That is a model of financial analysis. I really admire how you thought through that.
It's interesting that with all his graphs and graphs, he never ran the annuity alternative. (did he even discuss them?).
I don't think he discussed a rolling bond ladder alternative either.
Have you seen the ARVA article by Stefan Sharkansky? I use a TIPs ladder for my essentials (where the "cost of the insurance" is worth it), but the author takes this idea even further, making an extensive argument that ideally all of one's bond allocation should be a TIPs ladder! The article is no longer available for download but here is a summary, https://alphaarchitect.com/tips-ladder/
Thank you @Jkandell
I had not read this article, thank you for sharing.
The ARVA recommendations in this article is nearly perfectly aligned with my own approach that I have pieced together from various sources. The biggest deviation in my approach is that I don't find a TIPS-ladder covering the full retirement period to be optimal. It's just too expensive given the modest extra protection that it offers. Instead I prefer a dynamically rolling bond ladder of fixed duration that is sufficient to carry the retiree through the majority of potential market extended bear markets.The key foundational observation of that article is that actuarially-variable spending from a 100% equity portfolio will deliver the highest average lifetime spending, but at the cost of high(er) volatility and down-side risk.
The key planning question then becomes
1) What de-risking mechanism offers the best insurance against down-side risk?, and
2) How much insurance against down-side risk do I want to buy, given how much I'll need to pay for it?
I believe that a dynamicaly-rolling bond-ladder offers the most cost-effective risk reduction in early retirement, and annuities offer the best risk reduction in late retirement (esp. if you can buy inflation-adjusted annuities).Most relevant to this thread on bond-ladders is in my own analysis of retirement outcomes across several bond ladder dimensions from which I concluded that a 6-7 year TIPS ladder approximately covering my essential expenses is optimal for me.
Here is a quick summary of the analysis I ran:
Retirement duration: ~50 years
Retirement draw-down strategy: Actuarial spending strategy with zero legacy
Retirement expense profile: ~50% Essential, ~50% discretionary (relative to Y1 spending allowed under Consumption Smoothing or Actuarial spending strategies)Simulations I ran:
1) Traditional Monte Carlo simulations
2) Historical analysisOutcomes I evaluated:
1) Chance of Success
1) 50th-Percentile (Median) Lifetime spending + Legacy
2) 20th-Percentile Lifetime spending + LegacyBond-ladder variables I adjusted:
1) Annual payout as % of Actuarially affordable spending in Year 1: 0%-100% in 10% steps
2) Ladder duration: 0-12 years
3) Bond type: T-Bonds, TIPS, Muncipal bondsIn the end I concluded that the best bond ladder for me was: A 7-YEAR TIPS LADDER covering my "essential" spending
I also tried modeling non-rolling v. rolling ladder variants, but the Monte Carlo simulation engines that I have access to don't model those dynamic "what if" scenarios well. Projection Lab was able to model dynamic rolling "a bit" using their milestones feature and those results seemed to show that a dynamically rolling ladder can provide some benefit over non-rolling ladders. In the end I concluded that the best approach regarding rolling v. depleting bond ladders would be that each year when I receive that year's bond-ladder payout I should re-run the full bond ladder analysis asking the question "What is the best bond ladder structure for me going forward?", and the outcome each year would tell me 1) whether I should spend that year's payout or use the payout to extend the bond ladder another year, and 2) whether I should adjust the future payout magnitudes up or down.
Best regards,
Kevin
@jkandell Can you explain/outline how you use your TIPS ladder? Living off on interest payments, using only when they come to end of term, combination??
It's all hypothetical so far. My bond ladder payments each year consist of interest + maturing bonds. I have a speadsheet that has all my bond in my ladder, and adds up all the interests and maturings for each year. Plan is: Either the money becomes due earlier than needed, and I save it in MM, or I have enough other funds to "cover" the expense until the money I know is comings come due later in the year. I also have a separate small "emergency fund" bucket (which I use the "cash" label for in Pralana) that can be tapped. How do handle your own treasury ladder? As you've noted, zero coupon treasury STRIPs are much easier to plan than this, cause you can ignore the interest till the end and don't need my extra spreadsheet.
@jkandell Not sure what you mean by "It's all hypothetical so far"? Can I assume that your TIPs ladder has not paid out yet?
My US Zero Treasury ladder goes from 2027 to 2042. I have one treasury that comes to maturity each year. I know exactly what the payout will be. Do I need my ladder to be that long? Need is a strong word, I prefer choice 😋. The only reason I extended the ladder in 2025 (most of the ladder was put together in Oct 2023) is because the US stock market kept hitting records highs 🤑. I basically took the stock market profits and bought bonds to keep my AA in the same range. Sell high buy low.
Back to TIPs. Not criticizing, just asking the question, why do you think the 10 year prediction "The current market expectation is that inflation will average ~2.34% over the next 10 years" is any more valid then any other financial prediction of the past 100 years?? 😝
If I were to buy a, say, 5 year TIP today, how much money would go into my money market after the first 6 months from that TIP? I believe they pay out interest every 6 months?
