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If you’ve been thinking that this year’s miserable returns on stocks and bonds have put a safe retirement out of reach, think again.

Thanks to the recent rout in bond prices, Treasury inflation-protected securities, or TIPS, have turned into a cheap form of insurance for the first time in more than a decade. Buying and holding them in your retirement portfolio can help assure you of a lifelong stream of income that won’t be devoured by the rising cost of living.

TIPS are U.S. government securities whose principal value ratchets up (or down) to keep pace with inflation, as measured by the Consumer Price Index.

They also pay a fixed rate of interest. As with nearly all bonds, when market prices for TIPS are high, the yield—annual interest divided by latest price—will be low. When prices fall, the yield rises.

Unlike I bonds, or inflation-protected savings bonds, TIPS are tradable, available in large amounts, and offered by banks and brokerage firms. They also come bundled into mutual funds and exchange-traded funds. Those qualities make TIPS more flexible, especially for wealthier investors.

That flexibility isn’t always a blessing. TIPS gained about 6% last year, rising in price so much that the income they pay investors above inflation, nicknamed “real yield," stayed deeply negative.

That meant future returns would likely be, too. Even so, investors poured $75.5 billion into TIPS mutual funds and exchange-traded funds in 2021, according to Morningstar.

TIPS aren’t risk-free. They protect against inflation—but get pummeled just about as badly as regular bonds when interest rates rise.

That’s partly because TIPS pay lower interest coupons, partly because they have longer maturities on average than conventional bonds.

Through Nov. 30 this year, according to Pimco, TIPS gained 7.3% from the inflation adjustment to principal—but their market price fell nearly 18%, significantly worse than the 14% price drop in conventional Treasurys.

All told, the total return on TIPS was minus 10.9%, not much better than Treasurys without inflation protection.

That puts them on track for the worst year ever in their more than 25-year history.

If you hold to maturity—when you’ll get your initial investment back, plus inflation adjustments along the way—none of that should matter.

But many of the same people who piled in when inflation protection was overpriced have fled now that it’s gotten so much cheaper. Investors have pulled $16.1 billion out of TIPS funds through Oct. 31, estimates Morningstar.

However, now that TIPS have toppled, you could lock in a yield of almost 1.6% above inflation this week, according to Pimco. A year ago, that real yield was negative 1.7%.

If your eyes are on the retirement road in front of you, rather than on the rearview mirror, you should be buying TIPS, not selling.

At recent prices, investors in TIPS can lock in the ability to withdraw about 4% of their capital annually for 30 years without running out of money after inflation, says Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo.

“The higher the real yield has gone, the greater the safe spending rate you’ve been able to develop," says Mr. Roth, who recently bought a slug of TIPS himself and is recommending them for clients in or near retirement.

This year’s miserable market for TIPS has a “silver lining," says Nathan Zahm, head of goals-based investing research at Vanguard Group. “It’s caused losses, but it’s also increased future expected returns. A higher real yield means a much more promising outlook for retirees."

You probably shouldn’t put your entire nest egg into TIPS. It’s a defensive strategy to ensure you won’t run out of money, after inflation, if you hold until maturity. But that’s all—and that might not be enough. Some of your money should play offense, too, in hopes of earning a higher return in the long run.

But inflation-protected Treasurys are a great addition to a portfolio of stocks and other assets.

“TIPS tend to offer unique diversification to just about any other investment that retirement savers are considering, because of the contractual linkage that they have to inflation," says Bransby Whitton, an executive vice president at Pimco who specializes in retirement strategies.

TIPS can cause a tax headache. Besides their regular interest payments, they also generate those inflation adjustments to principal. That rising principal value creates so-called phantom income that is federally taxable even though you don’t receive it until the TIPS mature or you sell them. That’s why many people hold TIPS in a tax-deferred retirement account.

They’re free of state and local income tax, however. So, if you live in a high-tax state like California or New York, says Mr. Roth, consider holding your TIPS in a taxable account.

Jeffrey Rapp, 63 years old, is a physician in the Los Angeles area who retired in 2021. A few years ago, he built a “ladder," a portfolio of TIPS maturing in almost each year from the time he will turn 65 to when he will be 85.

That will provide him with a stream of income, consisting of a mix of interest payments and maturing principal, that will keep pace with inflation.

“It’s allowed me to not care about the volatility associated with equity investing," he says. “I had zero anxiety this year over what happened to my equities. Having that TIPS ladder really took the edge off."

Another Wall Street Journal reader, a 72-year-old retiree in the Chicago area, has about 10% of her retirement assets in TIPS after making a sizable investment in October.

“You can’t guarantee that stocks will do well in every 20-year period," she says. “So something that gives you real yield with inflation protection is kind of the perfect retirement asset."

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