MW As we head into 2025, these ideal investments for retirees have almost never been this attractive

By Brett Arends

'Real' yields aren't often this high

TIPS keep looking better and better.

So-called TIPS bonds - the acronym stands for "Treasury inflation-protected securities" - are the only asset legally protected against the risks of default and inflation. They are bonds issued by the United States government that pay interest twice a year, like regular Treasury bonds, but which also raise the face value of the bond in line with consumer prices.

If you hold a TIPS bond to maturity, you are guaranteed to earn a certain rate of return above and beyond any inflation during the period - no ifs, ands or buts. This certain rate of return, known as the "real" yield, is determined at the moment you buy the TIPS bonds.

And right now, thanks to what's been happening in the markets, it's well above 2%. For longer-term TIPS bonds, such as those maturing in 20 or even 30 years' time, the real yield is nearly 2.5%.

It is almost never this high. For most of the period since the late 1990s, when TIPS bonds were first launched, those buying the bonds had to content themselves with real returns of 1.5% or 1% - or even less. At certain times, people have been so worried about inflation they've been willing to buy TIPS bonds with negative real yields - meaning they were guaranteed to end up with less purchasing power than at the start. (As someone once said, some ideas are so stupid only experts could believe them.)

Only on a few rare occasions since these bonds were launched have they ever offered rates this good or better.

TIPS, like all bonds, operate like a seesaw. When the price of the bond rises, the yield or interest rate falls (and vice-versa). The price of TIPS bonds have been tumbling in recent weeks, sending the interest rate higher.

TIPS bonds can be bought individually, like any other U.S. Treasury bond, through a brokerage account. Or they can bought through funds, such as the Vanguard Inflation-Protected Securities Fund VAIPX, or the iShares 0-5 Year TIPS Bond ETF STIP for short-term bonds, or the PIMCO 15+ Year U.S. TIPS Index ETF LTPZ for long-term bonds.

Technically, the only way to guarantee that you will get exactly inflation plus the determined real return on a TIPS bond is to buy an individual bond and hold it to maturity.

One technique often used by financial advisers and savvy investors is to combine a collection of these bonds in a so-called ladder, meaning a portfolio of bonds that matures consecutively, year after year: 2026, 2027, 2028, 2029 and so on, all the way, if you like, to 2054.

As you are guaranteed to earn inflation plus the "real" return over the life of each bond, a ladder means you can protect yourself against inflation for decades.

TIPS bonds at current levels can offer dramatic help to retirees - and others - seeking to draw down a portfolio in a low-risk manner. They even offer a zero-risk approach to the so-called 4% rule, which is the idea that you should start your retirement by withdrawing 4% of your portfolio's value in the first year, and then adjust the annual withdrawals each year in line with inflation.

Someone aged 65 who invests their portfolio entirely in TIPS bonds yielding 2.2% a year above inflation could follow the 4% rule and be guaranteed that their portfolio will last at least 30 years. This probably isn't recommended - over the long term, you would want to capture the presumably higher returns from stocks - but it shows how TIPS can lower retirement-income risk.

Meanwhile, for those nervous nellies viewing the next four years with gloom, panic or terror, there is always the option of the April 2029 TIPS bond 912810FH69, which guarantees you will earn inflation (whatever it is) plus 2% over the stretch - come war, peace, tariffs, inflation, deflation or the second coming of Zuul. It also pays a nice 3.7% current yield.

-Brett Arends

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January 02, 2025 12:50 ET (17:50 GMT)

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