Are TIPS Best for Retirees?

There’s an ongoing debate in the finance community about the best portfolio for retirees whose savings aren’t clearly enough to sustain their spending indefinitely. One recommendation that’s getting a lot of attention is from Zvi Brodie of Boston College and co-author of the new book, Risk Less and Prosper. Brodie’s strategy is to buy Treasury Inflation-Protected Securities (TIPS) to cover all your basic spending during retirement. You invest in assets other than TIPS only after ensuring the TIPS secure all your basic spending. There are pros and cons to the strategy, especially at the low yields TIPS offer today. Here’s a very good overview of Brodie’s strategy and some cautions about it. My belief is that at today’s yields the TIPS strategy is more risky than Brodie believes, but it’s a better strategy than some others, such as stocks for the long run and traditional diversified portfolios.

If you invest your retirement funds in stocks, on average you can expect the stocks to grow larger than the TIPS growth, but stocks are much more volatile and there is a decent chance that you may end up finding the portfolio value of your stocks to be insufficient to meet that $20,000 spending need.  This is the idea behind “risk less.”