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ONE SUMMER MORNING in 2023, my husband Warren and I had an ad hoc business meeting over bowls of cereal. He told me, “The pandemic really hurt my in-person speaker’s business. I’m not sure it’s ever going to come back.” Then I mentioned that my freelance-design income had also really slowed down, the result of a lack of marketing and enthusiasm on my part.
Neither of these was a newsflash. But that was the moment we realized this is what retirement looks like for a self-employed couple in their mid-60s. There would be no goodbye parties, no gold watches and—most germane to this article—no pensions.
We still have lots of fun projects we want to pursue, but can’t bank on them being moneymakers. The money race was over. Now, it was time to switch from earning, saving and investing to the very different mode of spending down our finite nest egg in a measured way.
We’re two risk-averse people who’ve tried our best to prepare for retirement. We’ve been careful to minimize debt, live below our means and maintain a good sense of our annual spending needs. We forecast that our spending will stay roughly the same in retirement. At the time we had that breakfast conversation, our nest egg was split 45% stock funds, 35% bond funds and 20% cash investments.
My husband had one main concern. “I don’t want to have to think about whether the stock market is doing well or badly when it’s time to take out our yearly allowance,” he said. “How can we create our own pension to cover our basic living costs in a set-it-and-forget-it kind of way?” For Warren, a longtime freelancer who operated one tax year at a time, a simple no-brainer annual income was the goal.
Meanwhile, my concerns included sequence-of-return risk, bridging the gap until my Social Security benefit kicks in six years from now, at age 70, and the corrosive effects of inflation on our cash holdings. I also had an overdeveloped desire to control our money, the result of a bad experience with a financial planner.
Back to school. To answer Warren’s question, I took a crash course last fall in different ways to construct a “retirement floor.” I read about everything from immediate annuities to dividend investing to the bucket strategy.
Just as I was starting to compare different ways to self-annuitize our savings, I came across a lot of media chatter about Treasury Inflation-Protected Securities (TIPS) ladders and how they could help you lock in a higher living standard without taking unnecessary risk or paying annual fees.
I found in-depth articles that tell you everything—mathematically and more—that you wanted to know about TIPS, as well as less-complicated resources that spoke more to novice ladder-builders like myself. I learned that you can buy TIPS directly from the government or on the secondary market, which sounded a little daunting but just means you’re purchasing through your online broker’s website.
I also learned that when you build a TIPS ladder made up of annual rungs, the income of each maturing rung is a combination of the interest all the later ladder rungs throw off every six months, plus the principal of the bonds maturing that year. By using a tax-deferred account to purchase TIPS, we wouldn’t have to pay taxes on the bonds’ interest until we withdrew our yearly allowance.
After all my research and a lot of number crunching, I posed my own question to Warren: “What if we could create an inflation-indexed guaranteed pension from half of our savings—one that wouldn’t involve any annual investment expenses, aside from paying taxes on the amount we take out every year? That money, along with our two inflation-indexed Social Security income streams, could cover our estimated annual living costs for the next 20 years.”
I continued: “In this ‘what if’ scenario, most of the other half of our savings would be invested simply but more aggressively in a U.S. total stock index fund and a total international stock index fund. Those investments could surf the market for the next 20 years without us freaking out about every tumble off the surfboard. And then those funds would be what carries us to the end of our life. How does that sound?”
Warren liked the idea of turning half of our money into a simple inflation-adjusted pension that we controlled. He also liked the duration—he seems to feel that he might not be around more than 20 years, going by his six older siblings’ health issues. And he liked that we were still leaving some money in the stock market long-term while hopefully not biting our nails (too much) about it.
Climbing the ladder. And so, in February 2024, I purchased a 20-year TIPS ladder. Next February, this ladder of bonds will begin coughing up a preset inflation-indexed amount each year until Warren is age 87 and I’m 85, knock on wood. It’s what’s known as a “collapsing” ladder rather than a “rolling” ladder, meaning we cash in the income from each rung—rather than reinvesting it—and the ladder will disappear after the last rung of bonds matures in two decades.
Making the purchases in my and Warren’s tax-deferred accounts wasn’t complicated. On the Bogleheads forum, I found out about TIPSladder.com, a free online tool for creating a TIPS ladder shopping list. In one thread, I also found all the answers to my “how do I…?” questions.
TIPSladder.com let me play around with two main toggles: desired annual real income and length of the ladder. You can specify the same real income amount for every year, as I did, or differing amounts for different years. By playing with the income and duration inputs, I confirmed that a 20-year ladder best matched our coverage needs and purchasing budget.
