For context, the safe withdrawal provided by a 30-yr TIPS ladder is currently about 4.9%. That’s about 2% higher than the real yield of 30-yr TIPS. If you need the extra income, and are not concerned about leaving a legacy or longevity risk, it’s very compelling.
Alternatively, some people use a shorter TIPS ladder until age 70 when social security payments kick in. Portion of portfolio required to produce the required level of income is lower using a ladder setup than just relying on real yields alone.
I dont subscribe to a theoretical “safe”. When you buy TIPS with a 3% real yield, the safe withdrawal rate is 3%. With a 30 year bond, you can rely on that for 30 years.
In my mind, the only need for a ladder is to ensure the required monthly/annual liquidity to draw your 3%, since it’s rare the real return equals the coupon interest rate that’s paid. Or because you think that real return is going to rise further so staggerd maturities let you capture that increase.
Yes, they’re not exactly the same. The ladder replicates a 30 year inflation- protected stream of cash flows (whatever a non-life annuity is called?) that’s worth zero at the end of year 30. The 30 year tip bond pays out less but leaves you with the inflation-adjusted principal at the end.
Depends on whether you want an estate goal or not. I don’t have any children.
Even moreso, it depends on how long you live. I dont want to be watching the calendar in my twilight years knowing I “need” to die in the next 2 years or I’ll be broke…
I guess it’s a different question when you are already in your 70s. But in my 40s, that draw rate needs to be self-sustaining indefinitely. There is no end date.
I agree for other use of safe withdrawal rate but for a TIPS ladder, it’s guaranteed (unlike other “safe” withdrawal rates. The 1.9% extra (vs the 3% real yield of the bonds) is due to the liquidation of each bond (which is a guaranteed amount since not subject to market value fluctuations) of the ladder as they mature.
But I agree with the sentiment of not wanting to guess how long I’m gonna live to setup the perfect TIPS ladder to die with zero. Which is why outside of an income bridge to social security, if I had to go for a TIPS ladder because I needed the higher withdrawal rate, I’d go for the full 30-yr one. And maybe take extra steps to mitigate longevity risk.
Pick your poison. You can either annuitize it at low IRR to insulate from longevity risk, or underspend your whole retirement at a conservative SWR and die with too much left
I think most people cope with it with a mix of Social Security or pensions/annuities, and using a variable spending rate. I don’t really know anyone who’s blindly following the Trinity study.
And anecdotally, the Tips ladder people are not putting their entire net worth into it and spending it with reckless abandon, lol. More like, enough such that the tips proceeds, and Social Security is enough for their basic expenses, then they let the rest of it ride in 100% equities.
The 1.9% extra is the inflation adjustment, which is constantly variable (so I dont know where they get 1.9% from), and is what mantains the buying power of the bond principle. If you draw off that extra each year, the bond at maturity is going to buy a lot less than it does today.
With a real yield of 3%, you can spend 3% annually, and are also guaranteed that the TIP principle will have the same buying power at maturity as it had when you purchased it.
*guaranteed only as far as you accept that inflation data is accurate, of course…
