4% Guaranteed Withdrawal Rate (Inflation-Adjusted) with TIPS Ladder

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Retirement income planning would be so much easier if you could buy a known amount of guaranteed lifetime income that automatically adjusted for inflation. However, the reality is that not a single insurance company in the entire world is willing to take on that long-term inflation risk. The only possibility left is to ladder inflation-linked bonds (TIPS) so that each year you would cash out some bonds and interest to create your own DIY inflation-adjusted income.

Thanks to the rising real yields of TIPS, you can now create a 30-year TIPS ladder that will create effectively a 4% guaranteed real withdrawal rate. If you put $1,000,000 into a 30-year TIPS ladder right now, you will get $40,000+ income for year 1 and then another $40,000 adjusted for inflation (CPI-U) annually for the next 29 years. All backed by the US government.

Allan Roth did the hark work and bought a 30-year TIPS ladder x 4.3% real withdrawal rate using $100,000 of his own money on the secondary market. He also introduced me to eyebonds.info, which has a lot of helpful spreadsheets for the hardcore DIY TIPS and Savings I bond investor.

Such a TIPS ladder will only go for 30 years, and you end up with nothing at the end, so it does have some limitations. If you retire at 65 and spend your 4% every year, this portfolio will be completely depleted by age 95. If you start at 55, it will end at 85. Therefore, this tool would work best as a supplement to your Social Security benefits and perhaps keeping some stocks for potential upside…

Now, Allan Roth also wrote about the “No Risk” portfolio where you put most of your money in zero coupon bonds that will guarantee you don’t lose any dollars but put the rest in stocks for upside potential. It feels good to know you’ll both start and end with at least, say $100,000. However, the reality is that you are still exposed to inflation risk, as $100,000 in 10 years may be worth a lot less than $100,000 today.

What if you simply replaced those traditional-style bonds with TIPS as your super-safe base? You’d remove the inflation risk while still keeping minimal credit risk. Enter the concept of Upside Investing by Lawrence Kotlikoff (author of Money Magic).

Upside Investing, as I described in recent Forbes and Seeking Alpha columns, is simple as pie.

– You invest in the S&P and TIPS/I-Bonds and specify a period during which you’ll convert your stocks to TIPS/I-Bonds.

– You build a base living standard floor assuming all stock investments are lost.

– You increase your living standard floor only when and if you convert stocks to TIPS/I-Bonds.

If you can lock in your TIPS ladder at a decent real yield, you could have an intriguing combination of a very safe base income, while still giving you a very good chance of a higher income with stock returns anywhere close to historical averages.

In rough terms, what if a 75% TIPS/25% stock portfolio offered a minimal guaranteed withdrawal rate of 3% real for 30 years (only this low if stocks go to zero!) with the good probability that you would likely be able to withdrawal 4% and quite possibly more. For a conservative investor, knowing you have a rock-solid safe floor would allow you to spend freely with the rest. 🥳 Something to investigate further while TIPS real yields are decent again.

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  1. Hi Jonathan, thanks for the info! One question, You wrote about Allan’s TIPS ladder that you would end up with nothing at the end. But when I read Allan’s article it says you end up with $128882 at the end of the 30 years? Tips are always a mind bender for me, so I probably missed something. Thank you for any clarification

    • You are referring to this quote:

      I spent $98,549 to produce an average cash flow of $4,296 annually, which equates to a 4.36% real average annual withdrawal rate. I’ll get back a total of $128,882 in today’s dollars or a real annualized return of 1.83%.

      Yes that’s the total number of real dollars you’ll get back when you add up all the principal and interest over 30 years. $4,296 a year times 30 years = $128,880. But after spending that money each year for 30 years, you’ll have nothing left.

  2. I made myself a 5-year TIP ladder on secondary market but with a real yield of about 1.7% and then noticed it went up to 2.1%. Vanguard says I am under water but I don’t care as long as I get my money worth at the end. Which is not the case with TIPS ETFs as you don’t know exactly when you’ll get back your money plus inflation plus real yield.