After I got the buy-in for the plan from Warren, I printed out my TIPSladder.com shopping list with the bond ID numbers and quantities to purchase for each income rung. Next, I logged on to the Vanguard site to purchase the bonds in two separate IRAs we have there. Once I got started, plugging in the different ID numbers on Vanguard for each of the 20 rungs took just over an hour, only because I checked everything thrice, of course. The Bogleheads thread’s screenshot of the buy-a-bond screen was helpful here.
By the end of the next day, the purchased bonds were showing up in our two accounts. The timing of my purchase guarantees 1.8% above inflation over the next 20 years. Our do-it-yourself income stream was set.
We know we’re leaving a lot of possible performance and standard-of-living upside on the table by locking in this conservative solution in our mid-60s. But as a pair of self-employed people without the corporate benefits that others take for granted, we long ago gave up trying to keep up with the Joneses.
I’m hopeful that our solution—half of our savings in TIPS, while most of the other half enjoys some capital appreciation in broad stock-market index funds for two decades—gives us the best of both worlds. If we’re lucky, we’ll never miss what we didn’t make, and we’ll still sleep well at night.
Laura E. Kelly is a web designer and book editor living in Mount Kisco, New York, with her husband, author Warren Berger. As Laura contemplates retirement and relocating, all of those things could change (well, probably not the husband). Her previous articles were Just the Two of Us and Dying at Home.
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I really wasn’t quite understanding why you’d buy TIPS and put together a TIPS ladder, but the Rob Berger video on YouTube was absolutely fantastic (it’s referenced above)!
I had thought I’d be doing an annuity ladder, but now I am thinking a TIPS later is better.
The video is here: https://youtu.be/WMSOdk9Ga_Q?si=lokOHfQPwD6xlFik
Yes, Rob Berger’s video, published when the TIPS rates were at their highest in 2023, was one of my best resources when I was buying about 3 months later.
Great article, very helpful as I too am thinking about this same ladder as my retirement floor. Can anyone explain to me why there are no TIPS for the gap years between 2033-2039? I can’t seem to be able to find any good explanation about it. What is the best approach to handle the gap years for a 30-years ladder? TIA
Hi achnk53. Here is a link to the Bogleheads explanations and remedies for the TIPS gap years 2033-39: https://www.google.com/search?sitesearch=bogleheads.org&q=TIPS+gap&sid=3404f1292b2340947b875f12baa7a55a This happened because the government didn’t issue TIPS in certain years way back, so there weren’t bonds maturing for people building TIPS ladders that spanned the above years. Following the suggestions I found on the various Bogleheads threads, I bought more TIPS bonds maturing the year before 2034 and same for the year after the gap (2040), splitting the difference to cover the “missing years.”
The tipsladder.com tool I mentioned told me exactly how to make the wisest purchases to cover that gap, so it was a no-brainer.
The good news is that the gap is closing. Last year the government issued a 10-year TIPS bond that matures in 2033; this year the government issued a 10-year TIPS bond that matures in 2034, etc.
I think I would make it simple by filling the gap with both earlier and later years now, then seek to buy 10-year TIPS for that particular year with my excess dividend income that is not use for spending or reinvesting, until the gap fill up.
Thanks, Laura. Another concern is that what happen to our 30-years ladder if we both pass in year 10 & the ladder is in my Roth account. Does my children have to liquidate them before they mature in 10 years?
I guess the decision about letting the bonds mature in the Roth and either reinvesting it or taking the money as needed OR liquidating the bonds right away would be up to your children. But I think that one of the pluses of this kind of “self-annuity” is that the money is there for your inheritors, as opposed to insurance annuity payments, which end when you do, right?
Thanks for your blog. I feel we spend may to much energy searching for the best possible financial returns. It appears to me you have focused your energy on identifying and executing the strategy you are most comfortable with. Great job!
My wife and I are blessed in many ways. We have a financial
planner we like and trust. As far as laying down a floor; between three modest pensions and social security we can pay our monthly obligations. This allows us to be a bit more aggressive with our investment accounts.
This article is EXACTLY why I love HumbleDollar so much! Real people using their own actual money to secure the retirement they want for themselves, and telling us exactly how they did it.
Could you provide a link, please, to the “ I also found all the answers to my “how do I…?” questions”?
Could you also share why you are doing this at age 63?
I had long thought I’d be doing an immediate annuity ladder, but now I am thinking I like your strategy better!
Thanks to Jonathan for separating out that link to the Bogleheads thread below. I looked at that thread recently and learned that the free tipsladder.com form I used back in February ’24 has been greatly improved by its creator Kevin Esler. I feel very lucky to have found all that patient, expert advice throughout the 11-page thread!
As for why I did this at age 63–it was external timing, not my age, necessarily. We realized our decumulation years were upon us and putting the money designated for our annual “allowance” in a government-issued, inflation-adjusted, easy-to-access account seemed like the kind of safety and simplicity we wanted. Also, the pluses of making a TIPS ladder for retirement seemed timed to the higher TIPS yields that were happening this past year, and I didn’t want to miss the boat on this purchase timing. Finally, I was just tired of thinking about how we were going to access our money each year as the stock markets went up and down. All three of these things = TIPS ladder this year.
Here’s the hyperlink that Laura included in the above article and where she found the answers she was looking for:
https://www.bogleheads.org/forum/viewtopic.php?t=394380
A few commenters have asked me how I expect the TIPS to work with RMDs.
Warren’s RMDs have to start when he is 73, which is 7 years from now; mine start at age 75, which is 11 years away for me. Our IRA situation is not equal—mine has more funds since I was in corporate life for a while and later rolled my 401k into my IRA.
I was able to set it up so my larger IRA contains 80% of the TIPS ladder and the rungs in my IRA will mature before the ones in Warren’s IRA. So I know for sure that my IRA amount will diminish over the years with the yearly living expenses withdrawals. What I don’t know for sure is how much the other 50% (spread across both my and Warren’s IRAs) in U.S. and int’l index funds will grow (or diminish) over the 20 years. So who knows if those yearly TIPS withdrawals will cover the RMDs I’ll need to take?
It’s hard for me to think about something 20 years away or even 11 years away—so many variables! So, the smartest thing I will be doing is hiring a fee-only financial/tax planner for a few hours to run the numbers on various scenarios of future RMDs, including whether doing some Roth conversions at some point makes sense or not. (Before I made my TIPS purchases, I double-checked that, if needed, TIPS can be transferred “in kind” into a Roth IRA.) My aim with hiring the planner is to make sure there aren’t some obvious things I should be doing in 2024 that will help me in 2035 and onwards.
And then we hope to be on autopilot for a while! Although next spring, I have to make my Medicare choices for the first time. Luckily right now I live in NY where you can switch between Advantage and Traditional without facing underwriting, but it still seems complicated. The experiences of HD contributors being shared in the Forums and in comments to earlier HD posts have been very useful for my decision making. Thanks to all for that.
Thanks for an informative article. The TIPS ladder approach is attractive after having watch bond funds go down at the same time as stocks in 2022. But my understanding is that part of a classic “4% rule” strategy for drawdown is rebalancing between a target stock/bond allocation quarterly or annually. It seems like having most or all of one’s fixed-income assets in TIPS would make rebalancing difficult. Am I overlooking something?
They are withdrawing much less 4%
if they have half their assets in TIPs (50%), and are drawing that down evenly across 20 years, that means they are only spending 2.5% per year.
They are “rebalancing” every year as they cash in bonds without replacement. Only they are actually rebalancing in a more aggressive direction.
in short, their strategy has nothing to do with “4% rule”.
Wow! Great article. Well researched, great links and well written! As I am in the same boat – retired in my early 60s and not planning to take SS until age 70, no meaningful pension, and worried about inflation, this is incredibly useful. Thanks so much for sharing.
Well done!! Great article and good to see recognition that implementing a TIPs ladder is not terribly difficult once you arm yourself with a strategy. We have a 10-year rolling TIPs ladder which we replenish annually with whatever is up in a stock/bond ETF mix. The ladder is about half our bond allocation. We don’t go beyond 10 years due to duration risk. The TIPs are liability-matched against the gap between projected income and expenses and we always hold them to maturity. Like you, our TIPs are part of our income floor along with delayed SS and pensions which cover all of our expenses, both fixed and discretionary. I really saw the unique value of our TIPs in 2022 when inflation was high and both stocks and bonds were down.
Laura. Thank you for your informative article. How are you planning to coordinate RMDs in your & your husband’s accounts with the TIPS maturities?
Hi ps f—I posted an answer about our RMDs thinking in a comment above.
Thank you for the great article, Laura – really appreciate it! I was wondering the same thing: how should RMDs figure into ladder calculations. Do most people build those bigger amounts into their annual “income floor” needed once RMD age hits?
Also pondering what one’s “income floor” should be: 100% of fixed income needs, minus SS? Or just a portion of fixed income needs?
If one counts all taxes, all healthcare, all living expenses, lumpy surprises (health emergency, new car, huge home repair, etc) 20-25 years would be quite a sum to commit to, but perhaps that’s what’s advised in building this “pension” – aka TIPS ladder?
