New LifeX Funds Combine TIPS with Longevity Pooling for High Safe Withdrawal Rates

The most important and challenging financial problem is how much one can safely spend in retirement. In January of last year, I disagreed with Morningstar’s 3.8% real spend rate over 30 years; I thought that was too high. Then real rates on TIPS surged from -1% to 2%, and I was able to build a 30-year TIPS ladder for myself and clients with a 4.4% real distribution.

I now agree with Morningstar.

But implementing the TIPS ladder is clunky, so I challenged the fund industry to simplify and improve with a TIPS ladder Fund. Stone Ridge Asset Management has done just that with its new LifeX Inflation Protected mutual funds. In fact, it went beyond my challenge and implemented some longevity-risk pooling as well as monthly distributions including during the nearly six years between 2034 and 2040 when there currently are no maturing TIPS. I interviewed Nate Conrad, head of LifeX at Stone Ridge Asset Management. Nathan Dutzmann first wrote about these funds in Advisor Perspectives.

I took a deeper look and performed an economic analysis.

There are two series of LifeX mutual funds – one pays a fixed nominal rate while the other has inflation-protected increases. I’m examining only the inflation protected, as the nominal series could be devastated by inflation.

LifeX inflation-protected funds

  • Each open-end mutual fund is offered exclusively to investors of a particular birth year and gender (currently born between 1948 and 1963) and is only available through the advisor channel.
  • The funds intend to distribute monthly payouts until the end of the year in which the investor turns age 100.
  • The funds offer daily purchases and sales of shares until December of the year in which the investor turns age 80, at which point the funds will reorganize into a closed-end successor fund (the “successor funds”). Heirs would inherit the net asset value if the investor died before age 80 but, like most single-premium immediate annuities (SPIAs), nothing after age 80.
  • The successor funds intend to make payments to those still alive until December 31 of the year the cohort turned age 100, at which point any remaining funds would be distributed to the investors still alive.
  • All funds currently have a 1% annual expense ratio.