Inflation doesn’t need a market crash to wreck a retirement plan. For retirees, making everyday life more expensive can do enough damage on its own.
Cash can cover what is needed soon, but it cannot protect an entire nest egg from rising prices. With inflation back near the center of portfolio planning, savers approaching retirement can shift part of their conservative allocation toward TIPS and shorter bonds rather than leaving too much money idle.
Make the bond allocation work against inflation
Treasury Inflation-Protected Securities are US government bonds whose principal adjusts with inflation. Their fixed interest rate is applied to that changing principal, helping preserve purchasing power as withdrawals get closer.
The timing is notable because real yields on some TIPS recently topped 3%. Buyers who hold the bonds to maturity can earn income above inflation, making them more useful than standard bonds when rising prices are the bigger concern.
A ladder can turn that protection into future income. Individual TIPS are bought with different maturity dates, then each bond provides money for spending as it comes due.
“Only with TIPS do you know, at all times, how many loaves of bread you can put on the table.”
The case gets stronger when current yields are compared with conventional government debt. Five-year TIPS recently offered a real yield above 2%, while five-year Treasuries have produced 2%-plus real returns in less than half of rolling five-year periods since 1990.
TIPS fit best inside the fixed-income allocation rather than taking the place of long-term stock exposure. Cash also remains necessary for emergencies and expenses coming up within weeks or months because longer-term TIPS can be volatile before maturity.
Once those immediate needs are covered, short- or intermediate-term TIPS can take on some of the money that might otherwise remain in cash.
Individual bonds offer more certainty
How TIPS are owned matters almost as much as deciding to own them. Individual bonds work best when they can be held until maturity, avoiding the need to sell during a bad rate environment.
Funds are easier to manage, but many maintain a steady duration by replacing bonds as they mature, leaving investors exposed to price swings.
The average TIPS fund lost 11.8% in 2022 even though the underlying securities hedge inflation.
Target-maturity funds offer a middle ground. Some ETFs hold TIPS that mature in a single year, making future real returns easier to estimate without requiring investors to manage each bond themselves.
Broad funds favor simplicity instead. Vanguard Total Inflation-Protected Securities ETF charges a 0.05% expense ratio and owns TIPS across maturities. PIMCO Inflation PLUS Active Exchange-Traded Fund charges 0.25% and can hold short-term TIPS, inflation-linked securities, and swaps.
Taxes can influence where those holdings belong. TIPS interest and inflation adjustments are federally taxable, and the adjustment can create taxable income before the additional cash arrives at maturity.
A tax-deferred retirement account can avoid that annual tax drag. TIPS are also exempt from state and local income tax, which can be useful for high earners living in high-tax states.
The maturity schedule can help with required retirement distributions as well. A TIPS ladder generates cash as bonds come due, while some retirees can move TIPS from a retirement account into a taxable account through an in-kind distribution. That can satisfy a required minimum distribution without forcing the bond to be sold before maturity.
Leave room for growth
Inflation protection should not push every growth asset out of the portfolio. Stocks remain the long-term growth piece for many retirees, and cutting the allocation too far can leave spending power with less room to grow over retirement.
For someone who wants no more than 15% in equities, Treasuries, municipal bonds, annuities, money market funds, CD ladders, TIPS, and I bonds can make up other parts of the portfolio.
Municipal bonds can help higher-income retirees manage taxable income, while annuities can turn part of a nest egg into guaranteed income. The downside is that annuities can lock up principal and may not include inflation protection.
Liquidity still needs its own place. Cash and short-term holdings can cover spending without forcing stocks or longer-term bonds to be sold during a bad market.
Expenses can take some pressure off the investment side too. Nearly half of retirees said their costs exceeded expectations in Schroders’ 2026 US Retirement Survey.
Downsizing, shopping for insurance, reviewing Medicare coverage, cutting subscriptions, and delaying Social Security can stretch retirement income when prices rise.
TIPS do not need to carry the whole portfolio. They can protect the part most exposed to inflation while cash covers immediate needs and stocks remain in place for long-term growth.