Not long ago investors had to pay the U.S. government for the privilege of owning TIPS. The real yields, that is the yield after factoring in inflation, were negative. Last year, as a phoenix rising, real yields broke above 0%. Today the real yield on 10-year TIPS is about 2.50%. This offers some intriguing options for those in or near retirement.
Treasury Inflation-Protected Securities, or TIPS for short, are U.S. government bonds whose principal amount adjusts for inflation. They are as close a sure thing as an investor can get. Of course, there is no free lunch. What an investor gives up with TIPS is the possibility of better returns with nominal bonds (should inflation end up lower than expected) or with more risky assets such as stocks. For many retirees, however, risk is a four-letter word.
So let’s explore two TIPS ladder strategies that retirees might want to consider. We’ll walk through building a 30-year TIPS ladder and a 5-year TIPS ladder.
*Join the Newsletter. It’s Free:*
*Financial tools I use:*
*I track all of my investments, performance, fees, and asset allocation with Empower. It’s Free:*
*My retirement plan comes from New Retirement, the most robust retirement planner available at a reasonable cost:*
*I used Capitalize for my last 401(k) rollover. They did all of the work, and it’s Free:*
*My budgeting tool of choice is Tiller. It downloads all your banking data to Excel or Google Sheets:*
*We save and invest our credit card rewards. Here are some of my favorite credit cards:*
*My Book (Retire Before Mom and Dad):*
————————————
Video Resources
————————————
Real Yields:
Nominal Yields:
Breakeven Inflation Rate:
TIPS Ladder Tool:
BlackRock TIPS ETFs:
BlackRock Bond Ladder Tool:
#TIPS #bondladder #robberger
ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (
LET’S CONNECT
Youtube:
Facebook:
Twitter:
DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase and/or subscribe. However, I only recommend products or services that (1) I believe in and (2) would recommend to my own mom….(read more)
HOW TO: Hedge Against Inflation
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
As individuals near retirement, it is important to consider all options for generating income during this phase of life. One strategy that can provide security and peace of mind is building a TIPS ladder.
TIPS, or Treasury Inflation-Protected Securities, are typically issued by the U.S. government and offer investors protection against inflation. These securities pay interest twice a year based on a fixed rate and the inflation rate as measured by the Consumer Price Index (CPI).
Building a TIPS ladder involves purchasing individual TIPS bonds that mature at different times, creating a stream of income that is staggered over a period of years. This strategy can help retirees mitigate interest rate risk and inflation risk, as the constant maturity dates of the bonds ensures a steady income stream.
There are a few key reasons why building a TIPS ladder in retirement can be beneficial. Firstly, TIPS provide a safe investment option, as they are backed by the full faith and credit of the U.S. government. This can give retirees peace of mind knowing that their investments are secure.
Secondly, TIPS are designed to protect investors against inflation. As retirees rely on fixed income sources during retirement, the eroding effect of inflation can significantly impact their purchasing power over time. By investing in TIPS, retirees can ensure that their income keeps pace with inflation, preserving their standard of living.
Lastly, building a TIPS ladder can provide a predictable income stream for retirees. With bonds maturing at different times, retirees can stagger their income over a period of years, allowing for flexibility in managing their finances and budgeting for expenses.
To build a TIPS ladder, retirees can purchase TIPS directly from the U.S. Department of the Treasury through its website, or through a broker or financial advisor. It is important to consider factors such as the maturity dates of the bonds, the interest rates offered, and the impact of inflation on the bonds’ value when constructing a TIPS ladder.
In conclusion, building a TIPS ladder in retirement can be a valuable strategy for generating a steady income stream that is protected against inflation. This investment option can offer retirees security, protection against inflation, and predictability in their finances. By carefully planning and strategizing, retirees can build a TIPS ladder that meets their individual needs and goals for retirement.
Given the tax implications of TIPS, wouldn't it make more sense to create a traditional bond ladder? I'm thinking of someone who wants to generate risk free income on regular basis.
