Planning for retirement income would be much easier if you could purchase a known amount of guaranteed lifetime income that automatically adjusts for inflation. However, the reality is that no insurance company in the world is willing to take that long-term inflation risk. The only option left is to scale inflation-linked bonds (TIPS) so that each year you can cash in some bonds and interest to create your own inflation-adjusted income do-it-yourself.

Thanks to the increase in TIPS Real Returns, you can now create a 30-year TIPS scale that will actually create a 4% guaranteed real withdrawal rate. If you put $ 1,000,000 on a 30-year TIPS scale right now, you’ll get an income of $ 40,000 + for year 1 and then another $ 40,000 inflation-adjusted (CPI-U) per year for the next few years. 29 years old. All supported by the US government.

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

Such a TIPS scale will only last for 30 years and eventually you won’t end up with anything, so it has some limitations. If you retire at 65 and spend your 4% annually, this wallet will be completely exhausted by the age of 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 keep some stock for a potential upside …

Now, Allan Roth has also written about the “No Risk” portfolio where you put most of your money into zero coupon bonds that will ensure you don’t lose dollars but put the rest into stocks for a potential upside. It’s nice to know that you will start and finish with at least, let’s say $ 100,000. However, the reality is that you are still exposed to inflation risk, as $ 100,000 over 10 years could be worth much less than $ 100,000 today.

What if it just replaced those traditional style ties with TIPS as a super secure foundation? You would remove inflation risk while maintaining minimal credit risk. Enter Lawrence Kotlikoff’s concept of Upside Investing (author of Money Magic).

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

– Invest in S&P and TIPS / I-Bonds and specify a period during which you will convert your shares into TIPS / I-Bonds.

– Build a basic standard of living plan assuming all equity investments are lost.

– Increase your standard of living plan only when and if you convert shares into TIPS / I-Bonds.

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

Put simply, what if a 75% TIPS / 25% stock portfolio offered a guaranteed minimum withdrawal rate of 3% real for 30 years (only that low if the stock went to zero!) With the good chance that you you would probably be able to withdraw 4% and most likely more. For a conservative investor, knowing that you have a rock solid safe floor would allow you to spend freely with the rest. 🥳 Something to investigate further as TIPS real returns are decent again.

Leave a Reply

Your email address will not be published. Required fields are marked *