{"id":153958,"date":"2025-03-24T16:03:36","date_gmt":"2025-03-24T16:03:36","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/investing\/using-tips-funds-as-a-social-security-bridge-oblivious-investor\/"},"modified":"2025-03-24T16:03:36","modified_gmt":"2025-03-24T16:03:36","slug":"using-tips-funds-as-a-social-security-bridge-oblivious-investor","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=153958","title":{"rendered":"Using TIPS Funds as a Social Security Bridge \u2014 Oblivious Investor"},"content":{"rendered":"


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A reader writes in, asking:<\/p>\n

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\u201cThis might be a question other people have too, but it\u2019s certainly on my mind: you\u2019ve spoken a lot about social security bridges using TIPs. If I were to use a TIPS fund instead of individual TIPS bonds, and the start of the bridge is about 1-2 years away, would it be better to use a shorter duration fund like VTIP rather than an intermediate duration fund?\u201d<\/p>\n<\/blockquote>\n

With TIPS mutual funds rather than individual TIPS, in theory the idea is that the fund\u2019s average duration<\/a> should match the average timing of the cash outflows<\/i>.<\/p>\n

For example, if the first payment were 1 year from now and the last were 8 years from now, we\u2019d want an average duration of 4.5 years: (1+2+3+4+5+6+7+8)\/8 = 4.5.<\/p>\n

But a key point here is that the duration of a bond fund will stay more or less constant, whereas we actually want the duration to decline<\/em> over time, as the desired cash outflows come closer and closer to the present.<\/p>\n

In our example above, after one year has elapsed, we\u2019d want the average duration to be 4 years: (1+2+3+4+5+6+7)\/7 = 4. Another year later, we\u2019d want the average duration to be 3.5 years: (1+2+3+4+5+6)\/6 = 3.5. And so on.<\/p>\n

So, for the best match, we need to use two<\/em> different funds and adjust the balance between them over time (i.e., shifting more toward the fund with the shorter duration) in order to keep the weighted average duration where we want it.<\/p>\n

But at that point, it\u2019s actually more<\/i> work than just buying 8 individual TIPS all in one sitting to begin with. (With a ladder of individual TIPS, the work is all up-front. Once they have been purchased, you just let them sit there until they mature and you spend the money. And if we\u2019re talking about a fairly short ladder such as an 8-year Social Security bridge, you\u2019re only buying a handful of different bonds.)<\/p>\n

So in short:<\/p>\n