Quick Read

• Inflation protection with less uncertainty: Unlike gold, TIPS directly adjust their principal with changes in the Consumer Price Index, allowing income to rise alongside inflation.

• Short duration reduces interest-rate risk: VTIP's average duration of just 2.3 years helps limit the price declines that can affect longer-term bond funds when rates rise.

• Conservative and tax-efficient: Backed by the U.S. Treasury, VTIP carries very low credit risk, while its Treasury income is generally exempt from state and local income taxes.

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Gold has preserved purchasing power over decades, even centuries. That makes it a logical reserve asset for institutions like central banks, whose investment horizons are effectively perpetual. Most retirees, however, don't have the luxury of waiting decades for that inflation protection to consistently pay off.

In the meantime, owning gold comes with several trade-offs. Prices can be highly volatile, particularly when speculative enthusiasm is rampant. Moreover, most gold ETFs structured as grantor trusts are taxed as collectibles. That means long-term gains may be taxed at a maximum federal rate of 28%, higher than the 20% maximum rate that applies to most long-term capital gains. On top of that, gold produces no income. Unless you're willing to periodically sell shares or generate cash flow through strategies like covered calls, it doesn't naturally support retirement withdrawals.

If my goal were protecting purchasing power during retirement, I'd look elsewhere. Rather than commodities or equities, I'd favor a particular corner of the fixed-income market: Treasury Inflation-Protected Securities, or TIPS. Unlike traditional Treasury bonds, the principal value of a TIPS bond adjusts with changes in the Consumer Price Index (CPI).

As principal rises with inflation, the bond's coupon payments increase as well because they are calculated as a percentage of that inflation-adjusted principal. TIPS generally outperform when inflation turns out to be higher than investors expected. Personally, I think the era of consistently achieving 2% annual inflation is behind us, at least for the foreseeable future.

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While investors can purchase individual TIPS directly from the U.S. Treasury, I prefer using an exchange-traded fund. ETFs simplify diversification, eliminate the need to manage individual maturities, and provide regular income distributions. My preferred choice is the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP).