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Building a TIPS Ladder: A Step-by-Step Guide for Advisors

Featuring Jay Abolofia, PhD, Founder of Lyon Financial Planning

Fact-Checked Summary / Overview

Treasury Inflation-Protected Securities (TIPS) have received renewed attention as real yields have reached levels not seen for much of the past decade. For advisors seeking ways to help clients generate predictable, inflation-adjusted income, manage sequence-of-returns risk, or fund specific future liabilities, TIPS ladders offer a unique planning tool.

In this session, financial planner and economist Jay Abolofia walked advisors through the practical process of constructing TIPS ladders using real-world client scenarios. Rather than focusing solely on theory, the webinar demonstrated how advisors can build ladders for retirement income, Social Security bridge strategies, Roth conversion planning, and long-term accumulation portfolios.

The presentation emphasized that TIPS ladders should be viewed differently than traditional investment portfolios. Instead of maximizing returns, a ladder is designed to purchase a future stream of inflation-adjusted spending. By combining multiple TIPS with staggered maturities, advisors can create predictable cash flow streams while reducing exposure to market volatility and interest rate fluctuations.

The webinar also explored important implementation issues, including bond selection, phantom income taxation, brokerage versus retirement account placement, ladder maintenance, and the tradeoffs between individual TIPS and TIPS mutual funds or ETFs.

Key Topics and Expanded Insights

Understanding TIPS and Why They Matter

What Makes TIPS Different?

TIPS are U.S. Treasury securities whose principal value adjusts with changes in the Consumer Price Index (CPI). Unlike traditional Treasury bonds, the principal amount rises with inflation and can decline during periods of deflation.

The coupon rate remains fixed, but because the principal changes over time, actual interest payments adjust as well. Interest is paid semiannually.

Key Takeaways

• TIPS provide explicit inflation protection backed by the U.S. Treasury.
• Real yields are quoted above inflation, unlike nominal Treasury yields.
• Investors know the real return they will receive if the bond is held to maturity.
• TIPS help preserve purchasing power rather than simply generating nominal income.

Planning Implications

For retirees, inflation can be one of the most significant long-term financial risks. TIPS ladders provide a way to match future spending needs with assets designed to maintain real purchasing power.

What Is a TIPS Ladder?

A TIPS ladder is a portfolio of individual TIPS with staggered maturity dates designed to generate a predetermined stream of inflation-adjusted income over a specified period.

Each maturity year functions as a "rung" of the ladder, providing cash flow through:

• Principal returned at maturity
• Ongoing interest payments
• Inflation adjustments

Key Takeaways

• A ladder converts assets into a predictable future spending stream.
• Advisors can target specific annual income levels.
• Cash flows are tied directly to future spending objectives.
• The ladder structure can be customized to virtually any time horizon.

Advisor Perspective

Abolofia emphasized that advisors should think of a TIPS ladder as "buying future spending" rather than managing an investment portfolio.

Case Study #1: Retirement Income Ladder

The first case study examined a newly retired 65-year-old seeking:

• $80,000 of annual inflation-adjusted income
• A 20-year time horizon
• Immediate income commencement

Using current TIPS yields, the ladder generated:

• Approximately $1.6 million of future inflation-adjusted income
• At a cost of roughly $1.3 million
• With an effective real yield of approximately 2.32% above inflation

Key Planning Benefits

Sequence-of-Returns Risk Reduction

By removing a portion of retirement assets from equity market exposure, the retiree reduces vulnerability to adverse market returns early in retirement.

Inflation Protection

Income remains tied to inflation, helping preserve purchasing power.

Interest Rate Risk Mitigation

Unlike bond funds, individual TIPS held to maturity largely eliminate interest rate risk.

Risks That Remain

The ladder does not eliminate:

• Longevity risk
• Opportunity cost relative to equities
• Potential future reinvestment risk
• U.S. government credit risk (although generally considered minimal)

Advisor Takeaway

The retirement income ladder may be particularly attractive for clients who prioritize spending certainty over maximizing long-term portfolio growth.

Case Study #2: Social Security Bridge and Roth Conversion Planning

One of the most practical advisor applications discussed involved clients delaying Social Security benefits.

The example involved:

• Retirement prior to age 70
• Delayed Social Security claiming
• Potential Roth conversion opportunities
• A need for secure income during the bridge period

The ladder targeted:

• $120,000 of inflation-adjusted annual income
• Three years of funding
• An effective real yield of approximately 1.93%

Why This Strategy Matters

Clients often experience unusually low taxable income during the years between retirement and Social Security commencement.

These years can create valuable opportunities for:

• Roth conversions
• Tax bracket management
• Strategic income planning

Advisor Planning Opportunity

A TIPS ladder can be designed not only to support spending needs but also to provide liquidity for paying taxes associated with Roth conversions.

Important Implementation Detail

Abolofia noted that clients generally should pay Roth conversion taxes using taxable assets rather than IRA distributions whenever possible.

Managing Pre-Ladder Interest Payments

A subtle but important topic involved interest payments received before the ladder's first spending year.

When income needs begin several years in the future, bonds may still generate coupon payments before spending begins.

