Retirement income planning would be so much easier if you could buy a known amount of guaranteed lifetime income that automatically adjusted for inflation. However, the reality is that not a single insurance company in the entire world is willing to take on that long-term inflation risk. The only possibility left is to ladder inflation-linked bonds (TIPS) so that each year you would cash out some bonds and interest to create your own DIY inflation-adjusted income.

Thanks to the rising real yields of TIPS, you can now create a 30-year TIPS ladder that will create effectively a 4% guaranteed real withdrawal rate. If you put $1,000,000 into a 30-year TIPS ladder right now, you will get $40,000+ income for year 1 and then another $40,000 adjusted for inflation (CPI-U) annually for the next 29 years. All backed by the US government.

Allan Roth did the hark work and bought a 30-year TIPS ladder x 4.3% real withdrawal rate using $100,000 of his own money on the secondary market. He also introduced me to eyebonds.info, which has a lot of helpful spreadsheets for the hardcore DIY TIPS and Savings I bond investor.

Such a TIPS ladder will only go for 30 years, and you end up with nothing at the end, so it does have some limitations. If you retire at 65 and spend your 4% every year, this portfolio will be completely depleted by age 95. If you start at 55, it will end at 85. Therefore, this tool would work best as a supplement to your Social Security benefits and perhaps keeping some stocks for potential upside…

Now, Allan Roth also wrote about the “No Risk” portfolio where you put most of your money in zero coupon bonds that will guarantee you don’t lose any dollars but put the rest in stocks for upside potential. It feels good to know you’ll both start and end with at least, say $100,000. However, the reality is that you are still exposed to inflation risk, as $100,000 in 10 years may be worth a lot less than $100,000 today.

What if you simply replaced those traditional-style bonds with TIPS as your super-safe base? You’d remove the inflation risk while still keeping minimal credit risk. Enter the concept of Upside Investing by Lawrence Kotlikoff (author of Money Magic).

Upside Investing, as I described in recent Forbes and Seeking Alpha columns, is simple as pie.

– You invest in the S&P and TIPS/I-Bonds and specify a period during which you’ll convert your stocks to TIPS/I-Bonds.

– You build a base living standard floor assuming all stock investments are lost.

– You increase your living standard floor only when and if you convert stocks to TIPS/I-Bonds.

If you can lock in your TIPS ladder at a decent real yield, you could have an intriguing combination of a very safe base income, while still giving you a very good chance of a higher income with stock returns anywhere close to historical averages.

In rough terms, what if a 75% TIPS/25% stock portfolio offered a minimal guaranteed withdrawal rate of 3% real for 30 years (only this low if stocks go to zero!) with the good probability that you would likely be able to withdrawal 4% and quite possibly more. For a conservative investor, knowing you have a rock-solid safe floor would allow you to spend freely with the rest. 🥳 Something to investigate further while TIPS real yields are decent again.

Everyday investors now have trillions of dollars invested inside Target Date Funds (TDFs) with their “set-and-forget” simplicity that provides “industry-standard” investment advice for a relatively low cost. Many people are out there selling better solutions, but I think TDFs are a good default that lets you focus on the saving. Another benefit of TDFs is their structure tends to encourage inaction – There was relatively little TDF selling activity during the March 2020 temporary market drop.

The Callan article Target Date Funds and the Ever-Evolving Glidepath reminds us that “industry standard” investment advice is not written in stone. It’s set by big institutions with marketing departments and does change over time. You are handing over the reigns to the fund provider, be it Fidelity, Vanguard, T. Rowe Price, Blackrock, etc.

Here are the overall trends to TDF asset allocation from in the decade from 2012 to 2022:

• Growth assets (stocks, REITs, junk bonds) went up across the board. Ex. At age 25, growth asset allocation grew from 89% in 2012 to 94% in 2022.
• Fixed income (bonds) have gotten slightly riskier credit ratings at younger ages (presumably to boost yield a bit).
• Inflation-sensitive assets (TIPs, commodities) went down across the board in 2021/2022 than in 2012, only to tick up slightly looking forward in 2022.

What I see are big institutions making small, gradual changes to the glidepath, with the directions almost certainly to be towards mild performance chasing. Nobody gets fired from the executive suite for doing that. From 2012-2022, the stock market has done quite well (more of that!), bond yields have been tiny (let’s crank up the risk to boost yield!), and inflation was very mild (less of that, we don’t need to worry about infla-whoops!). If the next decade has low stock returns, high bond interest rates, and lots of inflation, I would expect a reactionary-but-slow turning of the enormous cruise ship.

The JP Morgan Guide to Retirement slide deck is provided to its advisors to discuss retirement planning with clients. Updated annually, they kindly share this document publicly and it contains many useful charts and graphs, like the one above that reminds us to focus on what you can control, and to not waste time and energy on what you can’t. Below are a few more highlights from the 52-page 2022 edition that I found most helpful.

How does everyone else manage given all the news of low savings balances? Well, the reason it is called “Social Security” is because without it, there would be widespread poverty amongst seniors. The higher your spending, the more you must rely on your other assets to replace your current income in retirement.

You may have seen variations of this chart elsewhere, where “Quitter Quincy” who starts early but completely stops after only 10 years ends up at the same place as “Late Lyla” who starts late but contributes for another 30 years (triple the time).

How the average household spending changes by age (amongst relatively well-off households).

How to prioritize your savings.

Look how “Escalating Ethan” does nearly as well by allowing a 1% auto-escalation once a year.

You might think that because you pay 401k loans back into the original account plus interest that it won’t hurt your final retirement balance, but the missed compounding growth can really impact things.