I know for SPIAs, they advise NOT to commit all fixed assets – just a portion.
Hi CJ,
See my RMD musings in a comment above.
Over the past 10 years we have been through all sorts of lumpy surprises—big health emergency, new car (after a rear-ending of the old one), new roof, financial support of relatives, high NY taxes, the ever-rising cost of streaming subscriptions!—so we now have a good idea of the average annual amount to budget for. Each TIPS ladder rung is budgeted to cover ~60% of that annual number, with our two Social Security streams (eventually) covering the other ~40%.
Until that point of “total coverage,” we’ll use our ever-rolling CDs and other cash savings to cover what the TIPS can’t. We could also cut back expenses and/or pick up some work, possibly. Finally, we do have that other half of our savings, supposedly “growing in equities” for 20 years but also there in a pinch.
Our plan may not cover all eventualities—decades of bad health events or even affording the steep lump-sum entry fee of a Continuing Care Retirement Community—and I’m trying to get used living with all the unknowns.
Thank you! So helpful. As a bit of a control freak, I am trying to accept the unknowns, plus figure out whether to bother w/Roth conversions. Expecting hefty CCRC fees in the future, so trying to budget wisely for that and any addtl ltc needs too.
All the different paths and choices feel overwhelming at times.
Thanks Laura for sharing your research and implementing your plan. Many people don’t go through the process that you did, or don’t even know where to begin. I hope it will help others; at least it got me thinking and doing a little research thanks to you.
Great article on TIPS. Thanks for giving the ladder building details. The only problem I see with TIPS is that you have to trust that the government is honestly reporting the inflation rate. I don’t believe they have. I think since 2008 the real rate has been under reported by at least 50%. It does seems to have become more honest recently.
Great Article Laura, this line is awesome but as someone with almost 30 years at one company a decent size corporation, these are rare and if done, done just because someone likes you.
We have 200+ people in our building and not a single HR, what a change from when GE owned us. Anyone that had a company bought by GE will get this reference 🙂
But that was the moment we realized this is what retirement looks like for a self-employed couple in their mid-60s. There would be no goodbye parties, no gold watches and—most germane to this article—no pensions.
Thanks Rayan,
I think there’s plenty of good things to say about the corporate life and following the rules of that environment to retirement.
Rewarding work is out there and finding the good retirement plan with a job attached is quite. . . rewarding.
Sounds like it works great for you. You’ll be spending down half of your assets and hopefully the other half will have good gains. I’m assuming leaving assets to kids or heirs isn’t a goal. If it was, there may be better options out there.
Hi Boomerst—While I don’t have kids, I do have people in my life that need financial help right now (not when I die in 20 or 30 years) and so that help is a line in our annual budget now and forever (it seems). So while leaving assets to heirs years from now is not a big goal, if there is any money left over when both Warren and I are gone, two nieces (who are only teenagers now) might get a bit, but the plan is that the bulk would go to deserving charities where far more people and animals could be helped than just remaining family members.
I built my TIPS ladder nearly two years ago. I discovered it could provide over a 4% real withdraw rate for 30 years at the Bogleheads 2022 conference. I attest that the feeling of a guaranteed inflation adjusted cash flow from SS & the TIPS ladder creates such a calmness when markets plunge. My clients love it as well.
I credit Bogleheads Kevin Esler and Bob Hinkley for creating tools anyone can use that makes it easy to construct ladders. They do this without any profit motive – they just want to help people.
Thanks, Allan. A big factor in my feeling comfortable with the TIPS ladder idea were all your 2023 articles and interviews about this form of self-annuitzing.
Very informative article. Thanks for all the information.
Diversification in all things. Including bonds.TIPS have had the lowest return of the major bond categories over the last 15 years including what now should be their hay day.
Typically such results look at TIPs funds rather than individual TIPs which can do better when held to maturity
What a well written article! Nicely done on a topic I had been looking for more information about. Thank you.
TIPS as a form of self-created annuity makes sense. But don’t necessarily think of TIPS as an investment. They have some of the same flaws as bonds, in that the underlying value of a TIPS portfolio can swing wildly as interest rates go up or down. There were a few years in the last decade where TIPS were real dogs, and other years where they were stellar performers.
I think all bond ladders really only work if you plan to hold your individual bonds to maturity, where the payouts are guaranteed. My plan is that by holding each rung to maturity while turning a blind eye to swings in the interest rates and our TIPS portfolio along the way, we’ll get our set amount each year which always comes out ahead of inflation, whether inflation is up or down the year that rung matures.
