How TIPS Bridges Can Maximize Social Security Benefits

Like a bridge over troubled waters. 

Advisors with retiree clients probably know the basics of bridge strategies: In simple terms, they use other assets or income sources to cover living expenses while delaying Social Security. The core idea is straightforward: Monthly benefits increase 8% each year through age 70, making bridging a powerful way to increase guaranteed lifetime income. The hard part is actually building that bridge. Does one simply set aside cash? Draw from the total return portfolio? Maybe buy an annuity? 

For Nathan Dutzmann, CIO at Round Table Investment Strategies, the preferred strategy is crafting a bond ladder composed of Treasury Inflation-Protected Securities, known as TIPS. Though it can be tricky to model in financial planning software, the approach resonates with clients, Dutzmann said, especially those worried about sequence of returns and longevity risks. 

Building Bridges 

The first step is helping clients understand what TIPS do and why one would delay Social Security in the first place. “Social Security income has two key characteristics,” Dutzmann said. “They are guaranteed lifetime income and inflation adjustments.” TIPS share one of those characteristics, i.e., inflation protection, thanks to the fact that they enjoy both increasing principal and larger interest payments over time. So, a TIPS ladder can very effectively preserve purchasing power during the bridge years. “That alignment is important because the whole purpose of delaying Social Security is usually to secure larger real lifetime income later in life,” Dutzmann said. 

The next key step is helping clients set a realistic budget, both for the bridge period and afterward. Dutzmann’s firm uses an in-house tool to assess clients’ inflexible vs. flexible spending needs and then compare these with guaranteed versus risky future income sources. “Clients seem to understand that terminology more than ‘wants’ versus ‘needs,’” Dutzmann noted. “Wants versus needs is a very values-driven and abstract comparison.”

For many, TIPS ladders of longer durations can be appealing, and some even choose to build a maximum length 30-year TIPS ladder to effectively take longevity and inflation risk off the table. Generally, however, a shorter TIPS ladder is preferred to boost guaranteed income, while leaving a substantial portion of the nest egg invested in the stock market. 

Another Big Fan. The prominent retirement researcher Michael Finke is also a fan of TIPS ladders, including longer ones. A 65-year-old client can go out today and buy a ladder of TIPs through the age of 95, Finke said, and it will pay about 4.7% after inflation at today’s rates. That’s in line with what a conservative spending plan would look like coming out of the portfolio. “In effect, a 30-year TIPS ladder solves the retirement problem outright,” Finke said. “The thing is that people don’t understand that unless an advisor is there to guide them.”