@jkandell Not sure what you mean by "It's all hypothetical so far"? Can I assume that your TIPs ladder has not paid out yet?
Yah, I wrote poorly. I have had TIPs that have already matured; but it was while still working. I haven't yet tested how I'll handle the banking details in the future when it's just SS+TIPs for the year's essentials. But after all, I do have a discretionary account as well to "fill in" if need be. But in all likelihood I won't be using the TIPs returns literally to pay the expenses.
Back to TIPs. Not criticizing, just asking the question, why do you think the 10 year prediction "The current market expectation is that inflation will average ~2.34% over the next 10 years" is any more valid then any other financial prediction of the past 100 years?? 😝
I don't! It's the very fact I don't trust that number that drives me to TIPs.
I don't buy TIPs because of that magic number or to beat treasuries; I buy them because if inflation turns out to be 5% I'll have enough when the time comes. I think of TIPs as buying inflation insurance, not as a way to get the highest expected return. In fact, economic theory says they should be a bit lower than treasuries due to their certainty.
And I'm with you about the simplicity of zero-coupon bonds. The zero-coupon version of TIPs are iBonds, and I own a lot of those too.
If I were to buy a, say, 5 year TIP today, how much money would go into my money market after the first 6 months from that TIP? I believe they pay out interest every 6 months?
The coupon part works just like "normal" treasury bonds. The only difference is the principle gets adjusted every six months to reflect inflation. So every six months you get a fixed % coupon payment but reflecting that changing inflation adjustment principal.
@jkandell Great response as usual. Just looking for clarity, if I bought a 5 year TIP today at todays rate, and assuming inflation stays the same for the next six months, what would be the actual interest payment % in 6 month? For example, if the interest payout was 2.5%, do you get 2.5%/2 of the beginning price of the TIP after the first 6 months??
OK Kevin @boston-spam-02101gmail-com this is your thread, time to cough up your retirement plan so hopefully others will follow 😋. Don't worry, we will be gentle 🙃.
OK Kevin @boston-spam-02101gmail-com this is your thread, time to cough up your retirement plan so hopefully others will follow 😋. Don't worry, we will be gentle 🙃.
Okay, please see plan below.
All feedback would be appreciated.
This is my second attempt to post a summary of my retirement plan. First attempt was lost when I spend too long writing and the connection to the server timed out.
I'll update this message whenever I realize what I missed.
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Demographics
- Status: Retired
- Current age: 48
- Planning age: 100
- Marital Status: Single
- Family:
- Live-in long-term partner (51F)
- Neither of us have children
- Housing: Renter
Residency & Cost/Standard of Living
- 2025 - Boston, MA ($235/yr, Pre-retirement)
- 2026 - Rochester, NY (est ~$145k/yr)
- 2028+ - Charleston, SC (est ~$165k/yr)
Investment Assets
- Self
- Taxable Equities = $3.7M
- Taxable Bonds (TIPS) = $1.2M
- 401k Equities = $0.7M
- HSA = $26k
- Partner Assets
- Excluded from plan.
Asset Allocation
- Cash: Hold ~1yr of planned expenses in cash for convenience
- Bonds:
- TIPS ladder (7 yrs x $145y/yr)
- A dynamically rolling bond ladder to be gradually depleted during equity bear markets and extended whenever real portfolio value exceeds original plan forecast. Expected to result in increasing equity glide path.
- TIPS ladder (7 yrs x $145y/yr)
- Equities:
- 60% US Large Cap (VOO)
- 35% International Total Mkt (VXUS)
- 5% US Small & Mid Cap (VXF)
- Annuities:
- When/if efficiently-priced annuities that are indexed to inflation return to the US market, I will seriously consider purchasing enough annuity coverage to guarantee my future essential spending (~$145k/yr). I anticipate this to be cost-optimal circa age 80.
