4% Guaranteed Withdrawal Rate (Inflation Adjusted) with TIPS Ladder — My Money Blog

Retirement income planning 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 not a single insurance company in the world is willing to take such inflation risk in the long term. The only possibility left is to scale the inflation-linked bonds (TIPS) so that each year you take out some bonds and interest to create your own inflation-adjusted income.

Thanks to the increased real returns from TIPS, you can now create a 30-year TIPS ladder that will effectively create a guaranteed real withdrawal rate of 4%. If you put $1,000,000 on a 30-year TIPS scale right now, you’ll earn an income of $40,000 or more for year 1 and then another $40,000 adjusted for inflation (CPI-U) annually for the next 29 years. All backed by the United States government.

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

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

Now, Allan Roth also wrote about the “Risk Free” portfolio where you put most of your money in zero coupon bonds that will guarantee you won’t lose dollars, but put the rest in stocks for upside potential. He feels good knowing that they will both start and end with at least, say, $100,000. However, the reality is that he is still exposed to inflation risk, since $100,000 in 10 years can be worth much less than $100,000 today.

What if you just replaced those traditional style bonuses with TIPS as your super safe foundation? It would eliminate inflation risk while maintaining minimal credit risk. Introduce Lawrence Kotlikoff’s (author of Money Magic) concept of Upside Investing.

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

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

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

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

If you can lock in your TIPS scale to a decent real return, you could have an intriguing combination of a very safe base income, while also giving you a very good chance of a higher income with stock returns anywhere near historical averages.

Generally speaking, what if a 75% TIPS/25% stock portfolio offered a real 3% minimum guaranteed withdrawal rate over 30 years (only as low if the stock hits zero!) with the good chance from which you could withdraw 4% and quite possibly more. For a conservative investor, knowing they have a rock-solid secure floor would allow them to spend freely with the rest. 🥳 Something to investigate further as actual TIPS returns are decent again.

Source: news.google.com