A reader writes in, asking:
“What is your view on owning TIPS ladder (Bogleheads preferred) or short term TIPS fund when the majority of expenses are covered by pension and/or social security which are COLA adjusted.
One view I read is from Charles Ellis, who views all sources of stable retirement income (pension, social security) as bond like assets, essentially an indirect TIPS ladder.”
On the “should Social Security or a pension be treated as a bond” topic, my answer is that, no, they aren’t bonds. They are clearly fixed-income. But they are not bonds. (For a more full explanation, please see Social Security: It is an Asset, But Not a Bond.)
The case in which Social Security or an inflation-adjusted pension entirely covers spending needs is just a subset of the broader category of cases in which the household is spending at a very low rate from the portfolio in retirement. That is, for this purpose, we can lump together all cases in which a household is spending anywhere from zero to roughly 2% of the portfolio per year.
In cases like that, there is a huge range of asset allocations that would be reasonable. The household does not need high returns, so they can use a very conservative allocation. On the other hand, the volatility of an aggressive portfolio would not put their well-being at risk either, so an aggressive allocation would also be acceptable. Or anywhere in between.
In other words, at this point, it becomes entirely a matter of preferences. The retirement spending goal has been entirely satisfied. So now the question becomes:
- Should we use an aggressive allocation, in order to increase the expected bequest to heirs?
- Or should we use a conservative allocation, in order to not have to experience as much volatility?
Either answer is acceptable.
And because a very broad range of allocation (from highly aggressive to highly conservative) is reasonable, all the various sub-topics within the asset allocation topic become even less important.
Should this household own a ladder of individual TIPS? Sure, if that appeals to them. Or not.
Should they own a short-term TIPS fund? Again, sure, if that sounds good to them.
They could use a single LifeStrategy fund or iShares Core Allocation ETF.
Or they could use a “VT + TIPS” portfolio like I do. Or they could use a three-fund portfolio, with the bond fund being any of several different bond funds (short-term TIPS, intermediate-term TIPS, short-term nominal Treasuries, intermediate-term nominal Treasuries, a total bond fund, etc.). Or they could use any of 1,000 other more complicated portfolios, if one such portfolio appeals to them for a particular reason.
In general, when creating or assessing a portfolio, we want to be sure of five things:
- The portfolio is diversified (no huge allocation to a single stock).
- The portfolio’s risk level is appropriate for the household’s circumstances.
- The portfolio is simple enough to manage.
- The portfolio does not include anything with unreasonably high costs.
- The portfolio is reasonably tax-efficient.
For any given household, there are going to be many potential options that satisfy all five requirements. There is no perfect portfolio, but there are countless perfectly fine portfolios.
And specifically for a retiree household with a very low spending rate, requirement #2 on the list becomes less of a limiting factor than it often might be, so now there is an even broader range of acceptable portfolios.
“A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing.”
– Taylor Larimore, author of
