The TIPS Ladder: How to Engineer a 30-Year “Risk-Free” Paycheck
The TIPS Ladder: How to Engineer a 30-Year “Risk-Free” Paycheck
EXECUTIVE SUMMARY
- The Mechanism: A TIPS Ladder involves buying US Treasury Inflation-Protected Securities (TIPS) that mature in consecutive years (Year 1, Year 2… Year 30). Each bond pays off exactly when you need the cash to pay bills.
- The Guarantee: Unlike nominal bonds, TIPS principal adjusts with CPI. This means a TIPS Ladder guarantees a specific Real Income (purchasing power) for 30 years, regardless of whether inflation is 2% or 20%.
- Authority Baseline: This analysis follows the “Liability-Driven Investing” framework used by pension funds to match future liabilities (spending) with risk-free assets, eliminating market risk entirely for the essential budget.
- Scope Limitation: This strategy is for the “Safety” portion of a portfolio (Needs). It is not designed for growth or leaving a large inheritance (legacy).
The “4% Rule” is a probability bet (95% success). A TIPS Ladder is an engineering certainty (100% success, barring US default). If you absolutely cannot afford to run out of money, you don’t need a stock portfolio; you need a Defeased Liability Structure. According to Team BMT Analysis, building a TIPS Ladder is the most efficient way to buy “inflation-adjusted commercial annuities” without paying insurance fees. Source: Advisor Perspectives / William Bernstein
Scenario: You need $50,000/year (inflation-adjusted) for 20 years. Real Yield is 2%.
- The Purchase: You buy 20 individual TIPS bonds.
Bond 1 matures in 2026 ($50k).
Bond 2 matures in 2027 ($50k + inflation).
…
Bond 20 matures in 2045 ($50k + inflation). - The Outcome: You have prepaid 20 years of lifestyle. The stock market can crash -90%, and your checks will still arrive, adjusted for the cost of milk and gas.
- The Cost: At 2% real yield, this costs roughly $820,000 today (PV) to secure $1M+ of real spending.
Inflation Protection Test
| Inflation Scenario | Standard Bond (Nominal) Real Value | TIPS Bond Real Value |
|---|---|---|
| 2% Inflation (Expected) | 1000 | 1000 |
| 10% Inflation (Shock) | 600 | 1000 |
*Chart Note: In a 1970s-style inflation shock, nominal bonds lose massive purchasing power. TIPS act as the only “risk-free” asset because they are immunized against the destruction of the currency.
CRITICAL SCENARIO: The “Real Yield” Trap
When to buy matters.
| Real Yield (Rate – Inflation) | Strategy Verdict |
|---|---|
| Negative Real Yield (e.g., -1.0% in 2021) | Expensive Insurance. You lock in a guaranteed loss of purchasing power to gain certainty. (Avoid). |
| Positive Real Yield (e.g., +2.0% in 2024) | Golden Opportunity. You lock in a guaranteed increase in purchasing power. (Buy aggressively). |
Execution Protocol
Calculate your essential expenses minus Social Security.
Example: Need $80k/yr. SS pays $30k/yr. Gap = $50k/yr.
You need a TIPS Ladder to cover this $50k Gap. The rest of your portfolio (Wants) can stay in stocks.
You cannot easily build a precise 30-year ladder at TreasuryDirect.gov (auctions are sporadic). Use a brokerage (Fidelity/Schwab) to buy Secondary Market TIPS. Select bonds maturing in Feb or Aug of each year for the next 30 years.
Ignore the daily price fluctuation of your TIPS. If interest rates rise, the price of your 2045 bond will fall. It does not matter. You are holding it to 2045 to pay for your 2045 groceries. The redemption value is guaranteed.
Decision Order: Calculate Gap โ Check Real Yields (>1.5%) โ Execute Ladder Purchase.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a TIPS Ladder to replace the “Bond” portion of your portfolio if you are extremely risk-averse. It is safer than any corporate bond fund or annuity.
- Avoid This: Buying a TIPS ETF (like TIP) for this specific strategy. ETFs do not mature. You cannot “lock in” the income for a specific year with an ETF. You must own the individual bonds.
Frequently Asked Questions
Is this better than an Annuity?
Usually, yes. A TIPS Ladder has no insurance fees, and if you die early, the remaining bonds go to your heirs. An annuity (SPIA) generally disappears when you die.
What about taxes?
TIPS have “Phantom Income.” You owe tax on the inflation adjustment every year, even though you don’t get the cash until maturity. Always hold TIPS Ladders in an IRA or 401(k) to avoid this tax headache.
Can I buy 30 years out?
The Treasury issues 30-year TIPS, but there are gaps in some maturity years. You may need to buy a nominal Treasury for a few missing years or use a “Zero-Coupon” Treasury (STRIPS) ladder for parts of it.