Imagine turning $100 into a financial safety net that grows stronger as prices rise. Enter Treasury Inflation-Protected Securities or TIPS, the hero of savings bonds that fights inflation while it grows your money.
TIPS have the safety and stability of regular government bonds, but with a twist. Instead of set returns that just sit on the side no matter what happens, they grow to match rising prices. That’s because the U.S. Treasury guarantees TIPS will never lose value to inflation. They pay interest twice a year, but the real magic happens to your original $100. That amount adjusts up when inflation rises, meaning your investment grows in real value.
Then, when your bond matures in five, 10, or 30 years, you get back your initial investment plus all those inflation adjustments—whichever is higher.
The best part? You can start with just $100. It’s like planting a tiny money tree that’s weather-proofed against economic storms.
Key Takeaways
- TIPS offer unparalleled protection against inflation for small investors.
- Unlike savings accounts, which often lag behind rising prices, TIPS automatically adjust to keep pace with changes in purchasing power.
- This makes them an excellent choice for those saving for long-term goals like retirement or a child’s education.
- You can buy TIPS in $100 increments with a minimum investment of $100.
- TIPS pay interest twice yearly at a fixed rate, and the principal is adjusted for inflation.
- TIPS tend to perform best when inflation is rising, but interest rates are stable.
What Are Treasury Inflation-Protected Securities (TIPS)?
TIPS are the financial world’s shock absorbers. These government bonds protect your investment from the shock and corrosive effects of rising prices.
Here’s how TIPS work:
- Inflation-linked principal: The amount you initially invest grows automatically with inflation, as measured by the Consumer Price Index (CPI). This ensures your money keeps its purchasing power over time.
- Interest payments: TIPS pay interest twice yearly at a fixed rate. While this rate stays constant, the actual dollar amount you receive grows as your principal adjusts for inflation.
- Maturity guarantee: When your TIPS mature, you receive either the inflation-adjusted principal or your original investment, whichever is greater. This gives you a safety net even in the unlikely event of long-term shifts in the value of the dollar.
TIPS are accessible to most investors, with a minimum investment of $100. They come in five-, 10-, and 30-year terms, allowing you to choose a timeline that best fits your financial goals.
Below, we’ve calculated how much would be gained by having invested $100 in TIPS for the 20-year period starting in 2004. This was a relatively low-inflation and low-interest rate period, until the last couple of years, so it should be on the lower end of expected gains from TIPS. You can hover over the line to see the changes over time.
Why Those Worried About Inflation Turn to TIPS
In recent years, inflation has roared back into the spotlight, with the 2022-to-2023 period seeing the highest U.S. inflation rates in 40 years. While it’s cooled somewhat since then, the sting of $7 for a dozen eggs and $5 gas lingers in the memories of many.
The inflationary surge is a stark reminder: inflation can quickly erode your hard-earned savings and investment returns. The economic rollercoaster of recent years has thrust inflation back into the spotlight.
While inflation has moderated, for many, the lesson of recent years highlights the importance of having TIPS as part of a well-diversified portfolio.
This is where TIPS shine. As inflation rises, your investment grows right with it. Unlike traditional bonds or savings accounts that can lose real value during inflationary periods, TIPS ensures your money keeps pace with rising prices.
Let’s make this concrete: Most households buy milk weekly at the store. The cost of milk, adjusted for inflation, has come down over time, from about $4.86 in 1995 (2024 dollars) to $4.13 in 2024. But if we look at your family’s ability to pay for milk over time, that’s shifted around quite a bit, making it crucial for every household to pay attention to the effects of inflation.
If you had invested $100 in TIPS, your principal would have grown to match these shifts, preserving your milk purchasing power, so to speak.
Example of How TIPS Work
Let’s look at a hypothetical of how TIPS work. Imagine you bought $100 of a 10-year TIPS with a 2% interest rate in a year when inflation was 3% in year one and 4% in year two. Here’s what would happen:
Year 1:
- Principal at the start of the year: $100
- Adjusted for 3% inflation: $100 × 1.03 = $103
- Interest for the year: $103 × 0.02 = $2.60
- Principal at end of year: $102.60
Year 2:
- Principal at start of year: $102.60
- Adjusted for 4% inflation: $102.60 × 1.04 = $106.70
- Interest for the year: $106.70 × 0.02 = $2.13
- Principal at end of year: $108.83
This would continue each year, with the principal adjusted for inflation and the interest payments based on the adjusted principal. At the end of the 10 years, you would receive the adjusted principal, along with your final interest payment. Below is the interest TIPS has been paying on 10-year bonds:
How Much $100 in TIPS Could Generate over 20 Years
Let’s shift the example a bit to see how a $100 investment in TIPS might grow over 20 years. Using a 30-year TIPS maturing Feb. 15, 2044 (meaning it was issued in 2014), and a coupon rate of 1.375%.
The bond’s coupon rate of 1.375% reflects the lower interest rates when the TIPS were issued. Interest rates have risen since 2014, and the bond’s market price has decreased to reflect how newer TIPS are paying higher interest rates.
TIPS perform best when the interest rates are stable, but inflation is moving higher. When this happens, your TIPS principal goes up while your fixed interest rate should be higher than newly issued bonds.
When interest rates rise, the prices of existing bonds fall because investors can buy new bonds with higher coupon rates. Understanding this inverse relationship between bond prices and interest rates is fundamental when investing in bonds.
In this case, the 30-year TIPS maturing in February 2044 would trade at a discount, around $91.50, to reflect the higher interest rates for newer bonds. However, the adjusted principal of the bond for those who purchased it in the past would likely have increased due to inflation over the past 10 years.
