How Stocks and Bonds Work Together in LadderUp
How much of your retirement portfolio should be invested in stocks versus bonds?
Traditional retirement strategies often rely on familiar rules, such as maintaining a 60/40 portfolio or gradually increasing bond allocations as you age.
LadderUp takes a different approach. Rather than starting with a predetermined stock/bond allocation, it determines the investment strategy that best supports your retirement goals.
The underlying principle is straightforward: stocks provide opportunities for growth, while bonds secure future retirement income.
The challenge is determining when, and how much, to shift between them.
Two Different Roles for Stocks and Bonds
In LadderUp, stocks and bonds serve fundamentally different purposes.
Stocks are the growth engine. They provide opportunities to accumulate wealth and increase future retirement income. However, their value fluctuates with market performance, making the income they can support uncertain.
Bonds secure retirement income. LadderUp uses Treasury Inflation-Protected Securities (TIPS) to construct a bond ladder designed to provide predictable, inflation-adjusted payments throughout retirement.
A bond ladder is a portfolio of individual bonds with different maturities. By matching their principal and interest payments to anticipated retirement expenses, investors can secure future income without depending on stock market performance.
Social Security provides another important source of retirement income security.
Together, these investments allow LadderUp to balance two competing objectives: preserving opportunities for future income growth and protecting income already accumulated.
Why Traditional Bond Allocations Are Different
Traditional retirement portfolios use bonds primarily to reduce investment volatility.
While bonds generally experience smaller price fluctuations than stocks, their market values still respond to changes in interest rates.
For example, a Treasury bond fund can decline substantially when interest rates rise. Even though the underlying Treasury securities carry very little credit risk, investors who need to sell shares after rates increase may realize significant losses.
LadderUp uses a different approach.
Instead of relying on bond funds to reduce portfolio volatility, it uses individual TIPS to secure future retirement payments.
When TIPS are purchased to match future spending obligations and held to maturity, changes in market interest rates do not alter their contractual inflation-adjusted payments.
The bonds' market values can still fluctuate, but those fluctuations do not change the payments already secured.
This distinction is important. The objective isn't simply to reduce portfolio volatility. It's to provide the retirement income the investor needs.
Determining the Optimal Portfolio Allocation
There is no universally optimal stock/bond allocation.
Someone who is 30 years from retirement may benefit from maintaining substantial stock exposure. Someone approaching retirement may place greater value on securing the income their portfolio can already support.
But age alone isn't enough to determine the appropriate allocation.
Two individuals of the same age, with identical portfolios, may need very different investment strategies depending on their desired retirement income, risk preferences, and willingness to delay retirement.
LadderUp evaluates these tradeoffs using simulations of potential investment outcomes.
Rather than following a fixed allocation rule, the model determines how much stock exposure is appropriate and when accumulated wealth should be converted into income-securing investments.
This helps avoid both extremes: investing too conservatively and sacrificing valuable growth opportunities, or remaining too aggressive and exposing retirement income to unnecessary downside risk.
The resulting stock-TIPS allocation evolves with the individual's retirement objectives, investment performance, and changing market conditions.
Increasing Secured Income Throughout Retirement
LadderUp's investment strategy continues after retirement.
At retirement, a portion of the portfolio is allocated to a TIPS ladder designed to provide secured income through the planned retirement horizon. Remaining assets can stay invested in stocks, preserving opportunities for future growth.
When stocks perform well, some of those gains can be used to purchase additional TIPS, increasing the amount of secured retirement income.
Once this income has been secured, subsequent stock market declines do not erase those future payments.
This creates an income ratchet, allowing favorable investment performance to raise secured retirement income while protecting previously secured payments from future market losses.
As retirement progresses, the model generally shifts toward greater income security. The investment allocation evolves in response to the value of continued growth opportunities and the importance of securing the remaining retirement income.
Why TIPS
Treasury Inflation-Protected Securities are particularly well suited to this strategy because their principal adjusts with inflation.
Unlike conventional Treasury bonds, which promise fixed nominal payments, TIPS provide payments linked to inflation. A properly constructed ladder can therefore help preserve the purchasing power of retirement income.
This is important because LadderUp measures retirement income in today's dollars. Its objective is to support a consistent standard of living rather than simply maintaining a fixed nominal income.
Next: How Much of Your Retirement Income Should Be Secured? — understanding how the Security Ratio measures retirement readiness.