So, 2.57% yield plus 2.7% CPI-U inflation = 5.27%. Really?? So why not invest all your money in 30-years TIPs and retire happy?
TIPS have some features that you should think about before going all in.
The interest, including the inflation adjustment, is taxable each year, so inflation still eats away somewhat via taxes on the inflation adjustment. In a 22% tax bracket, 9.2% inflation would cause enough taxes on the inflation adjustment to wipe out your 2.6% yield [0.026*(1-.22)/0.22 =0.0922] . In a true hyper-inflation, the taxes will wipe you out just as surely as a conventional bond holder, just more slowly.
The maximum duration is 30 years, you may live longer than that, so I would make sure you have some left over each year to roll into the future in case you wake up old one day.
There are some complexities when buying as you are usually buying on the secondary market, so there is a wide variety of choices - differing guaranteed yields, different valuations, etc. so there is a learning curve in deciding which to buy. There are years where no TIPS of the duration you want were issued, you have to work your ladder around that. There is a nice tool called tipsladder.com that can help you build a ladder, working around the gap years and letting you select what to favor when buying - you tell it how much you want each year and it's output is a list of CUSIPS and quantities to buy and total cost. There are some threads at bogleheads.org about the nuances of picking what to buy.
Like any bond, it will not look like a good investment if interest rates rise. You will still get your contracted amount, but had you bought at a better time you would have done better.
Like any bond ladder, it can be rigid, if you need more money, you have to sell at the market rate. Intermediate term TIPS funds went down about 14% in 2022, which was better than similar duration nominal bond funds, which fell 16%, but it's not magic.
Overall, there is a case to be made that a secure retirement would include liability matching for at least the necessities. If you have a mortgage, then a ladder of nominal bonds is just fine for that, but for other expenses that you expect to rise with inflation, a TIPS ladder is a better choice. Of course if that's your goal, the first thing to do is maximize your SS benefits since that is not only inflation adjusted, but lasts your whole lifetime, not just a maximum of 30 years.
TIPS have some features that you should think about before going all in: Real taxes on Nominal inflation adjustments, max duration of 30 yrs, gaps/limitations in TIPS available, and yield volatility if not held to maturity
@Ricke, Those are great points!
The Real tax expense on the Nominal annual inflation adjustments is one of the important reasons that I chose to buy a dynamically rolling TIPS bond ladder in the 5-15yr range, rather than a fixed, depleting 30 yr ladder. The larger your taxable TIPS account, the higher the taxes on the inflation adjustments!
I found that historically, the dynamically rolling TIPS bond ladder would have offered much of the benefit of the longer fixed, depleting ladder (re: Chance of Success protection) at a much lower investment/opportunity cost AND with much lower annual tax expenses.
Of course the tax expense doesn't matter if you buy your TIPS in a tax-free account (which I did not).
You're finally coming 'round, Pizzaman. 🙂
Don't get too excited @jkandell, I am not changing anything 😋. It's nice you acknowledge that stocks do very well over time, dare I say you are coming 'round? 😆
In terms of inflation and the benefits of TIPs, an ominous new warning issued Thursday by the Committee for a Responsible Federal Budget (CRFB), the United States national debt has reached a precarious milestone, hitting 100% of Gross Domestic Product (GDP) and placing the nation on a trajectory that could trigger distinct types of fiscal crises, including rising inflation:
2. Inflation Crisis: To avoid default or bank failures, the Federal Reserve might be pressured to “monetize” the debt—printing money to buy Treasury bonds. This could spark spiraling inflation, eroding savings and purchasing power, similar to historical crises in Argentina or the Weimar Republic.
Hedge fund billionaire Ray Dalio has been consistently warning, including in conversation this week with Fortune from Davos, Switzerland, about the risks of the U.S. monetizing its debt. When it comes to the U.S. economy, Dalio has long been a vocal critic of the rapidly rising national debt, and told Fortune that he now thinks the crisis is so great that we are dealing with the “breakdown of the monetary order,” bringing up the grim choice: “Do you print money or do you let a debt crisis happen?”
