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Hi CuriousQ --

I like your attitude and perspective.

I took advantage of the rising stock market to build out my bond ladder to my full 7 year target. I don't particularly want to increase it any farther because I am banking on stocks to provide my long term inflation protection since cash and bond interest rates do not currently adequately compensate for inflation and taxes for me to consider them for that purpose. At the same time, I'm a bit nervous about current stock valuations and am finding it harder to commit new cash or cash from dividends and interest to new investments, though I do still find an occasional reasonably priced pick.

Upon thinking about how to go from here, I decided that there was one lever I was willing to adjust to try to balance the various risks. I use an assumed inflation rate in my bond ladder. Using fake numbers, assume I need $9,500 per quarter in current money. I estimate an inflation rate, such that the bond ladder would throw off $10,000 in the first quarter, and once the estimated inflation puts my cash needs above $10,000, the future rungs would be boosted to $11,000 -- and so on, so that the inflation-adjusted cash would be fairly consistent over time.

Up until this point, I have used a 3% annual inflation rate in those assumptions for my bond ladder. Based on the aggressively inflationary policies being pushed by Washington DC, I've just upped those inflation estimates to 6%. From a practical perspective, that has the effect of speeding up those ratchet points so that future rungs in the bond ladder will be that much larger. Frankly, I don't even know if that is adequate. By the BLS' own numbers, energy inflation is running around 13.2% ( ). Since energy is ultimately an input cost into practically everything else, there is a risk that those surging costs will soon find their way up much of the rest of the value chain.

With that adjustment, there are currently a few time periods in my real-money bond ladder where the expected maturing bonds in my portfolio are insufficient to directly cover those anticipated costs. However, in each of those time periods, the anticipated interest payments cover the gap in anticipated maturing bonds, so I'm okay with holding the line on those time periods and not increasing those existing rungs.

Still, it's an estimate, and the reality is that the more I shift to bonds, the less I have positioned to potentially fight the real as opposed to assumed inflation that does arise. So investing remains a balancing act, and while I've adjusted the balance, I'm not radically changing the overall plan.

Home Fool
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