Your retirement portfolio has a duration of 3–5 years. Your retirement spending has a duration of 15–20 years. That gap — 10 to 15 years of unhedged interest rate risk — is the largest single risk in most retirement plans. No one talks about it. Almost no one measures it. And the instrument that closes it has been available to individual investors since 1997.
Duration: What It Actually Means
Duration is the weighted average time until you receive cash flows from an asset. A bond that pays you back in 2 years has a duration of roughly 2 years. A bond that pays you back in 20 years has a duration of roughly 20 years.
But duration is more than a calendar number. It measures sensitivity to interest rates. When rates rise by 1%, an asset with 5-year duration falls about 5%. An asset with 20-year duration falls about 20%.
Here is the critical implication that the retirement industry ignores: duration also works in reverse. When rates fall by 1%, the 5-year asset gains 5% but the 20-year liability increases by 20%. If your assets have short duration and your liabilities have long duration, a fall in interest rates destroys your funded ratio — not because your portfolio lost money, but because the cost of funding your retirement just went up far more than your assets appreciated.
This is not speculative. It is arithmetic.
Your Spending Is a 15–20 Year Duration Liability
If you are 50 years old and plan to retire at 65, you have a consumption stream that runs from age 65 to roughly age 90 — or 95 if you're prudent. That stream of real spending is your liability. Its weighted average timing is centred around age 75–80, which puts it 25–30 years from now. Discount for mortality and weight by present value, and the effective duration is in the range of 15–20 years.
Pension funds calculate this precisely. They call it the "liability duration," and they spend billions matching it. For a typical corporate pension with a mix of active and retired members, the liability duration sits around 12–18 years. They know this number to the decimal because getting it wrong is the difference between being funded and unfunded.
Individual investors? Almost no one has calculated it. Ask any FIRE enthusiast the duration of their spending liability and you will receive a blank stare. It is the most important number in their financial life and they have never measured it.
Your Portfolio Is a 3–5 Year Duration Asset
Now look at the other side of the balance sheet — your portfolio.
| Asset | Approximate Duration |
|---|---|
| Cash / money market | 0.1 years |
| Short-term bond fund (BSV) | 2.5 years |
| Total bond market (BND) | 6.2 years |
| 60/40 (equity + BND) | ~2.5 years (bond portion only) |
| Target-date fund (2040) | ~3.5 years (bond portion only) |
| S&P 500 / total stock market | ~0 years (no duration match to real liability) |
| TIPS 0–5 year (VTIP) | 2.5 years |
| Individual TIPS held to maturity (2040) | ~15 years |
The typical FIRE portfolio — 80% equities, 20% total bond market — has a duration-matched component of roughly 20% × 6 years = 1.2 years against a 15–20 year liability.
That is a 14–19 year duration gap.
JL Collins — whose Simple Path to Wealth I recommend to anyone starting their accumulation journey — advises 100% VTSAX (Vanguard Total Stock Market). For accumulation, this is defensible: you are decades from needing the money, and equities compound powerfully over long horizons. But for decumulation, VTSAX has a duration-matched component of exactly zero. The real-rate beta (βᵣ) on equities is approximately 0.0. A 100% VTSAX retiree has a duration gap equal to the entire duration of their consumption liability — 15 to 20 years of completely unhedged interest rate risk. Collins's advice to "stay the course" is correct for the equity premium — that is good beta, and patient investors earn it. It is not a solution to the duration problem. You can stay the course on equities while also matching the duration of your spending with TIPS held to maturity. These are not competing strategies. They address different risks.
Even a "conservative" 60/40 portfolio has a bond-side duration of ~6 years, giving a total duration-matched component of 40% × 6 = 2.4 years. Still a 13–18 year gap.
What the Gap Costs
The duration gap is not abstract. It has a precise, measurable cost.
Every 1% fall in real interest rates increases the present value of a 15-year-duration liability by approximately 15%. If your assets have 3-year duration, they increase by only 3%. The gap — the unhedged 12 years of duration — means your funded ratio drops by roughly 12 percentage points for every 1% move in real rates.
From 2000 to 2020, real interest rates on 20-year TIPS fell from approximately 4% to approximately 0%. That 4-percentage-point decline increased the present value of a real consumption liability by roughly 60%. A retiree's spending liability — the cost of buying an inflation-adjusted income stream — nearly doubled over two decades.
During the same period, balanced portfolios performed well in nominal terms. Stock returns were positive, bond returns were positive (because falling rates drive bond prices up). On any wealth-based metric, portfolios looked fine.
But the funded ratio collapsed. The cost of the liability rose far faster than the assets. An investor who was 100% funded in 2000 — with enough assets to buy their entire real consumption stream — was approximately 65% funded in 2020 using the same portfolio. Their wealth grew. Their purchasing power over lifetime consumption shrank.
They got richer. They could afford less retirement. That is the duration gap at work.
Why Cash Is the Most Dangerous Asset
This is where intuition fails catastrophically.
Cash feels safe. No drawdowns, no volatility, always there when you need it. And for a short-horizon investor — someone who needs the money in 6 months — it is safe.
