Laying Down a Floor

ONE SUMMER MORNING in 2023, my husband Warren and I had an ad hoc business meeting over bowls of cereal. He told me, “The pandemic really hurt my in-person speaker’s business. I’m not sure it’s ever going to come back.” Then I mentioned that my freelance-design income had also really slowed down, the result of a lack of marketing and enthusiasm on my part.

Neither of these was a newsflash. But that was the moment we realized this is what retirement looks like for a self-employed couple in their mid-60s. There would be no goodbye parties, no gold watches and—most germane to this article—no pensions.

We still have lots of fun projects we want to pursue, but can’t bank on them being moneymakers. The money race was over. Now, it was time to switch from earning, saving and investing to the very different mode of spending down our finite nest egg in a measured way.

We’re two risk-averse people who’ve tried our best to prepare for retirement. We’ve been careful to minimize debt, live below our means and maintain a good sense of our annual spending needs. We forecast that our spending will stay roughly the same in retirement. At the time we had that breakfast conversation, our nest egg was split 45% stock funds, 35% bond funds and 20% cash investments.

My husband had one main concern. “I don’t want to have to think about whether the stock market is doing well or badly when it’s time to take out our yearly allowance,” he said. “How can we create our own pension to cover our basic living costs in a set-it-and-forget-it kind of way?” For Warren, a longtime freelancer who operated one tax year at a time, a simple no-brainer annual income was the goal.

Meanwhile, my concerns included sequence-of-return risk, bridging the gap until my Social Security benefit kicks in six years from now, at age 70, and the corrosive effects of inflation on our cash holdings. I also had an overdeveloped desire to control our money, the result of a bad experience with a financial planner.

Back to school. To answer Warren’s question, I took a crash course last fall in different ways to construct a “retirement floor.” I read about everything from immediate annuities to dividend investing to the bucket strategy.

Just as I was starting to compare different ways to self-annuitize our savings, I came across a lot of media chatter about Treasury Inflation-Protected Securities (TIPS) ladders and how they could help you lock in a higher living standard without taking unnecessary risk or paying annual fees.

I found in-depth articles that tell you everything—mathematically and more—that you wanted to know about TIPS, as well as less-complicated resources that spoke more to novice ladder-builders like myself. I learned that you can buy TIPS directly from the government or on the secondary market, which sounded a little daunting but just means you’re purchasing through your online broker’s website.

I also learned that when you build a TIPS ladder made up of annual rungs, the income of each maturing rung is a combination of the interest all the later ladder rungs throw off every six months, plus the principal of the bonds maturing that year. By using a tax-deferred account to purchase TIPS, we wouldn’t have to pay taxes on the bonds’ interest until we withdrew our yearly allowance.

After all my research and a lot of number crunching, I posed my own question to Warren: “What if we could create an inflation-indexed guaranteed pension from half of our savings—one that wouldn’t involve any annual investment expenses, aside from paying taxes on the amount we take out every year? That money, along with our two inflation-indexed Social Security income streams, could cover our estimated annual living costs for the next 20 years.”

I continued: “In this ‘what if’ scenario, most of the other half of our savings would be invested simply but more aggressively in a U.S. total stock index fund and a total international stock index fund. Those investments could surf the market for the next 20 years without us freaking out about every tumble off the surfboard. And then those funds would be what carries us to the end of our life. How does that sound?”

Warren liked the idea of turning half of our money into a simple inflation-adjusted pension that we controlled. He also liked the duration—he seems to feel that he might not be around more than 20 years, going by his six older siblings’ health issues. And he liked that we were still leaving some money in the stock market long-term while hopefully not biting our nails (too much) about it.

Climbing the ladder. And so, in February 2024, I purchased a 20-year TIPS ladder. Next February, this ladder of bonds will begin coughing up a preset inflation-indexed amount each year until Warren is age 87 and I’m 85, knock on wood. It’s what’s known as a “collapsing” ladder rather than a “rolling” ladder, meaning we cash in the income from each rung—rather than reinvesting it—and the ladder will disappear after the last rung of bonds matures in two decades.

Making the purchases in my and Warren’s tax-deferred accounts wasn’t complicated. On the Bogleheads forum, I found out about TIPSladder.com, a free online tool for creating a TIPS ladder shopping list. In one thread, I also found all the answers to my “how do I…?” questions.

TIPSladder.com let me play around with two main toggles: desired annual real income and length of the ladder. You can specify the same real income amount for every year, as I did, or differing amounts for different years. By playing with the income and duration inputs, I confirmed that a 20-year ladder best matched our coverage needs and purchasing budget.

After I got the buy-in for the plan from Warren, I printed out my TIPSladder.com shopping list with the bond ID numbers and quantities to purchase for each income rung. Next, I logged on to the Vanguard site to purchase the bonds in two separate IRAs we have there. Once I got started, plugging in the different ID numbers on Vanguard for each of the 20 rungs took just over an hour, only because I checked everything thrice, of course. The Bogleheads thread’s screenshot of the buy-a-bond screen was helpful here.

By the end of the next day, the purchased bonds were showing up in our two accounts. The timing of my purchase guarantees 1.8% above inflation over the next 20 years. Our do-it-yourself income stream was set.

We know we’re leaving a lot of possible performance and standard-of-living upside on the table by locking in this conservative solution in our mid-60s. But as a pair of self-employed people without the corporate benefits that others take for granted, we long ago gave up trying to keep up with the Joneses.

I’m hopeful that our solution—half of our savings in TIPS, while most of the other half enjoys some capital appreciation in broad stock-market index funds for two decades—gives us the best of both worlds. If we’re lucky, we’ll never miss what we didn’t make, and we’ll still sleep well at night.

Laura E. Kelly is a web designer and book editor living in Mount Kisco, New York, with her husband, author Warren Berger. As Laura contemplates retirement and relocating, all of those things could change (well, probably not the husband). Her previous articles were Just the Two of Us and Dying at Home.

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