However, on the flip side:
Financial Crisis: If investors lose confidence in the U.S. Treasury market, interest rates could spike uncontrollably. This would devalue existing bonds, potentially triggering cascading failures at banks and financial institutions.
https://finance.yahoo.com/news/form-crisis-almost-inevitable-38-180855339.html
So much for simple answers ☹️. My take is to use a balanced asset allocation.
You're finally coming 'round, Pizzaman. 🙂
Don't get too excited @jkandell, I am not changing anything 😋. It's nice you acknowledge that stocks do very well over time, dare I say you are coming 'round? 😆
I openly acknowledge the expected return on stocks is much higher than TIPs. I've given my reasons for keeping my essentials in TIPs in my response to Kevin above: most notably: close to infinite risk aversion (since it is food, medical, housing, with no "safety net" of intergenerational wealth or an expensive home).
This is the reason I should not under-invest in TIPs nor over-invest in TIPs.
2. Inflation Crisis: To avoid default or bank failures, the Federal Reserve might be pressured to “monetize” the debt—printing money to buy Treasury bonds. This could spark spiraling inflation, eroding savings and purchasing power, similar to historical crises in Argentina or the Weimar Republic.
...However, on the flip side:
Financial Crisis: If investors lose confidence in the U.S. Treasury market, interest rates could spike uncontrollably. This would devalue existing bonds, potentially triggering cascading failures at banks and financial institutions.
https://finance.yahoo.com/news/form-crisis-almost-inevitable-38-180855339.html
So much for simple answers ☹️. My take is to use a balanced asset allocation.
Those two factors you cite (inflation crisis and interest rates spiking uncontrollably) are arguments for an individual TIPs ladder.
Nothing hedges unexpected inflation like a TIP--
Here's a chart from an excellent Vanguard white paper examining various hedges to inflation:
You'll note short-term TIPs and Gold are the most correlated with unexpected inflation. Notice that SP500 has a negative correlation with unexpected inflation. Stocks are among the least correlated. And they are also the most correlated for expected inflation.
But those interest spikes are important: nominal bonds are absolutely devasted. But short term TIPs are not. And held to maturity, spikes are irrelevant.
A complete breakdown of the financial system would not be good for various reasons-- but the issues you cite are argument for TIPs (with some Gold, possibly) and against US stocks, not against.
The Real tax expense on the Nominal annual inflation adjustments is one of the important reasons that I chose to buy a dynamically rolling TIPS bond ladder in the 5-15yr range, rather than a fixed, depleting 30 yr ladder. The larger your taxable TIPS account, the higher the taxes on the inflation adjustments!
I found that historically, the dynamically rolling TIPS bond ladder would have offered much of the benefit of the longer fixed, depleting ladder (re: Chance of Success protection) at a much lower investment/opportunity cost AND with much lower annual tax expenses.
Can you say more how a rolling 5-15y TIPs ladder minimizes the awful OID taxation on principal compared to a 30 year ladder? And why did you choose to build the ladder in your taxable rather than tax-deferred accounts?
The Real tax expense on the Nominal annual inflation adjustments is one of the important reasons that I chose to buy a dynamically rolling TIPS bond ladder in the 5-15yr range, rather than a fixed, depleting 30 yr ladder. The larger your taxable TIPS account, the higher the taxes on the inflation adjustments!
I found that historically, the dynamically rolling TIPS bond ladder would have offered much of the benefit of the longer fixed, depleting ladder (re: Chance of Success protection) at a much lower investment/opportunity cost AND with much lower annual tax expenses.
Can you say more how a rolling 5-15y TIPs ladder minimizes the awful OID taxation on principal compared to a 30 year ladder? And why did you choose to build the ladder in your taxable rather than tax-deferred accounts?
Hi @jkandell,
Sure, I'll try to do Dynamically Rolling TIPS Bond Ladders (DRTBLs) justice in this message. Next message will be shorter and I'll comment on why I've placed my TIPS ladder in my taxable accounts.
