Morningstar’s research highlights building a ladder of Treasury Inflation-Protected Securities (TIPS) as a highly efficient withdrawal strategy. A 30-year TIPS ladder can sustain a guaranteed 4.6% withdrawal rate with a 100% success rate, backed by the full faith and credit of the U.S. government.
Mechanics You construct a portfolio of TIPS with staggered maturities ranging from 1 to 30 years. Each year, a portion of the ladder matures, providing you with inflation-adjusted principal and interest. By year 30, the ladder is completely spent (self-liquidating), leaving no residual balance.
The Phantom Income Trap While elegant in theory, holding a large TIPS ladder inside a taxable brokerage account during periods of high inflation is a tax disaster. The IRS taxes the annual principal inflation adjustments as ordinary income in the year they accrue, even though you do not receive the cash until the bond matures. This “phantom income” can create a massive, unfunded tax liability. A CA retiree in the 45% stacked bracket facing a 6% CPI print on a $1M TIPS ladder owes $27,000 in cash taxes on interest they have not yet received.
Unbreakable Rule: Build TIPS ladders strictly inside tax-advantaged wrappers (Traditional or Roth IRAs), where phantom income accrues invisibly.