I'm 58 and hate annuities. How can I get dependable income in retirement?

By Beth Pinsker

For a person looking to make their portfolio more conservative, a TIPS ladder may achieve the same effect

A TIPS ladder could complete part of your retirement income puzzle, but not all of it.

Got a question about retirement? Fill out our questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line).

Dear Fix My Portfolio,

I will not buy annuities ...but I want a pretty dependable paycheck in retirement. How well would a TIPS ladder work?

I'm 58 and plan to work for seven more years (unless laid off earlier, which is also a constant concern these days). I want to try to hold off on Social Security until 70, so there will be a gap from 65 to 70 where I will need to depend on my portfolio more heavily.

I have mostly equities and it's probably time to fix that. So my plan would be to ladder a series of TIPS to provide income for the five-year gap. According to my calculations, I can put about a quarter of my money into defined maturity ETFs, where the ETF liquidates and shuts down in the year you buy it, so it's held until maturity. Or should I buy all five years now to lock in the current high real yield?

Once I get to 70, rental income and Social Security will likely not fund all of my income needs, so I'll need to spend more of my portfolio. For that, I was thinking I'd allocate another quarter to cash and ultrashort Treasury ETFs. Then the remaining half of the portfolio would be left to grow in equities.

Am I locking up too much money now instead of letting it grow another three or four years? My thinking is that it might not make my portfolio grow as much as it could if it were all equities, but it would give me a forever paycheck. If needed, I could still sell shares or I could stop reinvesting dividends.

I don't need to be wealthy. I just want to make sure I have what I need in retirement. And if I can leave something to my kids that would be great also.

Feeling TIPsy

Dear Feeling TIPsy,

People have very strong feelings about annuities - mostly negative. But as I recently discussed with Prudential's head of research, David Blanchett, insurance contracts for monthly checks solve a need that people say they want: guaranteed income in retirement. It's never too soon to start thinking about this, and 58 is definitely not on the early side for starting to implement a plan.

The reason you're a little queasy about being 90%-plus in equities all of a sudden is because your risk tolerance naturally tends to shift as you age. There's no right or wrong to that, because it's about your perceptions and what level of security helps you sleep at night. It makes sense mathematically, too, because you're going to stop work soon, and you have less time to make up for losses in the market.

If you're looking for guaranteed income in retirement, there are many ways to go. Annuities are one route, for sure, but that's a nonstarter with you. Another option is to shift your portfolio allocations toward more fixed income - Treasury products, corporate bonds, dividend stocks, cash instruments like CDs or even just high-yield savings accounts. You can mix and match as you see fit.

Leaning toward TIPS means one of your chief worries is inflation. TIPS are Treasury Inflation-Protected Securities, and you can buy them directly from the government at issue at treasurydirect.gov, on the secondary market through brokers or in the form of ETFs or other funds. With these, you never lose your invested amount if you hold to maturity, but the principal value will fluctuate, along with the twice-yearly interest payment, according to the inflation rate at the time.

If you're looking for an easier option to understand than annuities, TIPS may not be the answer. "TIPS are complicated," said Jeremy Fletcher, a partner and head of trading at Asset Dedication, a firm that handles TIPS investments. As a chartered financial analyst and somebody who helped start one of the earliest TIPS mutual funds in the 1990s, Fletcher would know.

For laddering, Fletcher said that his team favors the kind of term-maturity ETFs you're talking about. "They mature each year around mid-October, so you get a similar experience to owning individual bonds," he said. Among the benefits, he liked that they could be bought in smaller quantities than buying direct, which can be helpful to individual investors, and that the management fees are minimal, usually around 10 basis points.

He did offer a few caveats, however: "The inflation accrual is passed through along with coupon interest on a quarterly basis; so if the payments are not reinvested, you don't get the full benefit of inflation protection," he said. Also, the ETFs only go out 10 years, while TIPS from the government can go out 30 years.

Also be mindful of where you hold your TIPS ladder, because there may be tax issues you're not aware of because of how and when the income hits your return each year.

If you're looking for more information, Fletcher suggested going to an online program like TIPSladder.com for help structuring, or to your brokerage of choice. All should have a calculator to help you construct a ladder with the timeline and budget that you would like.

Overall strategy

Your plan is to go from all-in on stocks to something more akin to 50-50, with your fixed-income side split between a TIPS ladder and short-term Treasurys. Doing that in one fell swoop might feel jarring to you. A more typical progression is to ratchet down to about 70% equities and 30% in fixed-income products, and then go from there. You could ladder TIPS, but also you could ladder CDs or just keep some funds in cash for emergencies, like being laid off.

You could also consider taking Social Security at 67 instead of 70, to avoid dipping too far into your principal in the years after you stop working. This is not a suggestion for action, but rather something worth running as a scenario. There are plenty of calculators available for figuring out your optimal claiming strategy. What you want to look for most is the difference between the lifetime increase in your Social Security payout at 67 compared with 70, and how that compares to taking that amount out of your portfolio. It could be that the ding to your savings is not worth it, but you'd need to see the actual numbers to know that for sure.

One last thing to think about is that you'll need to reset your TIPS ladders eventually, because they do not run for your entire lifespan. While the product is designed to protect you against inflation during the term you buy for, you will face reinvestment risk. You're young, and that could mean several cycles of ladders, and you don't know what inflation will be in 20 years.

You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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-Beth Pinsker

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10-22-26 1000ET