Retirement planning often forces a choice between guaranteed lifetime income and protection against rising costs. Stefan Sharkansky, a statistician who recently wrote for the Financial Analysts Journal, argues that many common annuity products fail to address the erosion of purchasing power over time. While annuities offer the advantage of longevity risk pooling, most options currently on the market lack true inflation indexing. This means retirees may find their monthly payments shrinking in real value just as they need them most.
To counter this, Sharkansky points toward Treasury Inflation-Protected Securities, commonly known as TIPS, as a more effective alternative for securing a stable income floor. By building a ladder of individual TIPS, investors can lock in a specific real return for up to 30 years. Unlike a bond fund or ETF, which fluctuates in value based on interest rate shifts, holding individual TIPS to maturity ensures a predictable cash flow that adjusts based on inflation metrics.
Setting up this strategy involves calculating the desired level of annual fixed income and matching the TIPS ladder to provide that amount alongside Social Security benefits. This approach allows retirees to define their own level of security versus growth. By covering fixed expenses with a TIPS ladder, the remaining portfolio can stay invested in equities to provide potential upside without the anxiety of market volatility affecting essential bills.
Sharkansky notes that the current market environment offers particularly favorable conditions for this strategy, with long-term real yields hovering around 2.8%. Because these yields are fixed once the bonds are purchased, investors lock in their purchasing power regardless of how future interest rate environments change. For those prioritizing certainty over the lifetime guarantees of a standard annuity, the TIPS ladder serves as a functional tool for managing the long-term reality of retirement spending.