Retirement income planning would be so much easier if you could buy a known amount of lifetime guaranteed income that would automatically adjust for inflation. However, the reality is that no insurance company in the world is willing to take on this long-term inflation risk. The only option left is to ladder inflation-linked bonds (TIPS) so that each year you cash in bonds and interest to create your own inflation-adjusted income.
Thanks to the rise in real TIPS yields, you can now create a 30-year TIPS ladder that will effectively create a guaranteed real withdrawal rate of 4%. If you put $1,000,000 into a 30-year TIPS scale right now, you’ll get an income of $40,000+ for year 1, then another $40,000 adjusted for inflation (IPC-U ) every year for the next 29 years. All backed by the US government.
Allan Roth did the listening work and bought a 30-year TIPS ladder x 4.3% effective withdrawal rate using $100,000 of his own money in the secondary market. He also introduced me to eyebonds.info, which has many useful spreadsheets for the DIY TIPS and Savings I Bond hardcore investor.
Such a TIPS ladder will only last 30 years and you will end up with nothing in the end, so it has certain limitations. If you retire at age 65 and spend your 4% each year, that portfolio will be completely depleted by age 95. If you start at age 55, it will end at age 85. Therefore, this tool will work best as a supplement to your social security benefits. and maybe keep a few stocks for upside potential…
Now Allan Roth has also written about the “risk-free” portfolio where you put most of your money in zero-coupon bonds that will guarantee you won’t lose dollars, but put the rest in stocks for potential rise. It feels good to know that you will start and end with at least, say, $100,000. However, the reality is that you are still exposed to inflation risk because $100,000 10 years from now can be worth much less than $100,000 today.
What if you just replaced those traditional-style bonds with TIPS as your super safe base? You would remove inflation risk while maintaining minimal credit risk. Enter the concept of Upside Investing by Lawrence Kotlikoff (author of Money Magic).
Upside down investing, as I’ve described in recent Forbes and Seeking Alpha columns, is easy as pie.
– You invest in S&P and TIPS/I-Bonds and specify a period during which you will convert your shares into TIPS/I-Bonds.
– You build a base standard of living assuming all equity investments are lost.
– You only increase your standard of living when and if you convert shares into TIPS/I-Bonds.
If you can lock your TIPS ladder to a decent real return, you could have an intriguing combination of a very safe base income, while giving you a very good chance of higher income with stock market returns close to historical averages. .
Basically, what if a portfolio of 75% TIPS and 25% stocks offered a minimum guaranteed withdrawal rate of 3% real for 30 years (only this low if stocks drop to zero!) with the right probability you would be able to cashout 4% and most likely more. For a conservative investor, knowing that you have rock solid safe ground would allow you to spend freely with the rest. 🥳 Something to dig into as actual TIPS yields are decent again.