    Glad to see there are more sophisticated strategies I could study, as I resolved to invest 10% of my income into a targeted Vanguard fund through thick and thin, and the rest would go into individual TIPS I hoping to build as a ladder. Still a bit too risk averse about 30-year time frame, I feel like I can stomach 5-year or at most 10-year ladder better.

    • I’m interested in the idea of keeping my nominal “regular” Treasury bonds short-term (and probably kept in a simple fund “ladder”), but having my TIPS bonds more actively managed and bought long-term when there is a decent real yield. But you have to get used to the market price fluctuations as it gets pretty extreme with long TIPS just as with long Treasuries.

  3. If you were planning for retirement you could also do something like build a TIPS ladder for 25-30 years with like 95% of your money and then put the other 5% into a guaranteed life annuity that would start 25 years from now. That way you’d get your TIPS income w/ inflation protection for the 25-30 years and then just in case you live a very long time you’d be protected with that life annuity when you hit 90-95 years old.

    • That’s true, but I would worry that its hard to know much much annuity to buy when you don’t know how much inflation would have occurred 30 years from now. How do I know what, say, $50,000 a year will buy in 2052?

      I guess my point is that you can’t get inflation protection for the rest of your life, only up to a fixed 30 years.

      • Right you couldn’t handle the inflation well with an annuity. You might figure for 4% annual inflation and just hope its not worse long term. It wouldn’t be perfect but you might be close eough. But I’m really thinking the annuity would just be a safety feature so you don’t end up 95 years old and penniless. I don’t know what $50k/year will buy me in 2052 but I do know what $0 will get ya.

  4. The elephant in the room is taxes. If inflation is running 5%+, the taxes on your TIPS investment will eat a good chunk of your 4% withdrawals. You might end up with only 2%.

  5. I do like this idea. Nice work. (probably shoulda led my other comments with that… )

    THey did used to have life annuities with inflation adjustments. I remember getting quotes on them online even. So you could buy a life annuity with an inflattion increase. I haven’t seen those though and I heard they got rid of em. Not sure if they still exist anywhere at all or not. They might have just been a fixed +% increase like 3% more annual rather than an actual measure of actual inflation.

  6. How come you (just because of the author) are using TIPS instead of plain Treasuries (I Bonds?) or even municipal? Wouldn’t it make sense to use other types of fixed income to accomplish similar results?

    • I bonds are very limited in terms of purchase limits. Other traditional nominal bonds are not guaranteed to provide a certain return above inflation, especially unexpected inflation.

  7. I thought the 4% rule said you can safely withdraw 4% of your savings indefinitely; But, this scheme says you have nothing left after 30 years? Don’t get it.

  8. Hi Jonothan:
    My wife and I just built a 20 year bond ladder that will begin in two years when I plan to retire at age 70. My DW will be 68. I locked in an average yield of just over 1%. Along with SS, the payout will maintain our current lifestyle for the first 12 years, then will be reduced for the last 8 “slow-go” years but will still cover basic expenses. The ladder cost about 33% of our retirement savings and is entirely in an IRA rollover account.

    My question: Should add 4 or 5 rungs to the ladder to bring us into your early/mid 90’s? My wife’s mother lived until 96. I am having trouble deciding how long the ladder should be. The longer the ladder, the safer we would be from unexpected inflation. And liquidity (for example a medical emergency) does not seem like an issue since we have additional savings outside of the ladder. And that does not include our paid off house with large equity. On the other hand, I also feel we may be over doing it and do not really need to add any rungs. Any guidance on how to think about this would be appreciated.

  9. What if one is 65, opens a 30yr TIPS but needs the money at, say, 80yo?
    What is the penalty to end the TIPS? Can it be ended early, and at what loss?
    Thank you,

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