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Investing Specialists

How Much Should Retirees Stake in TIPS?

Adding inflation protection to your portfolio, sensibly.

I've been traveling a lot recently, speaking to investor groups and promoting my new book, 30-Minute Money Solutions. Traipsing through airports gets a little old after a while, but the best part about these trips is that I get to hear what's on investors' minds.

One group I've been hearing from a lot lately is retirees and preretirees, many of whom are finding the current environment to be quite challenging, to put it mildly. With bond yields as low as they are, many retirees are complaining that it's next to impossible to generate a livable income stream from their portfolios. To cover their day-to-day expenses, they're having to choose between tapping their principal or venturing into higher-yielding, but also riskier, securities such as preferred stocks. Neither is an especially appealing prospect. Others, meanwhile, are concerned about what could happen to their bond portfolios if interest rates were to jump up, a topic I discussed in a recent article.

And while inflation currently appears to be under control, retirees are also rightfully worried about the potential for rising inflation to gobble up their portfolios' future purchasing power. I usually recommend inflation-linked securities like Treasury Inflation-Protected Securities as the most direct way to hedge against inflation. But even investors who are convinced that TIPS are a good place to be long term still have questions about implementation. How much of a retiree's fixed-income portfolio should go toward TIPS or other inflation-linked bonds? And what about timing? If you buy TIPS at an inflated level (pardon the pun) and the bonds' prices sink shortly thereafter, do you erode any long-term benefit you hoped to gain from them?