Inflation is the houseguest who promised to stay for the weekend. It’s been above the Federal Reserve’s 2% target for more than five years, with oil around $100 a barrel. No wonder readers keep asking Jason Zweig about TIPS — Treasury inflation-protected securities, government bonds whose payments rise with the cost of living. Real yields on some — the return above inflation — recently topped 3%.
What Zweig recommends, and why
The principal on a TIPS bond moves with the consumer-price index, and its fixed interest rate is paid on that adjusted amount. You’re buying purchasing power, not vigorous growth. So Zweig says most younger investors shouldn’t favor TIPS over stocks, while people in or near retirement are the natural fit.
His workhorse is a ladder: individual TIPS held to maturity, one rung coming due each year. Zweig built one himself. A ladder can pre-fund inflation-adjusted spending out to 2056. A 62-year-old waiting until 70 to claim Social Security could cover those eight years with TIPS. It’s what financial historian Edward McQuarrie prizes — always knowing “how many loaves of bread you can put on the table.”
Funds are the easy button, with a catch. Most hold shifting portfolios, so future cash flows vary, and heavy withdrawals in a downturn can force sales at a loss. The exception is iShares’ iBonds series, 11 exchange-traded funds that each hold only TIPS maturing in a single year from 2026 to 2036.
Where rates and taxes bite
TIPS aren’t risk free, and Zweig says nothing is. They’d be hurt if rates spike: in 2022, the longest-term issues lost more than 40%. That’s duration — how far a bond’s price moves when rates change. Hold individual TIPS to maturity, though, and you should be made whole.
Taxes need a plan, too. Outside tax-deferred accounts, the inflation adjustment is federally taxable before you receive it as cash. TIPS are exempt from state and local income tax, which can help high earners in California, New Jersey or New York. Required minimum distributions — the withdrawals that start at 73, or 75 for anyone born in 1960 or later — don’t have to force a sale. Planner Mike Piper notes TIPS can move in kind, as bonds rather than cash, to a taxable account.
The bigger lesson reaches past TIPS: give every safe dollar a due date. Finding out mid-downpour that your umbrella is long-duration is no fun. Fifteen minutes with a recent statement shows which of your safe dollars sit short and which are quietly long.