For a long-horizon investor funding a 15–20 year liability, cash is one of the most dangerous assets you can hold. Here is why:
Cash has zero duration. When real rates fall, cash yields fall with them. Your reinvestment rate drops. But your liability — the cost of funding 25 years of real spending — goes up because the discount rate used to value it has fallen.
In the language of Campbell and Viceira: cash has a real-interest-rate beta (βᵣ) of approximately +1.0. It is maximally exposed to reinvestment risk. When the real rate falls by 1%, your sustainable real income from cash holdings falls by approximately 1% — every year, compounding, for the remaining duration of your liability.
This is the opposite of what most investors believe. They think cash is the safest place to wait while "figuring things out." In funded-ratio terms, cash is a massive unhedged bet that real interest rates will rise. If they don't, the cost of your retirement climbs away from you while your cash yields nothing that keeps pace.
The 2010s proved this. Investors sitting in cash waiting for rates to normalise watched the cost of their consumption liability double while earning 0% real. By any wealth measure they were fine — the cash was still there. By any income measure they were progressively less able to fund their retirement.
The Instrument That Closes the Gap
Treasury Inflation-Protected Securities — TIPS — are the only instrument available to individual US investors that matches both the real character and the duration of a retirement spending liability.
A TIPS bond purchased at par with a maturity matching your spending year delivers a known real cash flow at a known future date. If you buy a 2040 TIPS today and hold it to maturity, you receive an inflation-adjusted principal payment in 2040 regardless of what interest rates, stock markets, or inflation do between now and then.
This is not a trade. It is not a bet on rates, or inflation, or equities. It is a match: a real asset, with the right duration, funding a real liability of the same duration. The duration gap on that portion of your spending is zero.
Pension funds understand this. When a corporate pension wants to "de-risk," it buys long-duration TIPS and nominal bonds to match its liability duration. It is called liability-driven investing, and it is the standard of practice for every well-managed defined benefit plan in the world.
Individual investors — including the most analytically sophisticated members of the FIRE community — almost never do this. They hold VTIP (duration 2.5 years) instead of individual TIPS maturing in 2035–2050. The duration match is 2.5 years instead of 15–20 years. They are hedging 15% of their interest rate risk and leaving 85% on the table.
The Irony of "Conservative" Allocations
The standard advice for retirees approaching or in retirement: "shift to a more conservative allocation — more bonds, less equities."
This advice is directionally correct and specifically wrong. The problem is not the equity allocation per se — it is the duration of the bond allocation. Shifting from 80/20 equities/bonds to 60/40 equities/bonds improves the duration match only if the bonds have the right duration.
If the "bonds" are a total bond market fund (BND, duration ~6 years), the shift from 80/20 to 60/40 moves your duration-matched component from 1.2 years to 2.4 years. Against a 15-year liability, you have closed the gap by 1.2 years. The remaining 12.6-year gap is still enormous.
If the "bonds" are individual TIPS maturing in 2035–2050, the shift to 40% in those instruments gives a duration-matched component of 40% × 15 = 6 years. You have closed the gap from 15 years to 9 years — a meaningful improvement that no amount of total-bond-market allocation can achieve.
Duration matching is not about the quantity of bonds. It is about the character of bonds. This distinction — between how much and what kind — is the central contribution of liability-driven investing, and it applies to individual retirement portfolios with exactly the same force as it applies to pension funds.
What Pension Funds Know
Every competent pension consultant in the world presents a client's position as a matrix:
| Assets | Liability | Gap | |
|---|---|---|---|
| Duration | 6 years | 15 years | −9 years |
| Inflation hedge | 30% real | 100% real | −70% |
| Funded ratio | — | — | 83% |
Three numbers. Duration gap, inflation gap, funded ratio. That is the entire diagnosis. All decisions — asset allocation, hedging, contribution requirements — flow from these three numbers.
No pension consultant measures success by the size of the pot. They measure it by whether the pot can buy the income it's supposed to fund. The direction of rates matters. The inflation sensitivity matters. The duration match matters.
The retail retirement industry measures success by the size of the pot.
This is why I designed SeLFIES — Standard-of-Living indexed, Forward-starting, Income-only Securities. A single instrument that automatically provides the right duration (forward-starting, maturing across the spending horizon), the right inflation character (indexed to real consumption), and the right measure of success (income per year, not wealth). Until such instruments exist, TIPS held to maturity are the closest available implementation of the same principle.
Your retirement portfolio has a 3–5 year duration. Your retirement spending has a 15–20 year duration. The gap is costing you purchasing power every year that real rates stay low, and no amount of equity returns or bond rebalancing will close it. The fix is specific: match the duration and real character of your assets to your liability using TIPS held to maturity. Pension funds have done this for decades. You can do it today.
This is Post 5 of The Funded Ratio — a weekly series on amifunded.com applying pension fund mathematics to individual retirement portfolios. The next post: "Factor Betas: The Three Numbers That Actually Describe Your Portfolio." Subscribe to get it when it drops.
This is Post 5 of The Funded Ratio — a series on amifunded.com applying pension fund mathematics to individual retirement portfolios. Built on the Campbell-Viceira (2002) intertemporal asset allocation framework, the lifecycle consumption theory (Merton, 1969; 1971), and the liability-driven investing practices used by pension funds, endowments, and sovereign wealth funds worldwide. No financial advice is given. All methods use publicly available academic research and market data.