Meanwhile, I’m hoping for the sake of our country that inflation will go low and stay low for a long time!
An excellently written article! I commend you and your husband for conservatively handling your financial affairs and coming up with what is a very sensible solution for your unique retirement needs.
Congratulations, that was a lot of work. I have a chunk of money in an intermediate TIPs fund, and a five year CD ladder, but I have a (non-COLAed) pension and am already taking Social Security.
“But as a pair of self-employed people without the corporate benefits that others take for granted, we long ago gave up trying to keep up with the Joneses.”
Not keeping up with the Joneses is an important thing. My wife swears that 2/3rds of her clothing came from Costco. If it happens to be a name brand it’s because she liked the color, and it fits. I’ve never met anyone as label blind as she is. That’s helped our retirement.
With steady income and controlled expenses, you seem to have a good plan in place.
Very sensible. I put two-thirds of my fixed income into a five-year TIPS last spring, because I’m too chicken to go longer than that. Don’t trust the gubmint, don’t trust the big-spending pols. <shrug> Fingers-crossed that something like its 2.1% real return will be available when this one matures.
The gubment and big spending pols have always been here, and we’ve survived. You should take that out of your evaluation method.
Great article, thanks so much for sharing and for the resources to help build a ladder. This strategy has a lot of merit and remember reading a very popular article about it from Allan Roth.
I’m not sure I’d call this a conservative solution but whatever it is, I find it appealing to guarantee an income floor that covers the expenses you care about most. Bravo.
Color me impressed!
Laura, you wrote a terrific article. Thank you for sharing your experience and including how you put your plan in place.
Laura. Thanks for an interesting and well-written article. Thanks for the links also. I’ve started looking at bond ladders recently. Did you happen to compare the income Produced by the ladder with available SPIA annuities ?
Are inflation protected single premium income annuities (SPIAs) available with no inflation cap?
No, there’s no true inflation-indexed annuity (except Social Security, of course). You can get SPIAs where the payout steps up every year by, say, 2% or 3%.
Hi Jonathan. It’s counter-intuitive but an annuity with a fixed COLA actually increases inflation risk since the duration of the payments is longer.
I tell people that actuaries are really smart people and, if they won’t take the inflation risk by offering CPI based annuities, I don’t think my clients should either.
That’s my question as well, and what was the final piece that lead you toward TIPS?
The first article that really tipped me off to TIPS was the October 2024 “High TIPS Yields Are a Retiree’s Best Friend” by John Rekenthaler on Morningstar.com. The rates last October were a high point for buying (and this past May was, as well). As I researched and dithered over the next three months, there were many other helpful articles that kept popping up—I have a whole folder of ‘em! The real “final piece” that led to my buying TIPS was finding the Bogleheads.com thread I mentioned in my article which gave me a map.
As for SPIAs, I didn’t spend too much time looking into those once I knew about TIPS ladders, since annuities didn’t match up with parts of our personal criteria, such as “not giving up control of our investments” and “baked-in inflation protection.” Also I had a bad experience with an index annuity (I know: very different from a SPIA) sold to me by a financial advisor many years ago, with its fees and surrender charges, so I was a bit prejudiced against annuities.
That article by John Rekenthaler really is excellent.
I’m with you – and, for that matter, William Bernstein – in seeing no point in SPIAs (or any other type of annuity) when TIPS are not only easy to buy, default risk and hidden-fee free but also support a 4%+ spending rate with the all-important guaranteed inflation protection that annuities don’t offer.
My wife and I are also at 50:50, but instead of a TIPS ladder we use half each VTIP and VGSH along with 3 years of residual (after Social Security) living expenses in SGOV. Our equities are as plain vanilla as it gets: 80% VTI, 20% VXUS. The barbell of short-term 100% Treasury bond funds is something I learned about from Jonathan Clements, though of course he has a much higher equity allocation than we do. We went this route in part because the mechanics of actually spending the individual TIPS given that they’re all in our IRAs and RMDs are quite awhile away for us were more complex than my wife felt comfortable with.
The short (~3 year) duration of these funds allows us to truly take our risk almost entirely on the equity side, with the peace of mind of knowing that even in a rising interest rate environment we could raise cash in an emergency without losing much if any money. And of course we’re agnostic as to whether inflation-indexed bonds will outperform nominals or vice versa. All that said, I envy the certainty and paycheck-like mechanics of what you’ve chosen and am sure it will serve you well in what I hope is a very long and happy retirement for both of you. I really enjoy your writing!
Thanks so much for sharing your knowledge and experience on this strategy!