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Can A TIPS Strategy Replace The 4 % Rule?
A new report proposes using a low-cost stock index fund and Treasury Inflation-Protected Securities to ensure lifelong retirement income. By Ben Mattlin
AS ADVISORS CONTINUE TO DEBATE THE BEST WAY for retirees to take income from their savings, a new approach emerged this fall from a research paper that challenges William Bengen’ s famous“ 4 % rule.”
This new take on decumulation involves mixing a low-cost stock index fund with a ladder of inflation-indexed bonds such as Treasury Inflation-Protected Securities( TIPS). And that’ s all. No other securities need to be in the portfolio.
“ We often hear that our retirement years should be about enjoying the fruits of our labor,” Stefan Sharkansky, the financial statistician proposing the new retirement planning method, said in a press release.“ This new research can help retirees feel more confident with their retirement plans.”
Sharkansky’ s paper builds on a previous strategy that recalculates every year how much money retirees can spend based on the value of their portfolio( a strategy called the“ annually recal- culated virtual annuity” approach). Sharkansky adds to that an updated decumulation method to ensure retirees don’ t run out of money.
“ Our main contribution is a practical and actionable framework for both the construction of the retirement portfolio and a strategy for spending down the portfolio during the retiree’ s lifetime,” the report explains.
Bengen’ s 4 % rule has long been viewed as a starting point for mapping out an annual withdrawal plan that helps retirees avoid running out of money. But the rule has been questioned in recent years, with planners suggesting that market volatility and inflationary pressures call for more flexible strategies.
Bengen himself has been busy rethinking his rule, and, in his latest book, said the ideal annual withdrawal rate probably is around 4.7 % if certain rules are followed.
The alternative allocation model proposed by Sharkansky has gained the attention of some advisors.“ The findings present a valuable contribution to research on sustainable retirement spending,” said Wade Pfau, author of the Retirement Planning Guidebook, in a statement.“ By combining a ladder of inflation-protected bonds( like TIPS) with a stock market index fund, [ the research ] shows how retirees can manage longevity risk, adjust for changing spending needs and draw variable income without running out of money.”
Sharkansky’ s portfolio is designed in two parts: The equity index fund provides low-cost growth potential. The TIPS ladder provides a predictable base of guaranteed income.
TIPS are far from the highest-yielding government bonds, but they provide certainty, the paper stresses. They pay a fixed interest rate that’ s applied to a principal value, and that principal value adjusts up or down with the inflation rate as measured by the Consumer Price Index. TIPS ensure that the value of the interest payments keeps pace with changes in the cost of living, Sharkansky said.
“ The TIPS ladder guarantees a predefined realdollar income stream,” the report said. For extra spending needs, however,“ withdrawals are made
DECEMBER 2025 | FINANCIAL ADVISOR MAGAZINE | 49