How to fund a TIPS ladder?

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Raybo
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How to fund a TIPS ladder?

Post by Raybo »

I am interested in creating a $40K/year TIPS ladder from 2025 to 2033 (up to the gap in available TIPS -- 2034-2039). According to tipsladder.com (an app created by a forum member), it would cost me $333K.

At present, my AA is 53/45/2 (stocks/bonds/cash) with 35% of my bond allocation in TIPS/IBonds. The IBonds are a sizeable chunk of my inflation-protected allocation and they mature in 2034-5, so I figure I'll use those to cover the (early) years without maturing TIPS, which is why the ladder only goes to 2033. Virtually all these funds are in IRA or Roth accounts.

Currently, my TIPS money is in Vanguard's TIPS fund (VAIPX). It makes sense to me to use those funds to buy the TIPS. But, I don't have enough in that fund to cover the entire purchase. My question is where to get the rest of the money needed for the ladder?

It makes sense to me to take the additional funds out of my other (nominal) bond holdings. But, at present I am over my AA (50/48/2), so even though I am not at my rebalancing bands, I could rebalance toward 50/48/2 by selling stocks (from Total Stock fund) to fund the TIPS purchase.

This leads to my second question. What AA should someone with a 10 year TIPS ladder have? Frankly, 50/48/2 seems a bit conservative. If I take the TIPS ladder out of my AA (which makes sense to me as the TIPS aren't really "available" assets anymore), then my AA would be more like 60/40. Is that too conservative with a 10 year TIPS ladder?

My RMDs start in 2025. The maturing TIPS should cover them. So, the ladder should cover my basic income needs for 10 years. My need to sell assets should be limited to covering unexpected expenses (though, on-going long-term health expenses (such as CCRCs) are hard to plan for). So, how does one decide on an AA after creating such a ladder?

I have no need to leave a legacy, so am mostly concerned with having enough until the end.

How would others answered these questions?
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er999
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Re: How to fund a TIPS ladder?

Post by er999 »

From my reading on a tips ladder the other side is a risk portfolio that can be aggressively invested up to 100% stocks depending on your comfort level. I would use the tips ladder as part of the bond allocation so if you desire 45% bonds before the ladder take the ladder value from the bond section so perhaps you’ll only have 25% bonds left, however much the $333k in tips is.

Is the tips ladder to bridge until social security, presumable starting until age 70 which then takes the place of that $40k/year? You might need to post more info (age, withdrawal rate, yearly spending, etc) to get better advice from people.
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Raybo
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Re: How to fund a TIPS ladder?

Post by Raybo »

er999 wrote: Sun Mar 26, 2023 11:05 pm From my reading on a tips ladder the other side is a risk portfolio that can be aggressively invested up to 100% stocks depending on your comfort level. I would use the tips ladder as part of the bond allocation so if you desire 45% bonds before the ladder take the ladder value from the bond section so perhaps you’ll only have 25% bonds left, however much the $333k in tips is.

Is the tips ladder to bridge until social security, presumable starting until age 70 which then takes the place of that $40k/year? You might need to post more info (age, withdrawal rate, yearly spending, etc) to get better advice from people.
I am already on Social Security (I'm 71). I have been waiting for real interest rates to rise before building a ladder. I'm now looking at it more seriously.

As I said in the OP, I figure I need $40K a year out of my pile to make ends meet. Yearly spending, WD, etc. are not relevant.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
er999
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Re: How to fund a TIPS ladder?

Post by er999 »

Personally I’d just buy the ladder now. I’m 47 so only peripherally looking at it but I bought some individual tips maturing when I’m 74-77 (I have a fixed pension starting at 60 so wanted something inflation protected besides stocks). It was a better deal to buy tips in October but even with the drop in rates it’s still the best time to buy in the last decade.

Rates could be better in 6 months or a year or could be worse — if it’s good enough now for you I’d take it. You are giving up return as likely would do better off in stocks or even regular fixed income but the guarantee of a chunk of inflation protected income each year seems worthwhile.

If you do decide to buy be aware the trades aren’t as quick as stock trades (sometimes you have to submit multiple times). If you wait a few minutes before entering the trade sometimes the bond is gone. Also hard to get exactly the price listed in the wsj (https://www.wsj.com/market-data/bonds/tips) — I got about 2% higher than the listed price.
er999
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Re: How to fund a TIPS ladder?

Post by er999 »

You could even extend it longer since you are 71 now potentially could go out to age 101. I’d consider doing it as long as it was less than 50% of my portfolio. Maybe have a few t bills and rest stocks. For the gap you could just buy more bonds maturing in 2034.
aristotelian
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Re: How to fund a TIPS ladder?

Post by aristotelian »

I don't think there is such a thing as too conservative. Really just depends on your risk tolerance and need for growth, but with no legacy interest you really don't need much growth.

I think to keep things simple I would take the funds from the bond allocation. Moving forward I would maintain an overall allocation at the same 53/47 level you have (calculated including your TIPS ladder). You will just want to rebalance to maintain your allocation every time you cash in a maturing tranche of TIPS. This way your desired "guaranteed" funds are set aside and earmarked but your overall risk profile is held steady.
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