Hate Annuities at 58? A TIPS Ladder Can Fill the Income Gap

Many people nearing retirement want a reliable paycheck but are wary of handing a lump sum to an insurance company. For a 58-year-old who dislikes annuities, one alternative that planners often raise is a ladder of Treasury Inflation-Protected Securities, or TIPS. It aims for the same goal, conservative and predictable income, but it gets there with government debt the investor owns directly.

TIPS are bonds issued by the U.S. Treasury. Their principal adjusts with the Consumer Price Index, and interest is paid twice a year on that adjusted principal. If a bond is held to maturity, the investor receives at least the original face amount, so the inflation adjustments are added on top of a guaranteed floor. That combination is why TIPS are often described as a building block for a conservative portfolio.

A ladder spreads that protection across time. Rather than buying one bond, an investor buys several TIPS that mature in consecutive years, for example one each year from age 60 through age 90. As each bond matures, its principal is returned and used to cover that year's spending. Each rung lines up with a specific year, so the investor knows roughly how much cash is coming and when, and the payments can rise with inflation.

For someone who dislikes annuities, the appeal is largely about control. The money stays in the investor's own brokerage or Treasury account, there are no insurer surrender charges, and the holdings are visible at any time. Any bonds not yet spent when the investor dies can pass to heirs, which is not true of many annuity contracts.

The central trade-off is longevity. A life annuity keeps paying for as long as the annuitant lives. A ladder pays only through its final rung. Planners typically address that gap in one of two ways: by extending the ladder further into old age, or by pairing it with Social Security. Social Security is itself a lifetime, inflation-adjusted income stream, and each year of delayed claiming up to age 70 raises the monthly benefit. Used together, the two can cover essential expenses while the ladder handles the years before benefits begin.

Taxes add a wrinkle. The annual inflation adjustment to a TIPS principal is generally taxable as income in the year it accrues, even though the investor does not receive that cash until the bond matures. Holding TIPS inside a tax-deferred account such as a traditional IRA can avoid that annual tax bill, while the interest and adjustments are still taxed when money is withdrawn. Income from Treasuries is also exempt from state and local income tax in most states.

Market risk does not disappear. A TIPS bought at one price and sold before maturity can be worth more or less than what was paid, because bond prices move with real interest rates. The ladder works as designed only if each rung is held until it matures. Prices and available yields change daily, so the cost of building a ladder depends on conditions on the day it is purchased.

Investors can buy new TIPS directly through TreasuryDirect or through a brokerage, and older issues trade on the secondary market. Because every household has different spending needs, savings levels, and Social Security timing, the number of rungs and their size are personal decisions. A fee-only financial planner can help model how much income a ladder would need to produce, and how long it should run, before any money is committed.