Planning Considerations

Advisors may:

• Reinvest early interest payments
• Include those payments in future ladder calculations
• Use lower-coupon bonds to minimize interim cash flow

Practical Tip

Abolofia generally favors selecting lower-coupon TIPS when building future-dated ladders because they reduce unwanted cash flow and potential tax consequences before spending begins.

Brokerage Accounts vs. Retirement Accounts

A common assumption is that TIPS belong exclusively inside retirement accounts.

The webinar challenged that assumption.

Traditional Approach

For most retirement income ladders:

• IRAs
• Roth IRAs
• Qualified retirement plans

are generally preferred locations because they avoid annual taxation of inflation adjustments.

When Brokerage Accounts May Make Sense

Bridge strategies and Roth conversion funding strategies may justify holding TIPS in taxable accounts.

Reasons include:

• Tax liability management
• Liquidity needs
• Funding conversion taxes

Phantom Income Considerations

A key issue is "phantom income."

The IRS generally treats inflation adjustments to TIPS principal as taxable income even though investors do not receive those adjustments in cash until maturity.

Advisor Takeaway

Account location decisions should be evaluated within the context of the client's broader tax strategy.

Case Study #3: The Rolling TIPS Ladder

The third case study focused on a younger investor still in the accumulation phase.

Example:

• Age 45
• $500,000 allocated to TIPS
• 10-year rolling ladder
• Effective real yield of approximately 1.93%

How It Works

As bonds mature:

• Proceeds are reinvested
• New longer-dated TIPS are purchased
• The ladder is continually extended

Benefits

• Locks in real yields
• Preserves purchasing power
• Maintains control over duration
• Reduces interest rate risk

Advisor Consideration

Rolling ladders require ongoing maintenance and may not be appropriate for all clients.

TIPS Ladders vs. TIPS Funds and ETFs

One of the most important distinctions involved individual TIPS versus pooled investment vehicles.

Individual TIPS Advantages

• Known maturity dates
• Known real yields
• Greater control over duration
• Ability to hold to maturity
• Reduced interest rate risk

TIPS Fund Advantages

• Simplicity
• Professional management
• Automatic diversification
• Easier implementation

Critical Difference

TIPS funds continually buy and sell securities, maintaining a relatively constant duration.

As a result:

• Interest rate risk remains ongoing.
• Investors never truly "reach maturity."

By contrast, individual bonds held to maturity allow investors to largely avoid that uncertainty.

Secondary Market TIPS vs. New Issues

The webinar also explored whether advisors should purchase newly issued TIPS or use the secondary market.

New Issue Advantages

• Original principal of $1,000
• Greater protection against prolonged deflation

Secondary Market Considerations

Secondary-market TIPS may have inflation-adjusted principal values significantly above original par value.

If severe deflation occurs, investors could potentially lose some of that inflation adjustment.

Advisor Takeaway

When possible, Abolofia prefers bonds with lower inflation-adjusted principal values because they reduce deflation-related risks.

Income Annuities vs. TIPS Ladders

A recurring audience question involved comparing TIPS ladders to single premium immediate annuities (SPIAs).

Key Distinction

TIPS primarily hedge:

• Inflation risk

Income annuities primarily hedge:

• Longevity risk

Important Considerations

Most SPIAs:

• Do not provide true CPI-linked inflation adjustments.
• Depend on insurance company guarantees.
• Generate mortality credits unavailable through TIPS.

Advisor Perspective

These strategies are not direct substitutes.

In some cases, they may complement one another rather than compete.

Practical Advisor Takeaways

• Think of TIPS ladders as purchasing future spending rather than managing investments.
• Use retirement income ladders to create predictable inflation-adjusted cash flow.
• Consider bridge ladders for clients delaying Social Security.
• Evaluate opportunities to coordinate TIPS ladders with Roth conversion strategies.
• Minimize unnecessary pre-ladder interest by selecting lower-coupon bonds when appropriate.
• Carefully assess whether taxable or retirement accounts are the best location for the ladder.
• Understand phantom income taxation before recommending taxable-account implementation.
• Consider rolling ladders for clients seeking long-term inflation protection during accumulation years.
• Recognize that individual TIPS provide greater maturity and duration control than TIPS funds.
• Compare inflation hedging and longevity hedging separately when evaluating annuities versus TIPS.

External Reference Sources

U.S. Treasury Department – Treasury Inflation-Protected Securities (TIPS)
https://www.treasurydirect.gov/marketable-securities/tips

TreasuryDirect – Understanding TIPS
https://www.treasurydirect.gov/research-center/history-of-treasury-securities/tips

Internal Revenue Service – Publication 550 (Investment Income and Expenses)
https://www.irs.gov/publications/p550

Internal Revenue Service – Taxation of Treasury Securities
https://www.irs.gov

FINRA Investor Insights – Treasury Inflation-Protected Securities
https://www.finra.org/investors/insights/treasury-inflation-protected-securities

U.S. Securities and Exchange Commission – Bond Investing Basics
https://www.investor.gov/introduction-investing/investing-basics/glossary/bonds

Treasury Yield Curve Information
https://home.treasury.gov