Money for The Rest of Us

Investment help and financial guidance for the rest of us.

  • Home
  • Topics
  • Your Info
  • Contact
  • Log In
  • Search
  • About
  • Podcast
  • Guides
        • Asset Classes

        • A Complete Guide to Investing in I Bonds and TIPS (2023)
        • A Complete Guide to Equity REIT Investing
        • A Complete Guide to Mortgage REIT Investing
        • A Complete Guide to Investing in Gold
        • A Complete Guide To Investing In Convertible Bonds
        • Investing in Bitcoin, Oil, and Volatility ETFs
        • Carbon Investing and its Effect on Climate Change
        • Farmland Investing
        • The Opportunity and Risk of Frontier Markets
        • Investment Vehicles

        • A Complete Guide to Investment Vehicles
        • How to Invest in Closed-End Funds
        • What Are SPACs and Should You Invest in Them?
        • IVOL ETF Analysis and Review
        • Fundrise Real Estate Interval Fund Review
        • Money and Economics

        • A Complete Guide to Understanding and Protecting Against Inflation
        • Understanding Web3 Investing
        • Strategy

        • Why You Should Rebalance Your Portfolio
        • What Is Risk vs Uncertainty?
        • Tail Events and Tail Risk
  • Members
        • Tools

        • Asset Allocation and Portfolio Tools
        • Current Investment Conditions and Strategy Report
        • All Investment Conditions Reports
        • Strategic and Adaptive Model Portfolios
        • David’s Current Portfolio
        • David's Portfolio Trades
        • Podcast

        • Plus Premium Episodes
        • Submit A Question to the Plus Podcast
        • Courses

        • Investing in Closed-End Funds
        • Resources

        • Member - Getting Started Guide
        • Member Tools and Downloads
        • Topic Index
        • Glossary
        • Most Influential Books
        • Forums
  • Join
You are here: Home / Podcast / 407: Worry-Free Retirement Investing

407: Worry-Free Retirement Investing

October 26, 2022 by David Stein · Updated November 29, 2022

How to use laddered inflation-indexed bonds (i.e., TIPS), CDs, fixed annuities, and fixed index annuities to meet retirement living expenses while worrying less about running out of money.

Smooth layered stone with caption "Worry-Free Retirement"

Topics covered include:

  • How individuals can use liability-driven investment strategies
  • Why now is the best opportunity to buy Treasury Inflation Protection Securities in 15 years
  • How to use bond ladders
  • How deferred fixed and deferred variable annuities work
  • How to analyze fixed index annuities

Show Notes

Worry-Free Investing by Zvi Bodie and Michael J. Clowes

Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed—FRED

Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed—FRED

New 5-year TIPS auctions with a real yield of 1.732%, highest in 15 years—TIPSwatch

Complete List of Multi-Year Guaranteed Annuities (MYGAs), October 26, 2022—ImmediateAnnuities.com

Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement by Wade Pfau

A Complete Guide to Investing in TIPS and I Bonds—Money for the Rest of Us

Episode Sponsors

Express VPN – get three months free on VPN service
Aura, the new standard in digital safety 

Become a Better Investor With Our Investing Checklist

Become a Better Investor With Our Investing Checklist

Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Related Episodes

279: Why All Retirees Should Consider an Income Annuity

326: The New Math of Retirement Spending and Investing

Transcript

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 407. It’s titled “Worry-Free Retirement Investing.”

Two weeks ago, in episode 405 we discussed how many UK pension plans were using liability-driven investment strategies. These plans got into trouble because they went beyond trying to match their assets with the liabilities but instead used implicit leverage, debt that is baked into derivative contracts in order to try to grow their assets. 

When these derivative contracts fell in price as interest rates rose, these UK pension plans were forced to sell bonds, which caused those bond prices to plummet, and the yields or interest rates to spike.

Interest rates got so out of hand that the Bank of England had to step in and purchase bonds in order to calm markets. 

Liability-driven Investment

Liability-driven investment in its simplest form is a sound concept. It is at the heart of what insurance companies do. They estimate what their payout is for claims, such as in the case for life insurance, or annuities, where they promise an ongoing payment to annuitants. 

They estimate what those cash flows will be each year, and then develop an investment strategy which mostly consists of bonds, so that the cash flow from their investments and premiums are sufficient each year to meet the expected claims and cash flow needs, including covering expenses, and so there’s enough so that there’s a profit for the insurance company.

Bond Ladders and TIPS

In 2003 I read a book by finance professor Zvi Bodie, titled Worry-free Investing. He proposed a liability-driven investment strategy for retirees that made a lot of sense to me. It used what at the time was a relatively new investment vehicle—Treasury Inflation Protection Securities, or TIPS. TIPS are U.S. government inflation index bonds. 

Bodie recommended structuring what is known as a bond ladder using TIPS. A bond ladder is a series of bonds that mature, and the proceeds from that bond maturity is then used to cover the cashflow that the retiree has that year. At the time the book was issued, the real yield on tenure TIPS was around 2%. That meant an investor would earn 2% plus the rate of inflation on those bonds. 

A retiree could buy a series of TIPS that would mature each year for the next 20 years, and those bonds would be used to fund the investor’s spending for that year. And since the bonds had an interest rate of 2% before inflation, the retiree would benefit from compounding to meet those future expenses. That intuitively makes a lot of sense to me, and it did when I read the book. However, the ability to implement it basically went away.

Since 2007, the yield on tenure TIPS has been less than 2%, except for a period of market dislocation in 2008 when the yield on TIPS spiked to 4%. Believe me, I bought TIPS then; it was the opportunity of a lifetime to buy TIPS. And then I sold it once rates fell, and I got the capital appreciation. 

But that foray into TIPS wasn’t an asset-liability matching approach, and it’s been difficult to match those assets with projected cash flows, because the yields on TIPS have generally been less than 1% for most of the past decade, and there have been extended periods of time when the yield has been negative, which means a TIPS investment actually didn’t keep up with inflation because the real yield or the yield net of inflation was negative. It’s costing money on a real basis to hold those TIPS.

As a Money For the Rest of Us Plus member, you are able to listen to the podcast in an ad-free format and have access to the written transcript for each week’s episode. For listeners with hearing or other impairments that would like access to transcripts please send an email to [email protected]estofus.com Learn More About Plus Membership »

Ready to get serious about your investing?

Access professional-grade portfolio tools, training, and a community to help you stay on track, tune out the noise, and grow your wealth with confidence.

Learn How

Filed Under: Podcast Tagged With: annuities, CDs, fixed annuities, fixed index annuities, immediate annuities, TIPS, Treasury Inflation Protected Securities

J. David Stein
Darby Creek Advisors LLC
P.O. Box 68544 • Tucson, AZ • 85737

Copyright © 2023 • Disclosures, Privacy Policy, and Cookie Policy • Site by Tempora

Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}
Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}