Very Short Version: With a DRTBL you can buy less TIPS, so you'll pay less taxes.
TLDR version: The 10-year DRTBL offers >90% of the protection of a 30-year TIPS ladder at less than half the cost, while effectively eliminating (most of) the emotional stress of market volatility.
Below is a breakdown of why I believe a 5-15 year rolling ladder is the "sweet spot" for long-term retirement planning, specifically regarding sequence risk and cost efficiency.
1. The Strategy: Rolling vs. Sinking
A DRTBL isn’t a static investment; it’s a "mechanical switch" for your portfolio:
- During Bull Markets ("The Roll"): You sell equity gains each year to buy a new "rung" at the end of your ladder (e.g., Year 10). This maintains a constant 10-year safety buffer.
- During Bear Markets ("The Sink"): You stop selling stocks entirely. Instead, you live off the maturing TIPS rungs. The ladder shortens, giving your equities the necessary time to recover without "cannibalizing" them at a loss.
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2. Historical Context: Why 10 Years?
Looking at U.S. market data from 1900–2025 (Real Total Return, including dividends and inflation), we see that bear market recoveries are rarely permanent obstacles:
- Total Bear Markets: ~33 to 35
- Recoveries < 5 years: 26 to 28 events
- Recoveries > 5 Years: 7 events
- Recoveries > 10 Years: Only 3 events (1929, 1973, 2000)
- Recoveries > 15 Years: Only 1 event (1929)
Key Takeaway: A 10-year ladder would have fully insulated a retiree against >90% of all historical bear markets.
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3. My Philosophy on the "Long Tail, Long Recovery" Risk
Both my parents are in their 80s, and live happily spending just their combined social security today.
Since I am under 50 and planning for a 50+ year retirement, I’ve made a conscious choice not to over-insure:
- The 20-Year Down Market: I view a 20+ year market stagnation as a "black swan" event. Insuring against it with a 30-50 year static ladder is prohibitively expensive in terms of opportunity cost.
- The Mitigation: Even if a bear market lasts 11 years, a 10-year ladder takes the "sting" out of it—you only experience 1 year of actual equity depletion. If the "long-shot" 20-year crash occurs, I will try to return to work in some way or (painfully) adjust my lifestyle downwards to a Social Security baseline.
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4. Efficiency: 10-Year DRTBL vs. Static 30-Year Ladders
A 10-year rolling ladder is significantly more cost-efficient than a traditional 30-year static ladder for two reasons:
A. Lower Opportunity Cost To secure $10k of annual real income:
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- A 30-year ladder costs ~$225k today.
- A 10-year ladder costs ~$97k today.
- By choosing a 10-year DRTBL, you keep more capital in the stock market, where it can capture long-term equity growth. (Opportunity Cost)
B. Reduced Interest Tax & "Phantom Income" (OID) TIPS held in taxable accounts are subject to OID (Original Issue Discount) tax on inflation adjustments. Because a 10-year ladder requires less than half the capital of a 30-year ladder (43% of the cost), your annual interest tax and "phantom tax" bill and opportunity cost are all reduced by roughly 2.3x.
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Conclusion & Summary: The DRTBL offers >90% of the protection of a 30-year ladder at less than half the cost, while effectively eliminating the emotional stress of market volatility.
Note: The above "heuristic" argument about bear market durations, percentage-proection, and relative-costs is my back-engineered attempt to explain my personal choice in a more generalizeable way. My personal choice was based on my own analysis of a series of Monte Carlo and Historical Back-testing simulations where I compared retirement plan outcomes for plans incorporating TIPS bond ladders of various durations and varying payouts per year.
Can you say more how a rolling 5-15y TIPs ladder minimizes the awful OID taxation on principal compared to a 30 year ladder? And why did you choose to build the ladder in your taxable rather than tax-deferred accounts?
Hi @jkandell,
Sure, I'll try to do Dynamically Rolling TIPS Bond Ladders (DRTBLs) justice in this message. Next message will be shorter and I'll comment on why I've placed my TIPS ladder in my taxable accounts.
