy an extra "set" of TIPS that mature in 2034, wait til they they mature to par, then put your money in a short term TIPS fund or a money market or something until the next year when you actually need the money.

[@jeffb.2469]

Trump's policy might change things, so there may be an unknown downside.

[@MargaretDKnapp]

I'm ecstatic with the outcome of the election and the year-end market surge. Which hidden jewels in the upcoming bull run would you buy with a 100K right now? My goal is to position myself for a prosperous Q1 in 2025.

[@AshleyChloe]

Index Funds & ETFs: 40-50%, Emerging Markets (e.g., VWO): 10-15%, Dividend Stocks: 10-20%, Growth Stocks/Small-Caps: 10-20%, REITs: 5-10% Remember to always work with a knowledgeable person in the financial market when starting out to avoid getting burnt.

[@michaelg8947]

In the scenario starting at 14:00 or so... help the slow kid... payout is $25K per year for five years totaling $125K, and I am buying TIPS for $138K cost to fund it? Is the tool paying out for six years? eta: Cost corrected to 138K, and pay table from tool shows five payments, so I am at a loss. OK, the last year / row in the table is a double payment? Why? Appears it is funding a sixth year.

[@coltondotdev]

I think he goofed slightly, he says 5 years but in that software selecting (2030-2035) counts it as six years (since it counts both the start and end year). The reason the last one has twice the TIPS for one year is because there are some years where there are no TIPS maturing, including 2035, the final year of this ladder. The Treasury has changed policy a few times on what TIPS are available and sometimes they don't release them at all (I think because the fixed rate would be too low at the time). So these kinds of software do their best to work around the years with no TIPS maturing, usually by having a security that matures a year before or a year after to try to make up the difference, and assuming you'll just plow that money into a short term TIPS fund like VTAPX in the mean time. So this one bought two 2034 TIPS, one for 2034 and one for 2035. 6 years, 6*25k = 150k of total real income, 138k purchase cost. Additionally, that 150k is real dollars in the future, which should be valued higher than the same number now. If inflation is 3% over the next 10 years, then the 2034 TIPS are not going to give you just 25k, they'll give you 35k, which will have the same purchasing power as 25k did now. To match that, you'd need a 10 year nominal bond that pays 5.5%, which you are not going to get from the treasury right now. If inflation is lower, say 1% average, a nominal bond or CD will likely win, but with a TIPS ladder you're less focused on winning and more focused on guaranteeing real income.

[@nishiki393]

​@@coltondotdevIt was so nice of you to reply so beautifully to that comment. Your time and effort is appreciated even by others besides the OP.

[@coltondotdev]

Happy to help!

[@nishiki393]

@@coltondotdev Great attitude. (I also fixed the dictation error I didn't initially catch, but thanks for understanding that and reading through it with an appropriate mental adjustment)

[@lindsaynewell6319]

@@coltondotdev thanks for flagging that (I read the comments before watching and only noticed @ 14:20 it shows 6 years because of your comment). I'm completely new to TIPS and Rob's video was a great introduction. Your comments added a lot of value.

[@Yette]

Rob, is there a clear winner between a TIPS strategy vs simply buying T Bills? Both have the same low risk. TIPS perform better with rising inflation.

[@coltondotdev]

They are entirely different strategies. T-Bills offer guaranteed short term interest with no risk of loss of principal, but also no guarantees of anything in the future. So no guarantee you'll continue to get a return at all in the future (if interest rates go down, for example). The other is a long term strategy for providing exact yearly real income over any given term up to 30 years, but has interest rate risk if you ever need to liquidate before maturity, and has "FOMO" risk, risk that yields might spike tomorrow and you'd have been better off waiting a day (or a month, or a year, etc).

[@kw7292]

$25,000 x 30 yrs = $750,000 for a $569,000 investment and no upside, I’m not feeling it, more to learn

[@coltondotdev]

You need to treat that $750,000 different from other prospective returns because it is a guaranteed REAL return. No other investment offers this. A 5% CD will get destroyed by high inflation. A 2.2% TIPS will appreciate. That's the upside, the complete elimination of inflation risk.

[@adnerbnomrah9076]

Maybe I’m missing something, but short term CD ladder while rates are relatively higher makes more sense than his suggestions.

[@adnerbnomrah9076]

@ Thanks, but he did mention short-term bridge income for someone 65 or so awaiting social security @ 70 (5 years) using this method.

[@coltondotdev]

You can't compare the rates like that. The TIPS ladder will have lower fixed rates but inflation protection. The bond ladder will have a higher fixed rate but no inflation protection. Thus, the CD ladders are exposed to asymmetric risk. If inflation is low, you do a bit better, 1-2% per year, than the TIPS ladder. But inflation could be anywhere between 2% and double digits. Heavy inflation would drastically erode a CD ladder, it's basically the very worst thing to have in a high inflation environment (besides cash in a mattress). So which would you rather have, slightly higher average returns but with serious risk in high inflation? Or good returns with no inflationary risk? Both have their place, but TIPS definitely make sense for many.

[@roundabout1419]

@@coltondotdev I have heard others recommend commiting half of one's bond portion to TIPS and half to nominal bonds as a way of generating income upon retirement until beginning Social Security (which I plan to delay until age 70). This would be in the context of a 60:40 passive portfolio with the nearly all of the bonds in an IRA. Have you heard similar recommendations? Thanks again for your comments.

[@coltondotdev]

@@roundabout1419 A 60% equities, 20% nominal bonds, and 20% TIPS portfolio (in a fund like VTAPX or VAIPX) would be an extremely reasonable portfolio for a retiree. Bonds in the IRA is also extremely reasonable. I would go as far as to say that's the ideal starting point for any retiree over 65 (younger retirees should likely have a higher equity portion), and other tools like a TIPS ladder or annuity can be added on to address specific situations.

[@bartz4439]

Why noone talks that government bonds are simply bad, no matter which one? When buying them you simply steal wealth from others

[@alcw625]

bad in what sense. The bond is loaning money to the USA. The USA uses most of their money for entitlements (like Social Security), debt repayment and defense. It funds the government for roads, airports and Parks. Yes it also funds all the departments which handle counting cows, leasing government real estate, setting pollution policies, Veterans, etc, but I think you get my point. Bonds don't steal wealth. They allow the government to function and have cash flow.

[@bartz4439]

@@alcw625 xD its called stockholm syndrome

[@Milhouse77BS]

Good stuff! Thanks!

[@TheAblist01]

Very few people annuitize their contracts. Most use a living benefit rider, and many have death benefit of initial premium or contract value.