TIPS Ladders vs. Annuities: Which Strategy is Best for Retirement Income?

Can TIPS ladders or annuities help generate more retirement income than a traditional withdrawal strategy?

In this conversation, Morningstar’s Jason Kephart, director of multi-asset ratings, explores how 2025 market conditions have changed the math for retirement income planning—including the role of Treasury Inflation-Protected Securities (TIPS), Social Security, immediate annuities and deferred annuities.

Kephart examines the potential benefits, trade-offs, and portfolio implications of strategies designed to address longevity risk—while still balancing flexibility, liquidity, and legacy goals.

Our research on the state of retirement income dives into:

• How to navigate market and spending shocks during retirement
• The impact of public and private investment in retirement strategies
• Which retirement withdrawal strategies are right for your clients' retirement needs

Christine Benz: In the paper, you do examine using a laddered portfolio of TIPS bonds and using that to augment social security. Can you talk about what you found in 2025 and how did that compare to the 2024 result?

Jason Kephart: Yeah, it went up a little bit. TIPs yields got a little bit more attractive. But what we basically found was that, if you're just thinking about our safe spending rate of 3.9%, you compare that to what you get with a TIPS ladder where you buy a TIPS that expires every year for 30 years, you basically end up with 4.5%.

So, that's a lot more kind of guaranteed lifetime spending and then you add social security on top of that, then you get some pretty good results. But, that's probably a little extreme for most people. And I think we'll talk about the the drawbacks, but it is kind of a cool idea in theory. 

And we also looked at what happens if say you do a TIPS ladder but also add some equity on the end so that way you do have something left over at the end. And we found that that also could be an attractive strategy. Maybe it's not something you want to do with your entire retirement income, but potentially if you can cover some basic living costs that way, it could be an interesting way to approach it.

Benz: Okay, let's talk about those drawbacks with the TIPS ladder. Academics love TIPS, my Boglehead friends love TIPS, but what are the main disadvantages to that TIPS ladder?

Kephart: Yeah, with the TIPS ladder, if you're doing a 30-year ladder and putting all your eggs in that basket, you're locking in to that strategy. You're not really giving yourself a lot of flexibility. So that's one thing.

The other thing is at the end of the 30-year period, your account balance is going to be zero. You're going all in on retirement spending  and not going to have anything left over at the end, which a lot of people might prioritize.

So that's why I think if you're thinking about a TIPS ladder as part of your retirement income strategy, you want to lock in something without going the the "A word" route, maybe the TIPS ladder is an interesting way to do it.

Benz: Okay, let's talk about the "A word:" the annuities. Another product type that academics tend to really like in terms of enlarging retirement income. A lot of consumers really don't love annuities, maybe because of the high cost and transparency, but let's talk about the annuities that you examined in the paper. You didn't get into the ones that are more complicated and have those really high fees attached to them, right?

Kephart: Yeah. They can come in a million different shapes and sizes and customized, so we've stuck with the very simple ones, either immediate income annuities where you hand over a lump sum of money and you start getting monthly checks in the mail, or deferred income annuities where you put up money now, but around age 85 you would start actually getting the payouts.

Benz: So, as with delaying social security, you found that buying some sort of an annuity does help enlarge lifetime income, but it's not a free lunch. So, can you talk about the tradeoffs of that annuity allocation?

Kephart: So, right now, it's an interesting time because when we look at just basic income annuities and when we looked at the rates you were getting now, they were decently higher than our forecast for fixed income. So, if you're funding a portion of your fixed income portfolio or using a portion of your fixed income portfolio to buy an income annuity, you're actually boosting your income by a decent amount.

And we found that that actually did help with retirement spending. Because if you take out 10% of your fixed income portfolio and then rebalance the rest to keep it at 40/60, essentially your equity weight is still going higher. So, you actually do have higher lifetime ending balances, too. So, the immediate income in annuities do look pretty good right now on that lens. 

However, the trade-off is once you're in, your money's gone. There's not a lot of liquidity there, so you are kind of locking into that. And then the other thing with annuities in general, the longer you live, the better bang for your buck you get. With a deferred income annuity, if you're waiting for it to kick in at 85, if you look at life expectancies, there's a 50% chance you won't have it. So you gave up money for something you might not need, but that's another drawback. And you know, that depends on your own health circumstances.

But in general, there's no government backing, there's no CPI adjustment like there is for Social Security. You can buy cost living adjustments, which will decrease your income, but again, if CPI is higher, you're not going to keep up with it there.