Hi @jkandell,
There are two primary reasons why I've placed my TIPS ladder in my taxable account.
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1) Tax-Deferred Portfolio Capacity - It wasn't going to fit.
- Based on my analysis of the optimum cost/benefit tradeoff for my situation, I purchased an 8.5-year TIPS ladder paying our ~$145k/yr at a price of ~$1.2M
- I've since concluded that I may be better shortening this ladder to 6-7 years, but 8.5ys is what I currently have in my portfolio.
- Total value of all my Tax-deferred accounts is $0.9M (401k + IRA + Roth IRA + HSAs)
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2) Tax-Drag from Displacing Equities - "The Opportunity Cost of missing out on all those years of tax-free equity growth from holding equities in my Tax Deferred Accounts is more than the direct costs of the TIPS taxes in my taxable accounts" - My former paid financial advisor
- For a brief time I worked with a paid financial planner and I directed him to provide me a simulation-based analysis to determine whether it would be better for me to hold ~$700k of TIPS in my Taxable or Tax Deferred accounts
- He and I both assumed that the analysis would come back showing that it was better to hold the TIPS in the tax-deferred account
- To our surprise, he found that the Legacy Value and Chance of Success were slightly better when holding the TIPS in the Taxable account
- He was surprised and reviewed his analysis with his firm's eMoney financial analysis support team, and they agreed with his finding
- Their interpretation was that; Placing $700k of TIPS in my Tax-deferred accounts pushed $700k of equities out of my Tax-Deferred accounts and into my Taxable accounts, and that created enough tax-drag that I was better off keeping the TIPS in Taxable.
- I'm not totally convinced of their finding or reasoning, but that's what they reported to me. I'll need to replicate the findings through my own analysis at some point before I'm 100% sure.
Not surprisingly I found a research article that says stocks are good protection from inflation:
A time-honored belief holds that inflation is bad for stocks, but recent developments may be challenging this view.
Recent events have challenged this principle, begging the questions of how it arose in the first place and whether inflation really is bad for stocks in today’s world. The narrative originally gained prominence in the 1970s, a time when inflation in the United States was persistently high and stocks suffered; however, several other factors impacted the economy, inflation, and markets during that period.
- The period began with the United States’ retreat from Vietnam, which caused the wind down of associated expenditures that were primarily in the defense sector but would eventually ripple throughout the broader economy.
- In August 1971, President Nixon closed the gold window, upsetting financial markets. The effects of this move were further exacerbated by loose Federal Reserve policy later in the decade, which undermined faith in the value of the dollar.
- In 1973 and 1974, OPEC placed an embargo on oil exports to the countries supporting Israel — principally the US and UK — heavily impacting prices throughout the US economy and causing a severe recession.
- The five years leading up to the oil crisis had witnessed a strong bull market for US stocks, with valuations for the most-favored stocks of the day (known as the “Nifty Fifty”) reaching more than double the S&P 500 as a whole.
Challenges to the narrative in recent years have taken the form of domestic and foreign stock markets performing well in high-inflation environments.
This decade has witnessed the highest level of inflation in the US since the early 1980s. Despite this, since the beginning of 2020, the S&P 500 has risen 81%, while the CPI during that same period has risen only 23% (my bold)
Any number of factors could explain the disparity between the 1970s scenario and these recent examples; however, we are confident that several changes over the last 40 years have likely played a role. Stock market participation has become far more accessible, inexpensive, rapid, and liquid than ever before. A few examples of these changes include:
- Since the 1970s, transaction costs have plummeted. Before 1975, commissions on stock trades were fixed by law at levels that often resulted in fees of hundreds of dollars. By using progressive steps over the decades, commissions today are essentially zero.
- Fifty years ago, settlement time, meaning the number of days from the order to purchase or sell shares until the payment and securities actually change hands, was five days (referred to as “T+5”). Gradually, as trading technology has improved, security regulations began requiring shorter settlement times to the point that, in 2024, the standard became T+1, and there is talk that it may eventually get to T+0.