Retirement Income
- Deferred compensation: 2026 = $735k, 2027 = $205k
- Social Security_SELF = ~$40k/yr starting age 70
- Social Security_Partner = ~$30k/yr starting at HER age 70
Spending Strategy: Actuarial / Variable Percentage Withdrawal
Legacy Goal: Zero
Spending Targets:
- Spending Floor = $165k/yr
- Target Spending = Max sustainable spending (est ~$350k/yr)
- Planned Spending Evolution By Year
- 2026-2031 - Ramp up from ~$165k/yr to max sustainable spend in 2031
- 2032+ - Max sustainable spending (est ~$350k/yr)
Roth Conversions
- Current Plan - Large conversions from 2028-2031 take 401k to zero by 2032, optimized to maximize net effective legacy under consumption smoothing spending strategy
- Future Plan - Maintain ~$200k (real) in 401k from 2032-2077, continuing to perform annual Roth conversions in no/low tax-brackets
Long Term Care
- Self-insured/planned LTC expense of $100k/yr from age 97-99 (net incremental)
Capital Market Assumptions
- Inflation (Updated periodically based on Forecast from Cleveland Fed)
- 2026-2035 = ~2.3%
- 2036-2077 = ~2.4%
- Real Rates of Return (Updated periodically based on *TIPS & ** A. Damodaran analysis of market pricing implied equity risk premium)
- Cash = 1%
- Bonds = 1.85%*
- Stocks = 5.5%**
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Current Outlook
- Maximum Sustainable Spending
- Planning SW - Withdrawal Strategy - Simulation Method - Capital Mkt Assumptions - Sustainable Real Spending
- Boldin - Max Spending - Deterministic - Boldin Defaults (Moderate Returns - Average) - 364,730
- Income Lab - GuardRails (Flat Income) - Traditional MC - Income Lab Defaults - 359,000
- Pralana - Actuarial - Deterministic - Custom (NYU, A. Damodaran) - 354,342
- Projection Lab - Variable Percentage Withdrawal - Deterministic - Custom (NYU, A. Damodaran) - 357,100
- Planning SW - Withdrawal Strategy - Simulation Method - Capital Mkt Assumptions - Sustainable Real Spending
- Chance of Success (Scenario: Target Spending = Max sustainable spending, with $165k floor)
- Boldin - No CoS for Max Spending strategy. For fixed spending: 99% @ $165k, 92% @ $235k, 64% @ $350k
- Income Lab - No CoS for Guardrails strategy. 59% chance of underspending, 41% chance of overspending
- Pralana - 86% (90y) -> 72% (100y) (There's only a ~10% chance I'll live past age 98)
- Projection Lab - 92.1%
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Plan Management
- Plan refreshed annually to determine then current-year affordable spending and Roth conversions
- Bear-market plan calls for re-balancing into equities and accelerated Roth conversions during bear markets
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Attachments - I'll attach 3 files to the upcoming messages:
- Input1 - Pralana Input file based on Actuarial Spending Strategy
- Results1 - Pralana Results file based on Actuarial spending strategy - in Monte Carlo Charts the Red Lines & Blue bands = Actuarial solution
- Results2 - Pralana Results file based on Consumption Smoothing spending strategy - in Monte Carlo Charts the Red Lines & Blue Bands = Actuarial, Yellow Lines = Consumption Smoothing
@boston-spam-02101gmail-com Kevin you are the definition of FIRE, great job!
First observations:
The average annual cost of nursing home care in the U.S. is approximately $111,325 for a shared room and about $127,750 for a private room. So you might want to up your costs for long term care.
I think assuming inflation will stay around 2.4% over the next 50 years or so is extreme wishful thinking, respectfully 😏. I know retirement planning is or should be dynamic, but this may give you a false sense of long term security.
Not sure I follow how you are going to do Roth conversion. Sounds like just from your 401K. Your going to be in a high tax bracket so how will this work??
Living in the Midwest I am always amazed by the high cost of living on the east cost.
I like your plan for an increasing equity glide path.
I know I am a lone wolf, but I think 35% AA in international equites is a little high, especially since you are looking at a 50 year retirement.
That's it for know. It looks very good!!
That is a lot to go through, I didn't make it through everything. A couple of thoughts:
I do not follow the logic behind Roth conversions at very high tax rates and then ending up with many years with zero taxes. I don't believe that's actually profitable. Is that really the plan Pralana suggested? Note that if you need long term care, LTC would be tax deductible but by pre-paying those taxes with Roth Conversions, you would be out of luck.
Why not a more tax efficient portfolio where you put your bonds preferentially in tax deferred? See the bogleheads.org wiki on tax efficient fund placement. Holding bonds preferentially in tax deferred works better because it matches the taxation of tax deferred as ordinary income with the taxation of the investment. That leaves more stocks for taxable where their primary growth would be taxed as LTCGs. You can model that with Mode 2-Advanced Portfolio Modeling in Pralana, though you should understand that direct comparison to Mode 1 is not reliable as it requires an adjustment in the quantity of bonds in tax deferred to correct for the taxes due on them and that's a very hard to pin down number that Pralana doesn't adjust for. That's also explained in the bogleheads.org wiki if you want to read up on it. A tax efficient portfolio inherently slows the growth of tax deferred and so reduces the need for Roth Conversions.
While you have no legacy goal, you have a partner that may be your heir and she would rather not inherit HSA money as the balance would be immediately taxable. Your stored up receipts become useless, or as my CPA put it, they fly off to heaven with you. So once you have to choose between HSA money and Roth money to spend, spend HSA money up to the limit of your medical receipts (which includes Medicare B and D costs).
The attempt to spend down your bonds in bad markets is not readily modeled in Pralana. Karsten Jaske (retired Fed economist) at EarlyRetirementNow.com did a study using monthly historical data and found that whether it outperforms a constant allocation is more a matter of chance than anything else. For every plan, there is a market that makes it a bad plan and a market that makes it a good one, you just don't know which you will get. Holding a constant asset allocation tries to steer you down the middle, avoiding the worst cases by not trying so hard to optimize things.
Is anyone else willing to share their retirement plan? Don't have to go into as much detail as I or Kevin went into.
