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I’M A 70-YEAR-OLD retiree with a conservative fund portfolio. I have 65% in short- and intermediate-term bonds, Treasury Inflation-Protected Securities (TIPS) and cash, with the other 35% in stocks.
Last year was a rough one for retirees. Rising interest rates and unexpectedly high inflation resulted in a losing year for stocks and bonds. My bond funds lost some 10%. It was one of the worst annual losses for bonds ever. Bonds have only lost value in five of the past 45 years, and the largest previous decline was a 2.9% loss in 1994.
But there was a silver lining: Bond yields are up. My mix of short- and intermediate-term bond index funds has a 30-day SEC yield—a calculation based on the 30 days ending on the last day of the previous month—of more than 4%.
That may look awesome if you’re just now moving cash into bonds. But if you’ve invested in bond funds for a while, you understand that yields are up mainly because rising rates have driven share prices lower.
This long-overdue increase in interest rates got me thinking about my bond funds. Should I hold on to them or purchase individual bonds to lock in today’s higher rates? Does it make sense to build a bond ladder? With inflation stubbornly high, would it make sense to build that ladder with TIPS?
None of these is a bad option. What’s best depends on your reason for investing in bonds. My main objective is income, but the preservation of principal and diversification matter, too. I use a version of the bucket strategy to help pay for retirement for my wife and me. With this strategy, I divide my portfolio into multiple containers, in my case segmented by years.
I have my IRA at Fidelity Investments. For years one and two, I invest in Fidelity Government Cash Reserves (symbol: FDRXX). For years three through five, it’s Vanguard Short-Term Bond ETF (BSV) and the iShares 0-5 Years TIPS Bond ETF (STIP). I hold Vanguard Total Bond Market ETF (BND) and iShares Broad USD Investment Grade Corporate Bond ETF (USIG) for years six through 12. My U.S. and international stock and real estate index funds are for years 13 and beyond.
I take monthly withdrawals from my cash bucket, which is refilled by interest and dividends from the other buckets. I’m not yet at the age where I have to take required minimum distributions (RMDs), but my annual withdrawal rate is close to what my RMD would be at age 73.
How would a bond ladder fit into my retirement income strategy? I’m not a fan of longer-term bonds because there’s too much interest rate risk. Still, by committing to hold bonds to maturity, I shouldn’t ever have to sell at a loss. If I were to build a bond ladder, I’d probably build a seven-year TIPS ladder for years six through 12—when my wife and I will both be 82—and then keep my stock and real estate index funds for years 13 and beyond. Doing so today would mean selling my Vanguard Total Bond and iShares Corporate Bond at a loss.
I like the idea of the added inflation protection and the greater certainty that comes with holding individual TIPs to maturity. Still, I’m not sure the strategy makes sense for me. I like simplicity. My bucket strategy is easy to manage. By contrast, building a bond ladder would involve a higher level of complexity. That’s especially true with TIPS. I’d have to worry about coupon rates, accrued principal, inflation factors and real yields to maturity, plus I’d need to buy the individual bonds on the secondary market.
More important, I didn’t build my bucket strategy for direct annual liability matching—that is, selling securities each year to fund that year’s expenses. For now, I’ve concluded that an acceptable alternative to a TIPS ladder is a combination of TIPS funds and other bond funds with average durations that match my short- and longer-term spending needs.
Chris Cagle retired from his career as an IT manager in the financial services industry in 2019. He now spends his time writing on his own site, RetirementStewardship.com, volunteering at his church, and hiking and fishing when he gets the chance. Chris has also written three books on retirement, Reimagine Retirement (2019), The Minister’s Retirement (2020) and his most recent, Redeeming Retirement: A Practical Guide to Catch Up (2021). Chris and his wife have been married 50 years and have six grandchildren.
