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Morningstar posted an article by Allan Roth (an investment writer just in the past year) this morning.
He writes the delaying Social Security until 70 and buying a US Treasury TIPS ladder are risk free inflation adjusted alternatives to purchasing an annuity through an insurance company who’s payments generally are not..
https://www.morningstar.com/funds/hidden-risks-income-life-target-date-funds?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_75089&MorningDigestUS&utm_id=39201
Enjoy
I recognize that financial planning isn’t a one size fits all strategy. I assume we all accept that reality. I’m no fan of annuities and my calculations say they are a bad deal for most. However, the peace of mind that it gives some cannot be underestimated.
I’d never buy one because as Roth states, I can create my own income streams at a much lower cost while retainingcontrolof my money. Some people may think an annuity is beneficial to them and it’s the job of the advisor to point out all the options available and help them chart the best course. All that said, I understand the point made by Roth but I have no issues if folks want annuities if it makes them sleep better at night.
There’s a bit of smoke and mirrors here. Roth leans heavily on the idea that annuities are just returning your capital, which is true, but then recommends a 30-year TIPS ladder that does exactly the same thing. He even admits it himself.
Also, what if you’re not average? What if you live to 101 and your ladder finishes at 95? Are you supposed to live on thin air?
His alternatives are most likely good advice…for someone who’s financially literate and asset-rich. There’s also the point that Roth is a CPA who can build a 30-year bond ladder in his sleep. I’d suggest the average 401(k) participant cannot, and I’ve read the whole point of embedding annuities in target-date funds is simplicity for ordinary people.
To me, it reads like advice written by an affluent author for other high-net-worth individuals that’s been dressed up as general guidance.
If one’s retirement assets are such that 100% has to be invested either in an annuity or a 30-year TIPs ladder, then you must flip a coin between betting on inflation risk (the annuity) or longevity risk (the TIPs ladder) – an unfortunate dilemma.
But for many of us, we probably have the financial ability to devote something less than 100% of our wealth to either alternative. As Allan Roth suggests, for example, 90% could be put into TIPs and 10% could be invested in stocks and left alone to grow for 30 years while we live off level real income from our TIPs ladder and Social Security. We could also do the same thing with an annuity, but the problem is that we may need to tap into our stocks along the way to make up any shortfall due to declining real annuity income from inflation.
After conducting an analysis, I determined that both strategies would have fared much better historically than plunking 100% of one’s wealth into either an annuity or a 30-year TIPs ladder. However, the TIPs+Stocks strategy left one with residual wealth after 30 years that was significantly greater than the Annuity+Stocks option. In fact, if you started at age 65 you would have been able to maintain level real spending until you were older than 105 before that strategy failed – assuming the inflation rate and stock returns that have prevailed since 1972. My money is on the TIPs ladder accompanied by an equity investment sleeve. I’m willing to bet that I won’t live past 105 more than I’m willing to bet on what inflation is going to be over the next 40 years.
William, that TIPS-plus-equity-sleeve model is a beautiful piece of financial engineering. I’m sure the math absolutely backs you up.
But I still have to circle back to the ‘Average Joe’ reality.
For the folks on this forum, constructing a 30-year individual TIPS ladder and systematically rebalancing a separate equity sleeve over three decades sounds like an engaging weekend project. For the general public, it’s a wall of complexity. The moment you tell an average 401(k) participant they need to buy individual inflation-linked bonds at auction, manage phantom taxes, or risk duration exposure with ETFs, you’ve lost them.
This is why embedded annuities in Target-Date Funds exist. It isn’t because they are mathematically superior to a perfectly optimized, DIY portfolio. It’s because they solve for simplicity and behavioral discipline. A lower-yield, institutional safety net that actually gets implemented will always outperform a flawless, multi-variable strategy that a stressed retiree fails to build in the first place.
I can’t argue that this is a strategy for the ‘Average Joe,’ even if they live in Lake Wobegon, and perhaps ‘hybrid annuities’ are a reasonable default for these folks. I do hope, however, that the inflation bug doesn’t spoil things for them. Given the state of all things global these days, I worry. If the financial behemoths can invent these things for Joe and Jolene, maybe they can conjure up some options that will help mitigate inflation risk for their customers instead of fully exposing them to it.
