No. of Recommendations: 8
Given that background, do folks think that building a TIPS ladder at these levels is a better solution for a retirement portfolio than other kind of bond holdings? Im curious about the % of ones portfolio one might assign to this, and how to think about the ladder construction.
For what its worth I'm mid / late 50s, ~ 5-7 years away from retirement
I pretty much agree with sutton about TIPS vs straightforward Treasuries. Unless you have some particular reason to worry about inflation, I would just go ahead and buy a small amount of treasuries; on the other hand, TIPS would do the job fine, too. I don't think any of us can really outguess the market about whether inflation is going higher or lower, so I would tend to be agnostic about TIPS vs treasuries too.
On the other hand, apart from how long it is until retirement, I would say it is also important to consider how much a person has in savings, in relation to the annual income they expect/desire/require in retirement. For instance, if you were to say that you expected to continue getting $200,000 a year and had $5 million saved already, then I would say you can comfortably withdraw about 5 years' worth of revenue (say $1,000,000, or 20% of your portfolio, like the 20-25% you mention), and then, with the help of any other pension funds you might have plus dividends from your stock holdings, you are safe to get through a 8-10 year slump in the stock market. But if you had $10 million in savings, by the same logic, you would only require 10% in your fixed income (treasuries) portfolio, and you would be better to keep the rest in stocks that will probably provide a better long term return.
It is possible to make the case that stocks are very highly valued right now, and that a higher percentage of fixed income (like 30-40%) may actually not cost you anything, in terms of expected return compared to stocks. With S&P 500 stocks paying an earnings yield of 4.1% right now, and with 1-y treasuries at 5.5% (as they say, the 'income' is back in 'fixed income'), it might be prudent to have treasuries, not just to provide income to get through a stock slump, but to have cash available to take advantage of that stock slump. In that case, you want enough cash and treasuries to provide for income AND investment opportunities. I think this makes sense, but I haven't pulled the trigger on this strategy myself.
You also mentioned the question of annuities. The big disadvantage of annuities is their very high cost, in comparison to the expected return. I think you really have to think of them more as an insurance policy (that you expect to lose money on) than an investment. The idea is to be able to cut off the tail of your life expectancy, say above the age of 85, where you have a fairly high probability of already having left the scene, but for which you would normally have to still have funds available, just in case. So you attribute a small percentage of your total investments to that annuity, a cheap one because of the advanced age, and can confidently plan for drawing down your assets from, say, the age of 65 to 85, allowing you to make much higher annual distributions to yourself than if you had to have funds available just in case you lived to 100 or more.
JMHO, regards, DTB