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I’m using a CD ladder for some of the money I plan to spend before SS kicks in at 70 (3 years from now). I have an account at Fidelity and they have a really nice easy to use interface for bond and CD’s ladders. I also discovered my risk aversion had a difficult time coping with the bond market’s decline last year, so I’m done with bond funds. I bought a 7 year MYGA from an A++ rated insurance company to cover for fixed income that I don’t need for over 5 years and an SPIA annuity that together with SS will cover my expenses at least for 10 – 15 years when I might add a QLAC. I still have the 65% of my portfolio left that was in equities, but since I’m covered for everyday expenses I don’t have to sweat the ups and downs any longer. We have a LTC policy we bought 12 years ago when we could qualify. The premiums have doubled during that time. I think I am finally (after 6 years retired) feeling comfortable that I have made the transition from accumulator to divestor – at least on paper. It’s been quite an unexpected challenge.
The transition from accumulator to divestor is indeed a challenging one, and coming up with a plan is more challenging than a lot of retirees realize. Your “safety first” strategy using CDs, an MYGA, and SPIA (and possibly a QLAC) is a reasonable one, especially for someone who is highly risk averse. Inflation would be my biggest concern about your strategy, but waiting until age 70 to start SS, which is inflation-adjusted, of course, will go a long way in dealing with that issue.
As someone considering an individual TIPS bond ladder in a retirement account, I’d like to learn more about your comment on the need “to worry about coupon rates, accrued principal, inflation factors and real yields to maturity” if you buy individual TIPS on the secondary market. In a tax-sheltered retirement account, buying on the secondary market gives you a guaranteed real yield to maturity, which seems like the most important thing. How do the other factors you mention come into play? thanks!
I was referring to the complexity of comparing different options for filling a “rung” in your TIPS ladder in the secondary market. Sometimes, you will find there is more than one TIPS issue that will expire in a given year in the future, and they will have very different characteristics based on when they were originally issued.
Thx Chris, I too use the bucket strategy for our investments. 401k is the cash bucket (its at Vanguard in a Money Market type GIC) and I have two IRAs for the other two buckets. My RMDs are placed in a taxable account for whatever I want to do with it. This will be my second year to take RMDs, just missed the new age limit of 73, but that’s OK. My wife has two account one IRA and one taxable, probably will open up another IRA since she is still working.
Hi, Randy. Sorry about missing the new age limit of 73. I can delay until that age, but since I am already withdrawing from my IRA, I am taking an “early RMD,” so it will be of little concern to me. I plan to use QCDs starting next month for my when I turn 70 1/2 for my larger charitable contributions, not to reduce my RMDs, but to gain additional tax benefits. https://www.retirementstewardship.com/2022/12/07/looking-forward-to-making-qualified-charitable-distributions-qcd/
Great article Chris! My biggest disappointment in my portfolio’s performance last year was not in my stock index ETFs (as I expect significant yearly fluctuations, and those funds are in my long term bucket), but my bond funds up to -13% loss in my medium term bucket. I know that performance is still better than the stock markets’, but still….yesh!
I feel your pain, David. Since I have decided to hold on to my bond funds (at least for now), I am hoping for a rebound sometime in the future (not holding my breath). But right now, I am mainly focused on the interest payouts I use as part of my retirement income.
Well said Chris. I also bought two of your The Minister’s Retirement for acquaintances.
Thank you, Rob, and thanks for grabbing a couple of copies of the book. I hope they help your minister friends.
Our FA has constructed a 10-year TIPs bond ladder, which we have had since we started working with him just before we retired a few years ago. As you mention, it is liability-matched against the gap between all of our expenses, fixed and discretionary. It’s about 25% of our assets, with 25% being bond ETFs and 50% being stock ETFs.
They can’t be beat for liability-matching, Rob. And it looks like you’ve integrated the ladder nicely with your asset allocation strategy.
I am about the same age, and I am still about 55% stocks. We could live for another 20 or 30 years, and will need the growth that equities can provide.
Just my two cents.
I completely understand I’m just a little more conservative than you. However, I don’t think equity returns are going to be anywhere near what we have seen for the last decade or two. Hopefully, they will at least do a little better than inflation.
With 55% stocks at age 70, hopefully your two cents will be four cents by age 80!
