Stocks and bonds in this model
If you have seen a typical target-date fund glide path, you might expect this planner to gradually shift from stocks to bonds as you age. This planner does rebalance over time—but using a very different philosophy.
Most retirement planners think about growing a portfolio. This planner thinks about funding future spending obligations.
That is the same philosophy used by pension funds and insurance companies. Future retirement spending is treated as a series of liabilities that must eventually be funded. Stocks are used to build wealth, while bonds are used to lock in the future income needed to meet those liabilities.
In other words, stocks create future income. Bonds secure it.
Stocks and bonds in a traditional portfolio
Traditional planners consider "stocks" to be equity index funds and "bonds" to be fixed-income funds. They shift from stocks to bonds as you age because bond returns are less volatile, helping reduce the sequence risk that is present in traditional portfolio planning.
The problem is that this is not a complete solution. Bond funds do not hold specific securities to maturity and therefore always carry some degree of interest rate risk.
Consider the iShares 7–10 Year Treasury ETF. This fund is composed entirely of risk-free U.S. Treasury bonds. From 2022 to 2023, yields on 7–10 year Treasuries rose by approximately 2%. This caused the ETF to decline by more than 20%. The bonds themselves remained risk free, but the market value of the fund fell because existing low-coupon bonds became less attractive after interest rates increased. If you had been planning to retire shortly after 2022 and had a significant portion of your portfolio invested in Treasury ETFs, this would have been a major setback to your retirement readiness.
In this planner, risk-free bonds are held to maturity to lock in cash flows when they are needed, completely removing exposure to interest rate risk. If you purchased a 10-year Treasury in 2022 and held it to maturity, you would never lose any of your principal. Under this approach, your retirement readiness would not have been affected.
Building wealth
Before and after retirement, the stock sleeve is the growth engine. This planner models retirement wealth using a diversified equity portfolio because equities have historically been the primary driver of long-term wealth accumulation. In addition, their liquidity makes them ideally suited for dynamically converting wealth into income.
In the planner:
- Pre-retirement contributions flow entirely into stocks.
- Stock returns are stochastic—drawn from historical real total returns using block bootstrap simulation—so paths can experience clustered good and bad years similar to history.
- Stock wealth is gradually converted into guaranteed income by purchasing a bond ladder as retirement approaches.
- After retirement, remaining stock stays invested and is used to build on the existing bond ladder to produce the Income Ratchet. The value does not disappear; it is simply converted from uncertain wealth into locked-in cash flows.
The bond ladder
The bond sleeve behaves very differently from a generic fixed-income allocation.
- Unlike a bond fund, the bond sleeve is built from individual TIPS that are intended to be held until maturity. Returns are determined by the current real yield curve implied by today's inflation-protected Treasury prices, not by random historical bond returns.
- Short-term risk-free bonds accumulate until retirement readiness is achieved. They are all held to maturity and therefore are not exposed to interest rate risk.
- At retirement, your existing bond balance is converted into a real bond ladder that provides level, inflation-adjusted income from retirement through your planned end age. A bond ladder is a portfolio of bonds with different maturities that generates a predictable stream of income. For example, purchasing 1-year, 2-year, and 3-year Treasuries ensures a steady stream of principal and interest payments one, two, and three years from today. That income is guaranteed for the duration of the ladder.
- After retirement, there are only one-way transfers from stocks to the bond ladder. The bond ladder is never sold to buy back stocks. In this way, the bond ladder produces guaranteed income, and retirement income only ratchets upward.
Holding individual bonds to maturity means changes in interest rates do not affect your retirement readiness.
Once future income has been locked in, market fluctuations in bond prices become irrelevant because the bonds are never intended to be sold.
Why TIPS?
Bond ladder income is priced using TIPS (Treasury Inflation-Protected Securities) because the entire plan is measured in real dollars—today's purchasing power. The ladder assumes level real income held to maturity along the forward curve. Stock returns are also modeled as real returns. This assumption helps mitigate inflation risk throughout the planning process.
In practice, TIPS principal is adjusted for inflation, providing additional retirement income as prices rise. Because both returns and income are measured in real dollars, the planner focuses on preserving purchasing power rather than nominal account balances.
What this means for you
When you look at the glide-path charts in the app, a rising bond allocation does not simply mean "getting conservative because you are old."
Instead, it means that a larger share of your future retirement income has already been secured against market risk.Stocks and bonds in this model
If you have seen a typical target-date fund glide path, you might expect this planner to gradually shift from a stocks to bonds as you age. This planner does rebalance over time — but using a very different philosphy.
Most retirement planners think about growing a portfolio. This planner thinks about funding future spending obligations.
That is the same philosophy used by pension funds and insurance companies. Future retirement spending is treated as a series of liabilities that must eventually be funded. Stocks are used to build wealth, while bonds are used to lock in the future income needed to meet those liabilities.
In other words, stocks create future income. Bonds secure it.
Next: The security ratio — turning guaranteed vs potential income into one number.