This is more of an investment question than a trading question, but there are some smart fixed income guys on here that could probably help me out. Let's say I am earning a pension in my retirement that pays $50,000/year. (I know, pensions, how quaint!). I am not concerned with the pension sponsor's ability to pay the pension payments for at least the rest of my life, BUT...there is no cost of living adjustment. What I would like to do (conceptually), is utilize products (stocks/bonds/futures/options) that are available to retail (or at least through an adviser) that could replicate CPI each year as a coupon to add to the pension payment, in order to convert a "nominal" pension into a "real" pension. So, in year one, CPI is 2%, so my total payment would be $50,000 + $1,000 = $51,000. In year two, CPI is 1.5%, so my total year two payment would be $51,000 + $765 = $51,765, and so on. I fully realize that a) I would need additional funds to create this "bond." and b) it may be impossible to create in perpetuity (like an immediate annuity). Normally, one could create a "synthetic real pension" by constructing a 30 year TIPS ladder (Wade Pfau wrote an good how to guide). The twist here, is that I don't need the principal payments of the TIPS ladder - I just want the cumulative coupons to add to my fixed pension payment. I know that there are inflation swaps out there, but that is institutional only. Could I buy a series of 1 year TIPS and short a 1 year treasury against it, rolling the principal into the next year after sweeping the spread? I feel like I'm missing something obvious here.
By construction, to convert a nominal payout into a real payout, you need to do a "breakeven inflation" trade. Specifically, you need to buy a TIPS and sell a nominal treasury. The issue is, of course, that selling a bond is rather tricky in a non-institutional context. You could, I suppose, use ETFs, but I am not sure what's on offer out there and whether the TIPS and nominal indices line up properly.