No. of Recommendations: 11
JIm, do you mean better to buy tips Ladder or just tips a certain year out.
We are a couple 85 years old no kids.
A TIPS ladder is a fine way to turn capital into income with no inflation risk. But it doesn't by itself address the issue of longevity risk: you might live 2 years, or 20+ years. What length ladder do you choose?
My suggestion was in the context of how to make an annuity work better, with a focus on longevity risk. i.e., avoiding being both unusually old and unusually broke at the same time.
If you don't need income from a given block of capital till (say) 5 years from now, you have several choices. One of them is to buy a deferred annuity. Another would be to buy 5 year TIPS, and buy an immediate annuity when it matures. My contention is that the second one is a very much better choice.
Now, this could be chopped into chunks. Maybe you want some income to kick in 3 years from now, and some 6 years from now, and some 10 years from now, for some reason*. In that case you might use that strategy in three chunks, with 3- 5- and 10-year TIPS, each one going into an annuity as it matures. In that case it would look a lot like a TIPS ladder, but only sort of by coincidence in this situation.
* the reason I mention this "some other reason" is that my main recommendation for younger retirees, say 60-65, goes like this:
- Put a fraction of your money, say 10-20%, into the strategy above: TIPS-then-annuity-at-old-age, maybe 85, whatever.
- Spend the rest of your portfolio in a more or less straight line so it runs out just as the first smaller chunk starts creating income. The two can be balanced to give about the same real income, no matter how long you live. The portfolio can remain invested, and you probably need only fairly small adjustments to your withdrawals since the end date is known.
The reason for this suggestion is that it is almost impossible to plan a portfolio withdrawal scheme that won't leave you broke if you live an unusually long time, but still allows you to benefit from most or all of the value in your portfolio. The scheme above is easy to do, and meets both goals. Only pooled schemes handle longevity risk at a sane cost. Since you are already in step two, the suggestion in this direction (which may or may not be best for you, it's just a suggestion) would be maybe two chunks. Some immediate annuity--the payouts aren't bad for 85 years olds--and optionally some in TIPS to turn into an annuity in a few years. The second chunk gives an income boost when inflation starts to erode the real income from the first chunk, and gives you a boost if perhaps you need extra care.
Jim