Scenario 1: Inflation = 0%
In this example, we assume there’s no inflation for the 20-year period.
- Starting principal: $91.50
- Annual interest payment: $100 × 0.01375= $1.26
- Total interest over 20 years: $1.26 × 20 = $25.20
- Principal at maturity: $100.00
- Total aggregate value at maturity: $100 + $25.20 = $125.20
Without any inflation, your principal remains unchanged, and you receive $1.26 in interest each year (paid every six months). After 20 years, you would have received a total of $25.20 in interest payments and the original $100 face value back, for a total of $125.20.
Scenario 2: Rising Inflation
In this example, we assume that inflation averaged 5% each year over the 20-year period.
For a 30-year TIPS bond issued 10 years ago and bought today on the secondary market for a discount at $91.50, the CPI adjustments would still be applied to the bond’s original adjusted principal as of today. This would reflect the cumulative inflation or deflation over the past 10 years. Let’s say that the adjusted principal basis is $120 at the beginning of year one.
| TIPS Hypothetical Return with 5% annual inflation | ||||
|---|---|---|---|---|
| Year | Adjusted Principal at Start | Inflation Adjustment (at 5%) | Interest Paid (at 1.1375%) | Adjusted Principal at End (starting principal + inflation adjustment) |
| 1 | 120.00 | 6.00 | 1.73 | 126.00 |
| 2 | 126.00 | 6.30 | 1.82 | 132.30 |
| 3 | 132.20 | 6.62 | 1.91 | 138.92 |
| 4 | 138.92 | 6.95 | 2.01 | 145.87 |
| 5 | 145.87 | 7.29 | 2.11 | 153.16 |
| … | ||||
| 18 | 275.05 | 13.75 | 3.98 | 288.80 |
| 19 | 288.80 | 14.40 | 4.17 | 303.24 |
| 20 | 303.24 | 15.16 | 4.38 | 318.40 |
(Due to rounding, rows may not add up perfectly)
The principal starts at $120 at the beginning of the first year, reflecting the cumulative inflation of 20% over the 10 years before your purchase. The annual inflation adjustments and interest payments are then calculated based on this starting principal and the 5% yearly inflation rate for the next 20 years.
Even though the bond was bought at a discount, the adjusted principal of $318.40 is returned to the investor at maturity, along with the accumulated interest received each year (totaling $110.69).
Scenario 3: Deflation
Let’s provide a rare scenario and assume mild deflation averages -0.25% annually over the 20 years. If you had bought the TIPS directly at issuance, you would not see your principal value drop below the initial $100, and you would receive that back at maturity. Since our example involves buying a TIPS on the secondary market at $91.50 at a discount, you would still be guaranteed at least the original $100 face amount at maturity, even if there is deflation.
When you purchase a TIPS bond on the secondary market at a discount (i.e., below its face value), you will receive the higher value of either of these:
- The adjusted principal value at maturity, which accounts for inflation or deflation since the bond’s original issue date or
- The original face value of the bond (not your purchase price).
Thus, purchasing a TIPS bond on the secondary market at a discount protects against deflation since you are guaranteed to receive at least your purchase price at maturity.
However, deflation will result in lower interest payments over time since the fixed coupon rate is applied to a gradually decreasing adjusted principal. Despite the deflation, you would still likely realize a small positive total nominal return because of the combination of interest payments and the return of the $100 principal at maturity.
How To Buy TIPS
You can buy TIPS directly from the U.S. Treasury through the TreasuryDirect platform in five, 10, and 30-year terms with fixed interest rates. The minimum investment is $100 and they are sold in increments of $100.
To buy TIPS, you need to first open a free TreasuryDirect account. You’ll give your Social Security Number, email address, and bank account information. You can then schedule a purchase of TIPS, and the money will be taken from your bank account. The TIPS interest rates and secondary market prices are available online.
You can also buy TIPS through banks and brokers in the form of a mutual fund or exchange-traded fund that holds TIPS of various maturities. This can provide more liquidity and diversification compared with buying individual TIPS.
When Is a Good Time to Buy TIPS?
TIPS can be especially attractive when inflation expectations are low but you think inflation may rise in the future. They can also play a role in diversifying a portfolio. Because they protect against inflation, they typically offer lower fixed interest rates than comparable government bonds that don’t.
How Often Do TIPS Pay Interest?
TIPS pay interest twice a year at a fixed annualized rate, which is set when the bond is issued. The interest payments are based on the adjusted principal value.
When Do I Receive the TIPS Principal?
You receive the adjusted principal or original face value, whichever is greater when the TIPS matures. You can also sell your bond in the secondary market before maturity, where it may trade a discount or premium to face value depending on changes in interest rates and inflation.
Can You Lose Money in TIPS?
You’ll receive at least your original principal at maturity, so there’s only a risk of loss should you sell before maturity when the market price and adjusted principal are less than your purchase price. You can lose out in real or relative terms if inflation is low or steady and other safe investments produce higher yields.
The Bottom Line
TIPS are an attractive investment for protecting your money from inflation, even with comparatively small starting funds of $100. The principal is adjusted based on the CPI, helping to preserve your purchasing power. Over a 20-year period, $100 invested in TIPS could grow to over $200 if inflation averages 3% or more annually due to the combination of inflation adjustments to the principal and accumulated interest payments.
However, TIPS may also underperform other bonds, and by themselves, they are not a complete investment strategy. Consider your overall portfolio, long-term goals, and risk tolerance when deciding on your investments.