- Previously, stocks were quoted, bought, and sold in increments of 1/8 of a share. That means the smallest amount a price could change was 12.5 cents. This had a negative effect on trading volumes and liquidity. Starting in the late 1990s, computerizing the process led to decimalization of quotes and trading, which increased liquidity and made the entire process of buying and selling easier.
- Internet technology may have done more than anything to make participation in the stock market easy, accessible, and affordable to virtually the entire adult population. Stock trades used to require relatively exclusive brokerage accounts and telephone communication between broker and client. Now, we trade via cellphone.
- Index ETFs, which did not exist decades ago but are now as broadly available and investable as stocks themselves, give individual investors with modest amounts of money the ability to own broad baskets of stocks and achieve diversification as never before.
Taken together, these regulatory and technological changes have made access to and participation in the stock market almost as easy as using a common bank account.
Does ease of use change or broaden the reasons why people might choose to invest in stocks? Traditionally, we have always associated stocks with long-term investing for the accumulation of wealth. Meanwhile, we have associated other investments, such as Treasury securities, with the preservation of wealth and protection against inflation. Might that be changing? Might the improved liquidity, cost, and accessibility of the stock market, combined with the ability to easily diversify and reduce risk, inspire investors to use stocks as a store of value and an inflation hedge? We have seen evidence of this in certain foreign markets, and we recognize the possibility that this could happen in the US as well. We see this as one more potential reason why stocks might perform better than expected, even in an inflationary environment.
https://www.advisorperspectives.com/commentaries/2025/03/19/could-stocks-serve-inflation-hedge
” Nothing hedges unexpected inflation like a TIP—”
During hyperinflation (hundreds percents per year) all bonds including TIPs will lose their value. Stock indexes may recover in the long run. Anything with real value (such as houses) will probably be the best hedge. (I am not sure if gold will retain its value). But the risk of hyperinflation in the US is very low.
” Nothing hedges unexpected inflation like a TIP—”
During hyperinflation (hundreds percents per year) all bonds including TIPs will lose their value. Stock indexes may recover in the long run. Anything with real value (such as houses) will probably be the best hedge. (I am not sure if gold will retain its value). But the risk of hyperinflation in the US is very low.
@hecht790, I agree; Hyperinflation would effectively devalue TIPS through the taxes imposed on the TIPS inflation-adjustment markups.
That said, personally I don't think Hyperinflation is plausible in the USA in the next 20-30 years. It seems to me that a much more likely path to addressing a US debt crisis would be tax increases and austerity measures. I suspect that hyperinflation is what governments do when they can't tax their way out of the situation.
Affordability of Insuring Against Long-Tail Risk: Personally I think that trying to drive risk to Zero isn't affordable, at least for me.
Truly taking the idea of insuring against long-tail risk to drive risk to Zero would mean incurring expenses by taking actions to simultaneously achieve 100% protection against both large scale risks like nuclear war, global biological pandemic, and meteor-strikes in your neighborhood, and small scale risks like car accidents, trip & falls, and home-invasion break-ins. I can't even begin to image the cost of driving even one of these risks down to absolute Zero, much less driving all of them to Zero simultaneously.
Not surprisingly I found a research article that says stocks are good protection from inflation:
@Pizzaman,
I agree that long-term stocks are a reasonable protection against inflation, because they represent a claim on future corporate earnings. If the future revenues, costs, and earnings are all "re-valued" through (hyper)inflation the price of stocks will also just revalue to the new currency standards IF the companies survive the period of economic turmoil around the hyperinflation.
Here's a really scary thought for you; Our entire investment system of stocks is based on the assumption that earnings will increase, and therefore prices will increase. Investors look into the future and set today's price for stocks by forecasting future earnings. But what happens when investors look into the future and they predict that global future earnings will start to decline? What if global & US populations start to decline, so that eventually people build and buy less stuff? What would happen to Coca Cola stock price if the beverage sales cut in half because the population cut in half? The prices will start to fall and never recover!
