Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Build a TIPS Ladder for Inflation Protection
Transcript
- Lucas: So we get a lot of questions from people in or near early retirement about what to actually with the fixed-income side of their portfolio. And the strategy that keeps coming up — especially in this yield environment — is a TIPS ladder. Luna: And for listeners who haven't dug into TIPS yet — Treasury Inflation-Protected Securities — the basic pitch is that the principal adjusts with inflation, so your purchasing power is protected. But actually building a of individual bonds is different from just buying a fund. Lucas: Right. And I want to anchor this with a concrete case. Let's say you're 50, you've got a million-dollar portfolio, you're planning to retire at 55. You want to cover your essential spending — let's call it forty thousand dollars a year — with guaranteed inflation-adjusted income for the first twenty years of retirement. Luna: So you're essentially buying a personal pension. And the appeal right now is that real yields on TIPS are actually attractive again. For years they were negative or near zero. Lucas: Exactly. As of mid-2026, the real yield on a 10-year TIPS is hovering around two point one percent. That's not huge, but it's positive and it's locked in. Compare that to 2021 when real yields were negative one percent — you were guaranteed to lose purchasing power if you held to maturity. Luna: So now the math actually works. And a ladder lets you match each year's spending need to a specific bond maturity. Lucas: Yeah. Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what keeps this show ad-free and lets us spend time on these detailed strategy episodes. So if these conversations have helped you think about a decision differently, that's the way to keep them coming. Luna: It really does make a difference. And we don't run ads or sell anything, so it's a clean model. Lucas: Alright, back to the ladder. So let's say our retiree wants forty thousand dollars of real income each year from age 55 to 74. That's twenty rungs. You would buy twenty separate TIPS bonds, each maturing in a specific year, each with a face value that — after inflation adjustments — will pay out roughly forty thousand at maturity. Luna: And you buy them at auction or on the secondary market. The Treasury issues TIPS with 5, 10, and 30 year maturities, so you can fill in the gaps. Lucas: Right. For the near-term rungs — years 1 through 5 — you'd buy shorter maturities, maybe even some that are already trading. For the middle years, you buy the 10-year. For the later years, you might use the 30-year or buy a 10-year and then reinvest at maturity. The key is that each bond's principal adjusts with CPI, so the forty thousand you get in year 15 is in real terms. Luna: But there's a nuance with the coupon payments. TIPS pay a fixed coupon on the inflation-adjusted principal. So if you buy a bond with a one percent coupon and inflation spikes, the coupon payment actually rises in dollar terms. Lucas: Yes. And that means you'll get semi-annual interest payments that fluctuate. For a ladder meant to produce a steady income stream, you can either reinvest those coupons or treat them as extra income. But if you're trying to hit exactly forty thousand in real terms each year, the coupon payments complicate the math. Luna: So a purist approach is to buy zero-coupon TIPS — but those don't exist. The Treasury doesn't issue STRIPS for TIPS the way it does for nominal bonds. Lucas: Right. So you have to work with coupon-bearing bonds. One practical way is to over-fund each rung slightly and accept that you'll get a little more than forty thousand some years. Or you can build the ladder inside a spreadsheet, calculating the exact face value needed so that the final payment plus accumulated coupons hits your target. Luna: And you can buy TIPS in a brokerage account, but there's a tax issue. The inflation adjustment is treated as taxable income each year, even though you don't receive the cash until maturity. Lucas: That's the killer. If you hold TIPS in a taxable account, you get a phantom tax bill. The IRS taxes the inflation adjustment as interest income. So in a high-inflation year, you could owe taxes on money you haven't actually received. That's why almost every financial planner will tell you to hold TIPS exclusively in a tax-advantaged account like an IRA. Luna: Which is fine for a lot of early retirees who have substantial IRA balances. But if your retirement savings are mostly in a taxable brokerage, a TIPS ladder becomes less