Building a ladder of individual TIPS—the Treasury’s Inflation-Protected Securities—with a different bond maturing in each year of your retirement can help investors take advantage of the current high real yields.
I’m referring to the famous research from William Bengen in 1994 that focused on how much a retiree could withdraw from his portfolio every year and be sure not run out of money over a 30-year retirement. Based on U.S. stock and bond data from 1926 to 1991, he found that a 50% stock/50% bond portfolio could support withdrawing each year an amount equal to 4% of the portfolio’s net worth at the beginning of retirement .
The strategy is in concept very simple, though as I will describe further in a minute, it is not a panacea and executing it takes some effort. The strategy calls for building a ladder of individual TIPS—the Treasury’s Inflation-Protected Securities—with a different bond maturing in each year of your retirement. TIPS, of course, are similar to traditional Treasury notes and bonds except that their quoted yields are above and beyond changes in the Consumer Price Index.
Since this 4.3% guaranteed spending rate is so attractive, you might consider this TIPS ladder strategy to be a no-brainer. But there are several things to keep in mind about it:
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