Subject: TIPS?
Hi folks

I've become aware recently that the yield on TIPS is now at or above 2% across the curve; some commentators have called this a gift to retirees / near retirees.

As I understand it, purchasers earn 2% on top of the annual CPI for the duration of the bond (e.g. 5, 10, 20, 30 yr) - which is appealing in that it reduces / eliminates inflation risk (to the extent that CPI is a good proxy for real inflation experienced by retirees. In contrast, although I could buy an individual 10 year bond yielding 4.5% today, which sounds attractive, if inflation remains a persistant problem over the next decade the real yield could be less than the TIPS 2% or even negative. One post I read made a comparison of TIPS at 2% to an annuity - which has occasionally been the subject of discusion here and on the Brk board - and said that TIPS were more attractive because the annuity does not provide inflation protection without an expensive rider that is usually not worth it.

Im hoping to learn how the retirement gurus who visit this Board think about TIPS given current yields, and how TIPS might fit in to an overall retirement oriented portfolio in terms of displacing other kinds of assets one might hold.

When Jim calculates expected returns on various equities (eg Brk) he often expresses it in terms of inflation + X%. And the x% is always far greater than 2%, reflecting the equity risk premium. I get that comparing stocks (even unkillable companies like Brk) to US government treasuries doesnt really make sense - its apples to oranges - so I dont see TIPS displacing equities in my portfolio.

On the other hand, bond ETFs / mutual funds have been crushed over the last couple of years, and like many others I've become increasingly concerned that the inverse correlation of stocks and bonds, the premise of the 60/40 portfolio and the basis of target retirement date funds is a thing of the past. Or at least a past when we had declining / low interest rates. I wish I had come to this conclsuion earlier. And perhaps my post will top tick the yield on the 10 year. But my gut (and now apprently Jamie Dimon) says we go higher.

Given that background, do folks think that building a TIPS ladder at these levels is a better solution for a retirement portfolio than other kind of bond holdings? Im curious about the % of ones portfolio one might assign to this, and how to think about the ladder construction.

For what its worth I'm mid / late 50s, ~ 5-7 years away from retirement

thanks