attractive. Lucas: Exactly. So let's run the numbers for our million-dollar retiree. If they put, say, six hundred thousand into a 20-year TIPS ladder — roughly thirty thousand per rung — they'd lock in a real yield of around two percent. That generates about twelve thousand a year in real coupon income, plus the principal returned each year. So total real income from the ladder would be around forty-two thousand annually, depending on the exact bonds. Luna: And the remaining four hundred thousand stays in equities for growth. That's a classic 'barbell' approach — safe inflation-linked income for essential spending, stocks for long-term growth and discretionary spending. Lucas: Yeah. And the beauty of the ladder is that it removes sequence of return risk for those first twenty years. You don't have to sell stocks in a down market to pay your bills. The bonds mature, you get your cash, end of story. Luna: But you do have to be willing to commit the money for up to 20 years. If you change your mind and need to sell a TIPS bond early, you could take a loss if real yields have risen. Lucas: Right. So this is not for someone who might need the money sooner. But for a retiree with a solid plan, it's about as safe as you can get in the fixed-income world. And the current yield environment — with real yields above 2 percent — makes it the most compelling it's been since before the 2008 financial crisis. Luna: So who is this actually for? I think the typical listener is someone with at least a few hundred thousand in tax-advantaged accounts who wants to de-risk without going to cash. Lucas: Exactly. Cash loses to inflation over time. A TIPS ladder preserves purchasing power. And if you combine it with a low-cost equity portfolio, you have a very resilient retirement plan. I'd say anyone within five years of retirement who's worried about inflation should at least model this out. Luna: There's also the option to buy a TIPS ETF like iShares TIP, but that doesn't give you the maturity matching. The fund holds a ladder of its own, but you don't know exactly when you'll get your principal back because the fund never matures. Lucas: Right. An ETF is fine for a general inflation hedge, but if you're trying to match specific spending needs, you need individual bonds. That's the whole point of the ladder. And with the convenience of TreasuryDirect or a brokerage account, buying individual TIPS is not that hard. You can set up a purchase at auction for each new issue. Luna: So let's say someone wants to start. What's the first step? Lucas: First, figure out your annual essential spending in today's dollars. Then decide how many years of that you want to cover with the ladder. Then open a brokerage account or TreasuryDirect account and start buying TIPS at auction. You can also buy on the secondary market to fill specific maturity dates. The Treasury auctions 5-year and 10-year TIPS monthly, and 30-year TIPS quarterly. Luna: And there's a tool on the TreasuryDirect website that shows upcoming auctions. You can also use the Bloomberg terminal or a financial advisor to see secondary market prices. Lucas: One more thing — if you're building a ladder for a 20-year horizon, you might want to consider using a mix of 10-year and 30-year bonds. For example, buy a 10-year TIPS to cover years 1-10, and a 30-year for years 11-20. But the 30-year TIPS has less liquidity and sometimes a different yield. So many people just use 10-year bonds and reinvest at maturity. Luna: And that reinvestment risk is real. If yields drop in 10 years, you'll reinvest at a lower rate. But at least you locked in the first 10 years. Lucas: Right. There's no perfect solution. But compared to the alternatives — like holding nominal bonds that get crushed by inflation, or keeping cash that loses purchasing power — a TIPS ladder is a very strong tool. And right now, with real yields positive, it's a window of opportunity that may not last forever. Luna: So the bottom line: if you're an early retiree with tax-advantaged space and a need for predictable inflation-adjusted income, a TIPS ladder deserves a serious look. Lucas: Yeah. And as always, the specifics matter. The exact real yield when you buy, the coupon rate, the tax location — all of that changes the outcome. But the concept is sound. I'd love to hear from listeners who've actually built one. Luna: Same here. Maybe we'll do a follow-up with a real case study from someone in our audience. Lucas: That would be great. For now, if you're thinking about de-risking your retirement portfolio, this is one of the cleanest ways to do it.