This is great info! Bengen’s 4% guideline assumed the bond allocation earned 5% each year, so wouldn’t adherents need to find a TIPS ladder yielding at least 5% to “stay true” to Bengen’s guidance?
Maybe one way to use a tips ladder is as your complete bond allocation. Say you felt like 60% equities and 40% bonds was the ticket for you. You could create a tips ladder (within your IRA) returning 5% (no idea if you can with todays rates), fund it with enough to make it 40% of your portfolio, and you’re done. Are there any holes in that approach?
I keep watching your videos and you keep say 'Don't do this in a taxable account'. Do you have a video about what to do in a taxable account?
Question – How far into the future (starting yr) people buy these tips ladders? Say your plan to retire in 5 yrs, do you buy now, next yr or when in the last working yr before retirement? Pros/Cons. Thanks.
Thanks never heart about tips before. I recently changed my portfolio to a 90/10 portfolio. Really happy with it. VUSA and VUTY. I have. Low cost both 0,07% cost.
Outstanding! I had considered TIPS ladders. Now, I am not. Thanks for the info!
If someone was talking the money to live off why does it matter if in a tax account?
I am scratching my head here. So if I invest in 1mill into 30y tips and spend all 47k after 30y all money is gone. Now if I invest 1mil to 30y treasury (current 4.2%) and spend all interest each year than at the 30y I will get my 1mil back. What am I missing ?? How this is suppose to be better, even if the inflation goes up?
Very interesting! I had wondered about a three year ladder to be the cash bucket? So placing it in a regular IRA to be the cash for the first 3years? Thank you.
Hi Rob – Is a TIPS ETF (VTIP or TIPS) okay to buy in a taxable account? Will there be any tax issues similar to those with REITs? My husband and I are planning to retire within the next 10 years, and we currently have some bond ETFs. However, we are considering TIPS ETFs due to the direction the economy is heading. Thank you for everything; I'm a huge fan of yours!
I am new here Rob and I must say your style really speaks to me. We all learn differently but for me I really understand these concepts much better so thanks so much for that. I am 66 and planning on rolling over 50% of my 401K in ROTH investments over the next 4-5 years. Would TIPS generally speaking be a good way for me to go? I know I will be exposed to taxes for the rollover years but then good. Your thoughts? Thank Rob.
I have a question: can this be done also by investing in tips via ETF like TIP for example? Since there is no maturity and they can go down so is it still less risky then for example Stocks mutual fund or regular bonds mutual fund?
Hello. I am 29 years old, and I would like to retire as soon as I can start drawing from my tax advantaged accounts at age 59 and 1/2. I may stay longer than that, but I'd like to plan on retiring at that time. Would it make any sense to start building a TIPS ladder now? By that I mean this year, and every year following this one, buying 30 year TIPS such that when I retire 30 years from now they start to mature? Is there any advantage to building it in this way? I don't want all of my assets in TIPS, but it would be really nice to have the bare minimum I need to survive each year in TIPS. Currently, I have about 30k in invested assets, ~98% in low cost stock index funds and ~2% in a bond index fund. I'm a bit behind for my age but that's just because I have spent most of the last decade getting my PhD. Now I am catching up by investing 19% of my income into retirement with an 8% match for an effective 27% contribution. I don't care about stock risks now since I have three decades to recover, but I imagine as I get older I will want some assurances that my money is safe.
Does Roth IRA work as a retirement account to tax shield TIPS inflation adjustments?
Right now in my IRA brokerage account, I’m laddering T-Bills and may eventually move into T Notes and Bonds when yield curves get above water. But, it seems the tax exempt advantage of the Treasuries will be lost – come the time I move money out of my IRA. So is this where TIPS may offer an advantage in a retirement account or does somehow the interest earned on T-Bills while in an IRA account maintain their tax exempt status when withdrawn into regular income?