Just to be sure I understand, now and for the next 12 years you will be living off of interest alone. Is that right?
Not exactly. Interest and dividends flow into my cash reserves “bucket,” which I essentially take an early RMD from. That income supplements our Social Security. Even though I am getting more interest, I am withdrawing more cash than the inflow, so the bucket, which contains two years of spending, will eventually be depleted, but it will probably take longer than two years for that to happen in interest rates stay high. Once it does, I’ll tap my short-term bond and TIPS funds, which should last at least four or five years, and so on. My strategy is not an interest-and-dividends-only approach, as I don’t have enough income to fund our spending needs without drawing down some of the principal. I seek to minimize that as much as possible.
Enjoyed your post Chris. Thank you.
I have bought I Bonds through treasurydirect (which I consider part of my emergency fund) and in late 2022 bought at auction some three year T Notes in my traditional IRA to lock in yield but have not bought TIPS yet. I am thinking about TIPS down the road as an investment/savings in my Roth IRA as I convert traditional IRA money and investments to my Roth in a tax efficient manner over the next decade. While I hope the Roth money will be available to leave as an inheritance my wife and I are unable to buy LTC care insurance because of preexisting health issues so I am hoping my Roth account will do double duty and I would tap the Roth for my wife or my own LTC needs as needed.
I am trying to balance the higher certainty of inflation protection and value of TIPS against the expected short term volatility of low cost broad based equity index funds with their historical better long term yield in the event I need to tap the Roth funds for future LTC financial needs. I plan for my conversions to Roth to end up with half invested as a bond ladder in 5 or 10 year TIPS bought at auction in the Roth and half in VFIAX and/or VTWAX transferred in kind to my Roth.
I have found the commentary of David Enna regarding TIPS and I Bonds helpful in my thinking regarding inflation protected Treasuries.
His blog is at https://tipswatch.com/
Best, Bill
You’re welcome, Bill. I have a (smallish) Roth IRA (I sure wish it was larger) and view it as something to let run and use for expenses 10 to 15 years down the road. My wife and I both have LTC policies, and I constantly debate whether to hold on to them. I’ve wondered if a QLAC and my Roth IRA would be a better way. Should I reconsider a TIPS ladder for that purpose? LTC is a big retirement conundrum. I view a long-term, skilled-care facility as a possible but unlikely event, but we can’t know for sure.
In hindsight I also wish the Roth portion of my retirement savings were larger but I have have come to accept the decisions I made and past actions or lack there of regarding LTC insurance.
I like the thinking and commentary of frequent HD writer Adam Grossman on LTC choices. His blog at Mayport may be a good read to help with your decision – https://www.mayport.com/2021/long-term-solutions/
Best, Bill
I assume you are taking Soc Security (maybe spousal) benefits. If so, you already have a tax preferred, inflation adjusted, no-default bond with survivorship benefits. Why buy TIPS? At age 70, with likely still substantial assets, you have “won the game.” Gradually, increase your Stock allocation, remembering it will probably go to your heirs. Read Mike Piper’s new book “More Than Enough.” My Vanguard Federal MMF is paying over 4.5% and State tax free. Average 5 year CD rate nowadays about 5%. Worth the hassle?
Yes, we are; Social Security provides about 50% of our spending needs, which I supplement with TIPS fund, bond index fund interest, and stock dividends to keep my cash “bucket” as full as possible. (It’s invested in a Government MMF yielding over 4%, which also helps my income situation.) I do plan to gradually increase my stock allocation as we age and recently purchased Piper’s new book.
Chris many of us are in the same particular moment as you. Enjoyed your postings.
How long do you think you need to hold your current bonds funds to get your original value of January 2022 back?
Thanks, Paul. We would love to see our holdings return to their Jan 2022 level. As for my bond funds, I have no idea when that will be as it will depend on if, when, and how rapidly the Fed decides to lower interest rates should we go into a deep recession. In the meanwhile, I plan to try to spend the interest from my cash account if I have to without selling depreciated bond fund shares if I can avoid it.