Crothers writes: “What if you live to 101 and your ladder finishes at 95? Are you supposed to live on thin air?”
Roth anticipates and addresses that question: “While it doesn’t have the longevity protection beyond 30 years, the Society of Actuaries shows a 65-year-old woman will, on average, live to age 90. If you want more longevity protection, put 10% of that money in a low-cost stock index fund and don’t touch it for those 30 years. It lowers the payment by 10% but provides real longevity protection.”
As to your point about the difficulty of building a TIPS ladder I would encourage the watching of the 2025 Boglehead’s conference presentation titled TIPS Ladders with Kevin Esler. The free tool Mr. Esler has developed makes building a TIPS ladder less complex in my opinion. I like to keep my taxes simple so I only own TIPS is a traditional or a Roth IRA. I have bought my TIPS mostly at auction but have bought some TIPS on the secondary market to fill in my rolling 10 year TIPS ladder rungs.
I would also note that the benefits from annuities are not indexed to inflation where buying individual TIPS, not TIPS funds, will return the real yield rate of the TIPS at purchase plus inflation if held to maturity. With annuities you may benefit from mortality credits from the members of the pool who die early but you suffer the expenses that are associated with annuities. Does the company issuing an annuity have the ability to fulfill their obligation to me under an annuity? Likely they do but I see TIPS as the most riskless asset I can purchase.
I agree with you regarding using a financial ladder, TIPS or other fixed investments, will run out of money when the ladder benefits ends. For me TIPS are just a large part of the fixed income portion of my overall asset allocation. I am a fan of the writings of financial writer David Enna and his website TIPSwatch and his statement about the purpose of TIPS when he wrote I want to state loudly that TIPS are for preserving wealth, not building wealth.
William, I’d still gently push back on the complexity point. I built a ten-year TIPS ladder myself using a similar tool to the one you referenced, so I’m not questioning whether it’s doable. I’m questioning who it’s doable for. Most readers here could probably manage it. The disengaged majority, who make up the bulk of 401(k) participants, can’t tell a bond from a stock, let alone construct a 30-year collapsing ladder.
There’s also a sleight of hand in the article worth noting. The author criticises annuities for spending down your own capital, then recommends a TIPS ladder that does exactly the same thing. The difference is one pools longevity risk and one doesn’t.
However, I agree that an inflation-protected security beats an annuity as part of a properly managed portfolio and income strategy. My issue was never really with the mechanics. It was with the framing. The article assumes a level of financial literacy and engagement that most people simply don’t have.
Just a quibble. It’s a question of who is Roth’s audience. Is it the disengaged majority? I’d argue it’s folks more like the ones who follow this site, and others such as Bogleheads, and might have some healthy skepticism about no-brainer offerings like target date funds with embedded annuities.
That’s a fair point.
That is fair. As a retired CPA (inactive) I do tend to think of many things financial as simple, but the same is true for many topics based on your own career training and experiences.
My expectation is that most who read and particularity those who write or comment on this website will not have any problem with constructing a TIPS ladder should they desire to do so.
A ten years TIPS ladder give non spouse beneficiaries time to hold the TIPS in the inherited retirement accounts to maturity. How to keep them from cashing them out quickly seems to me to be the harder problem.
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Correction: TIPS are inflation adjusted unlike annuities. There are also very cheap ETFs available now that help investors avoid the hassles of figuring out how to manage TIPS individually.
Mark, the inflation adjustment is a real difference, but it doesn’t touch my actual critique point: both strategies spend down a finite pot of money, and only one leaves you stranded if you’re still alive when the 30 years runs out.
On the ETF suggestion: that reintroduces duration risk, which is precisely what a ladder is designed to eliminate. It solves the complexity problem by creating a different one.
There is are the iShares iBonds Defined Maturity TIPS ETFs that have allowed us to easily build a 10-year rolling TIPS ladder (currently offering IBIC through IBIM) that we plan to use to supplement our SS benefits. It makes up 25% of our bond sleeve and are in our tax deferred accounts.
What if you can’t or do want to delay to age 70?
Dick,
I don’t think that Allan thinks this, or any financial concept is for everyone.