Time to Buy Treasury Inflation Protection Securities (TIPS)?

Yields on TIPS are now the highest they have been in over 17 years. Investors can currently earn over 2% above inflation while protecting part of their savings from rising prices. These securities are particularly suited to retirement portfolios.

For years, TIPS real yields—the return after inflation—were often near zero or below it. TIPS still offered inflation protection, but investors frequently had to pay for it by accepting little expected income. Today, these securities can play a more balanced role: helping defend purchasing power AND also providing regular income.

What TIPS Actually Do

Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds linked to the Consumer Price Index (CPI). When CPI rises, the principal value of the bond rises with it. Because the bond’s coupon rate will be applied to the newly adjusted principal, the dollar amount of interest payments can increase over time as well.

These features make TIPS different from an ordinary Treasury bond. A conventional Treasury pays a fixed coupon and returns a fixed amount of principal at maturity. If prices rise faster than expected, the buying power of those payments falls. TIPS are built to offset that risk. First, the principal amount of a TIPSincreases until maturity, and second, the coupon payment is made on a regularlyincreasing principal amount during the bond’s life (as long as CPI rises).

A Caveat: CPI is Not the Same as Your Personal Inflation Rate

CPI is useful, but it is not a perfect reflection of what any individual household experiences. It measures price changes across a broad national basket of goods and services.

For many retirees, the biggest costs are housing, healthcare, insurance, utilities, food, and transportation. Some of those categories can rise faster than headline CPI. A homeowner facing higher property taxes and insurance premiums, for example, may experience more inflation than the official index suggests.

While TIPS do not guarantee that every expense will keep pace with a retiree’s personal cost of living, they offer a reasonable inflation adjustment, which is far better than no adjustment at all.

Why TIPS Look Better Now

After the financial crisis, the Federal Reserve pursued a policy of Quantitative Easing (QE) to bolster markets and the economy. They bought massive amounts of Treasury and Mortgage-backed securities which drove down both nominal and real yields on bonds. During this time, TIPS often had real yields near zero or below zero. Investors could protect against inflation, but they were not being paid any income to do it.

QE ended, inflation spiked, and U.S. Treasury issuance has increased in line with rapidly growing national debt. As a result, both nominal and real bond yields have gone up.

Today, an investor can buy an individual TIPS bond with a 2.25% real yield. If inflation averages 3%, the nominal return would be around 5.25% (2.25% real yield + 3% inflation adjustments). If inflation rises further, the nominal return will rise, and if inflation falls, the nominal return will be lower.

Where TIPS Fit in Retirement

Inflation can be especially difficult in retirement. Working households may offset higher prices through pay raises or by saving more. Retirees generally have fewer ways to do that, particularly if higher expenses arrive during a weak stock or bond market.

TIPS can help support the part of a portfolio intended for essential spending—such as housing, food, healthcare, insurance, utilities, and transportation. They are not meant to replace everything else in a retirement portfolio.

This chart shows how different asset types perform different roles. Cash supports near term needs. TIPS help address inflation. Stocks support long-term growth. Nominal Treasuries can be helpful during recessions and when inflation and interest rates fall.

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When to Add TIPS to Your Portfolio

It is best to be strategic and add TIPS when you are near retirement, are concerned about inflation, and see that TIPS are providing a real return in addition to inflation protection.

Risks to Keep in Mind

TIPS are still bonds, so their prices can fall when real interest rates rise. Longer-term TIPS are especially sensitive. A broad TIPS fund has ongoing interest-rate exposure because its holdings are continually replaced rather than held to a single maturity date.

Individual TIPS are different. If held to maturity, the investor receives the inflation-adjusted principal and the real yield available at purchase. If there is deflation, the original issue principal amount protects you at maturity.

Taxes can also matter. In a taxable account, the annual inflation adjustment to a TIPS bond’s principal is generally taxable even though the investor does not receive that cash until the bond matures or is sold. So, TIPS fit more naturally in 401k and IRA accounts.

The Bottom Line

TIPS have regained a useful role because positive real yields now allow investors to earn a return above inflation while protecting purchasing power in retirement portfolios. CPI will never perfectly capture the lived experience of every retiree, but it provides a meaningful adjustment against broad price increases.

For many retirees, TIPS make the most sense as one part of a broader plan: short-term holdings for liquidity, inflation-linked bonds for purchasing-power protection, and diversified equities for long-term growth.

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