Inflation poses a significant risk to investors, particularly those nearing or in retirement, as it can diminish the value of their savings. Treasury Inflation-Protected Securities, commonly known as TIPS, are designed to help mitigate this threat by adjusting their principal value based on changes in the Consumer Price Index (CPI).
When inflation rises, the principal value of a TIPS increases, and conversely, it decreases when inflation falls. This adjustment ensures that the purchasing power of the investment is preserved. The interest payments, which are calculated as a fixed percentage of the adjusted principal, also fluctuate with inflation. TIPS are issued with maturities of five, ten, and thirty years. They are sold at auction by the U.S. Treasury and can also be bought and sold on the secondary market. Investors can purchase TIPS directly from TreasuryDirect.gov or through a bank or broker. While TIPS can be an effective tool for inflation protection, they are not without their own considerations, including interest rate risk and potential tax implications on the adjusted principal, even before maturity.