TIPS
TIANRONG INTERNET PROD SV
stockOTC

Your openness to effective strategies that aren’t the norm is something I can relate to. I started planning my retirement a year and a half ago, and I really knew nothing about investment when I started. I’ve tried to stay open to new information every day over this extended learning curve and that has served me quite well. In answer to your question, all my money outside of my VT growth engine is mostly in the 20-year TIPS ladder, but also maintain a cash-like buffer of SGOV and part of my fixed income allocation is sitting in a 3-year MYGA earning 6%. The MYGA proceeds will arrive in 2029, and I’ll be free to direct those proceeds in whichever direction makes sense given market conditions and my spending needs at that time. They could go to VTIP, BND, another MYGA, more individual TIPS, SGOV or even equities. Oh and I should say there’s another large fixed jncome component to my plan. I own an income annuity that of course doesn’t adjust for inflation (boo) but it does offer some longevity risk protection (yay) and the way FIAs with income riders handle taxation means that I’ll see very little tax burden on that income for about the first 12 years after that income starts next year (double yay). That high level of tax free income makes sequence of returns risk a little smaller. You might be getting the idea that every dollar has a job to do in my plan, and the vehicles I’ve chosen make that diversity of duties possible. When I was just sitting on BND and even VTIP I did not have this level of clarity about the exact role of those positions in my plan.

I will have a look. Thank you for pointing me in the direction. Do I understand your entire fixed income position is in TIPS as opposed to nominal bonds/bond funds of any maturity? I read about people doing this on bogleheads and my only issue it with it is that it’s “not the norm,” but that’s not a good enough reason to avoid learning about it.

I was one of those people who defaulted to a TIPS fund (VTIP) in addition to holding BND, and it was definitely a choice to favor simple over optimal. But then I saw how easy it was to at least build a ladder from 2029 to 2036 with ishares ibonds TIPS maturity ETFs. I started my ladder with those ETFs, and I willingly accepted the ER fee drag in exchange for the convenience of the ETF wrapper. *Then* I learned how easy it was to actually do the real deal and build a ladder with actual individual TIPS bonds using the free web tool tipsladder.com. Once I understood how that tool worked — it’s dead simple — I built out the remaining 12 years of my ladder using individual bonds. Now I share knowledge the tipsladder.com with people often in the hopes that they won’t need to travel the same journey that I traveled and instead just cut to the chase and build their ladders with individual bonds.

I think people find it easier to say: “I’ll buy a TIPS fund,” rather than “I’ll construct a TIPS ladder.” And I imagine that a ladder is smarter.

digcolnagos, generally, TIPS have outperformed nominal Treasuries when inflation is increasing. Creating a 30 year ladder is forecasting increasing or higher than normal future inflation. Based on a 30 year timeline, I suspect you created a self liquidating TIPS ladder that will draw down both interest income and principal over the 30 years. This strategy acts like a personal guaranteed annuity. I am sure you have read that the Fed tries to target inflation at 2% which is difficult to do. However, when the Fed obtains their 2% target or closer to 2%, your overall returns will reduce as well. I am sure you are aware that your overall TIPS returns will be a combination of discounted prices (TIPS bought in Secondary Market), minimal semi annual interest income (coupon payments), and final principal return ( inflation increases paid at maturity). You did not indicate if you studied or compared TIPS versus a nominal Treasury ladder wherein one knows exactly the amount of interest income and principal each year. Nor did you indicate if you compared the TIPS ladder or nominal Treasury ladder versus a guaranteed lifetime annuity (SPIA). At any rate, it would be interesting to know if you told the financial advisors, CPA, etc. that you were looking for a guaranteed income stream. If so, what were their solutions? In my opinion, the answer from the CPA may be applicable only if you already have retirement income as well as SS Benefits that will cover Basic Expenses and a portion, if not all, Discretionary Expenses.

I do very little. For decades before retirement, I just put money into Target Date Funds in my 401K. (Two of them, because I was uncertain about my retirement date. It probably would have made sense to just split the difference and use one fund in the middle of the two dates.) Shortly before retirement, I broke up the funds into components (index funds, bond (TIPS) ladders) in proportions similar to the proportion in the TDFs. That was mostly a decisionmaking process; the actual transactions could all have been done in a few hours. Now that I’m retired, every month or three I update the spreadsheet that shows all my holdings. I also tend the TIPS ladders—as TIPS mature and coupon payments come in, I generally spend that money on buying more TIPS in future rungs of the ladder. I don’t spend it yet, because currently my pension is just about enough. That will change as inflation continues and inevitable large expenses come up. If my stock index funds should go up a lot, I’ll also harvest some of that for more TIPS. So I look every month or three, do maybe ten TIPS transactions a year, and look at the stock market almost every day—but the last is just to say, “Yay!” or “Drat.” I do have one individual stock, representing less than two percent of my investments. I expect to keep it for decades.

Based on The Intelligent Investor book, Warren Buffett's bible, when the market is expensive which it is very much so right now by various yardsticks, better to be in 25% stocks and 75% bonds. However, soverign debt crisis is severely bad right now worldwide, thus we can expect financial repression where governments inflate away their debts, so your low fixed rate debt are amazing, let inflation inflate them away. And as such, I don't think long term bonds are a good investment yet if inflation, and rates may still go higher, so for the 75% liquidity side, I think it's best to split them between laddering 1 year brokered CDs at 4.75%, 5 year Treasury Inflation Protected Securities at 2.4% real yield, 20 year TIPS at 3.1% real yield, and gold. Once 30 year bonds go above 10%, that's when I'll start moving some of these into bonds.

I second the idea of MYGAs as I’m currently sitting on a 3-year MYGA at 6%. I’ll add that TIPS are an excellent replacement for regular bond funds. I’ve got a 20-year TIPS ladder and I didn’t shed a tear when I jettisoned BND to fund the MYGA and the TIPS ladder.

Started putting money into 401(k)/IRA's in the mid-1990s. Instead of diversifying, I put it all into VTI and an S&P index. Three weeks ago, I pulled everything out and built a TIPS ladder with AI--I had never heard of TIPS until reading about it in the Wall Street Journal. Talked to a couple financial advisors before pulling the trigger--one was an AUM guy, the other a by-the-hour fellow who estimated a plan would cost $5k, he couldn't come up with one until December at the earliest and I'd have to pay him in future years to keep the plan up to date. Before that, a CPA who charged $250 said I should do nothing--just keep seven figures in the stock market forever. So I pulled the trigger. So far, so good. If nothing else, I pulled out before recent market turmoil that could have taken my nest egg down a few percentage points. Now, I have a guaranteed income stream--more than enough to live on--through age 93 thanks to TIPS, plus a healthy sum left over, which I put back into VTI. Back to set it and forget it.

I am 67 and yesterday was entertaining, not devastating. Anyone close to or in retirement should be setup to withstand a long, deep bear market. But then, I am a heretic in the eyes of *The Church of VOO and Chill*. I look at risks and try to mitigate them. So I am sitting in a bond tent that includes TIPS (the actual bonds, not funds). On the equity side, last year I shifted from simple market cap indexes to indexes that are more quantitative due to the extreme market valuations. (As of this morning CAPE is still over 38).