Vanguard recently released the 2022 edition of their annual How America Saves report, a 110-page report targeted at industry insiders which looks at the nearly 5 million 401k, 403b, and other defined-contribution retirement plans. If you wish to geek out on 401k stats, there is a great deal of information in this report. Here are a few highlights based on 2021 data:

Employee contributions. The average/median employee contribution rate amongst participants was 7.3%/6.1% in 2021. Median means that half of people were saving more, while half were saving less. Average is weighted more by absolute dollar savings. (Click to enlarge.)

Employer contributions (company match). The total average/median contributions by year was 11.2%/10.3% (employer and employee combined). This means that the average/median employer/company contribution was about 4%. (Click to enlarge.)

How much does Vanguard think we should be saving? I found this quote noteworthy:

We believe participants need to reach a total saving rate of 12% to 15% or more to meet their retirement goals.

Maxing it out! Overall, 14% of participants saved the maximum annual amount of $19,500 ($26,000 age 50+) for 2021. However, 58% of those with incomes of $150,000+ maxed out their contributions. Here is the full breakdown by income:

(Not really sure how the folks earning under $15k per year are doing it… maybe these income numbers are after subtracting the contributions?)

How are people investing? Asset allocation. This chart shows the trends in asset allocation as the participants age. The increased use of Target-date funds and other professional management options has changed it so that young people are less likely to hold cash. (Click to enlarge.)

Account balances. The average account balance was $141,542 for 2021; the median balance was $35,345. This disparity means that a small number of plans with very high balances skews this often-quoted average upward. (Click to enlarge.)

I don’t pay much attention to this stat because the average includes workers across different age groups, income levels, job tenures, and so on. If I just switched jobs and rolled over my old 401k into an IRA, technically my balance is zero no matter what.

Jim Otar is a retired engineer-turned-financial-planner who has written many books and articles about retirement income. I recently found an old bookmark and reread his article Lifetime Retirement Income: The Zone Strategy from RetirementOptimizer.com. One core principle of his retirement advice that you don’t plan using averages:

The averages don’t cut it. For proper retirement planning, you must base your retirement solutions and strategies on adverse outcomes and not average outcomes.

For example, you don’t plan for average life expectancy. You plan for reaching age 95 for both you and your spouse/partner if applicable.

Green Zone: You have enough money that you can simply live off a balanced portfolio of stocks and bonds, even if returns are on the unlucky side of history and much lower than average. Here are the numbers for his calculated sustainable withdrawal rate until age 95:

For example, if you are 65 years old and need $40,000 of annual income from your portfolio (above Social Security and other income sources), then you would need a portfolio balance of $40,000 divided by 3.8% = $1,052,631. (Alternatively, multiply $40,000 by 26.3.) If you have more than this, you are in the green zone. You’ll have enough money even after a market run that is bad historically, and you’ll probably end up leaving a decent estate or be able to spend more later on.

Red Zone: You need guaranteed income. You don’t have enough to live off of a portfolio of stocks without a decent chance of running completely out of money. The most prudent advice is to buy annuities that will provide a guaranteed level of income and stretch your limited assets for the rest of your lifetime, no matter how long that is.

The advice is then to use your money to buy a single premium immediate life annuity with payments that are indexed to inflation (CPI). At the time of writing, such an inflation-indexed SPIA would pay more that the sustainable rate above. The effective “safe withdrawal rate” for the same 65-year-old above would be 4.5% to 4.9%. Unfortunately, this article was written back in 2007 and as of 2022 there are zero insurance companies that offer inflation-indexed immediate annuities.

However, the same overall concept still applies. The Red Zone means you need to take critical action. You should see how much guaranteed lifetime income you can receive from a single premium immediate annuity (SPIA), perhaps with an escalation rider that increases your payout 1%-3% every year. You will need to consider reducing expenses somehow (downsize home, relocate to lower cost-of-living area). You may need to find additional income (keep working, rent out property). You might need to do all three.

Grey Zone used to mean that you were between the 3.8% withdrawal rate of the Green Zone and the 4.5% withdrawal rate of the Red Zone. Today, I assume it simply means you are close to green, but not quite. You should take some of those Red Zone actions listed above.

I found the Green/Grey/Red Zone concept to be an interesting retirement planning framework to consider. If you don’t have enough, you shouldn’t just wing it with stocks and hope for the best. SPIAs can help you stretch your money for a more secure retirement. I believe that SPIAs aren’t discussed enough in personal finance, and if there were more demand, perhaps the competition would create better and higher-yielding SPIA products. The problem is that non-transparent products like indexed annuities that promise things like “market-linked returns with no downside risk” are both better sellers and offer higher commissions to most insurance salespeople.

At the top of many personal finance “To-do Lists” is to max out the employer match offered in your 401k/403b retirement plan. It’s usually the first “savings” step after paying down high-interest debt and keeping up with your bills. Here’s a screenshot from the Standardized Personal Finance Advice Flowchart via Reddit:

And here it is again from JP Morgan Asset Management, right after building up an emergency fund:

I’ve read this advice so many times, but how many people even complete this Top 3 item on the list? To be clear, this is just contributing enough to maximize your employer match contribution, not maxing out your allowable employee contribution. (That’s on the list of standardized advice as well, but at a slightly lower priority level.)

Vanguard recently released its How America Saves 2022 report with tons of data about the retirement accounts that they help manage. Let’s see what they found.

First of all, what does it take to max out your 401k company match? Roughly a 6% contribution rate over the years.

So… how many people actually max out their 401k company match? Roughly 70% of participants contributed at least the max match rate in 2021. For participants in plan with an auto-increase feature, this number goes up to 77% overall after three years.

If you aren’t at least maxing out the company match and getting your “free money”, hopefully this stat provides some peer pressure. Over 2/3rds are doing it! You don’t want to be below-average, do you?? 😱