Have you considered that we DO expect global populations to decline by the end of this century?
I hate to imagine what will happen to global stock market valuations if population declines cause the very long-term forecast of annual economic growth to drop from +1% to -1%? We can hope that productivity increases will save us, but it's not hard to imagine populations cutting in half every generation (South Korea, Japan) and the productivity increases failing to save us.
I have to believe that productivity increases would be related to population growth because more people means more people innovating, and less people means less people innovating. How can innovation accelerate when there are fewer people to innovate? AI maybe?
” Nothing hedges unexpected inflation like a TIP—”
During hyperinflation (hundreds percents per year) all bonds including TIPs will lose their value. Stock indexes may recover in the long run. Anything with real value (such as houses) will probably be the best hedge. (I am not sure if gold will retain its value). But the risk of hyperinflation in the US is very low.
Good point about hyperinflation. A more robust mix would be short-tips, gold, commodities. Gold for the "melt-down" sort of scenario, commodities (and "real value") for the hyperinflation, the TIPs for the generic unexpected inflation.
Affordability of Insuring Against Long-Tail Risk: Personally I think that trying to drive risk to Zero isn't affordable, at least for me.
Truly taking the idea of insuring against long-tail risk to drive risk to Zero would mean incurring expenses by taking actions to simultaneously achieve 100% protection against both large scale risks like nuclear war, global biological pandemic, and meteor-strikes in your neighborhood, and small scale risks like car accidents, trip & falls, and home-invasion break-ins. I can't even begin to image the cost of driving even one of these risks down to absolute Zero, much less driving all of them to Zero simultaneously.
But there is probably an ideal rate of "insurance" between 0 and 100%, e.g. 5%-10% Gold on the efficient frontier, maybe commodities.
Are there plenty of things to worry about, sure, but worrying about big problems that are unlikely to happen, especially those that we have no control over, well, are not worth worrying about. If these big problems were to come to fruition, it will not have mattered what your asset allocation (AA) was or what your retirement plan was, they all will fail. So, don't worry, be happy 😛. In fact, I have a challenge for PRC users. Run PRC with historical averages (inflation, ROR of stocks and bonds, 2% healthcare increase, 60/40 AA (include developed foreign markets if you wish), etc. Compare the results with whatever plan and inputs you are using now, and see what happens. Are there big difference? Is your adjustments to historical averages based solely on risk, your predictions about the future, something else?
Are there plenty of things to worry about, sure, but worrying about big problems that are unlikely to happen, especially those that we have no control over, well, are not worth worrying about. If these big problems were to come to fruition, it will not have mattered what your asset allocation (AA) was or what your retirement plan was, they all will fail. So, don't worry, be happy 😛. In fact, I have a challenge for PRC users. Run PRC with historical averages (inflation, ROR of stocks and bonds, 2% healthcare increase, 60/40 AA (include developed foreign markets if you wish), etc. Compare the results with whatever plan and inputs you are using now, and see what happens. Are there big difference? Is your adjustments to historical averages based solely on risk, your predictions about the future, something else?
I disagree. The whole idea of insurance is to cover rare but catastrophic things. Everyone owes it to themselves to stress test their plan (incluidng but not just with stuff like "suppose health care continues to go up 3% above inflation for the duration of my plan", "suppose inflation is 5%"); but with also very rare events and at least considering the so-called "Black Swans" (risks not really quantifiable) that can ruin your whole plan. The Long-term capital near destruction of the whole world economy was based on the fallacy that rare events won't happen--because they're rare. That doesn't mean obsessing about it, or spending too much for such insurance. But at least having a plan for these rare events is entirely rational if the event would lead to catastrophe.
The question to ask yourself is: Is there an efficient and affordable way to insure against this rare event or at least mitigate the damage? Sometimes there's nothing you can do. Often there are things you can do to mitigate the damage and prevent catastrophe.
I know during 1930s Germany some families survived by having such contingency plans (like planning to emigrate), and some didn't because "why worry about a rare event" and were exterminated. That's a dramatic--but real--example.
