Shielding Retirement Accounts From Inflation

For younger investors in its target-date funds, T. Rowe Price seeks to provide some inflation protection by including a small dose of T. Rowe Price Real Assets (PRAFX) , which holds stocks in energy, real estate, and gold. Those industries tend to rise when inflation flares.

T. Rowe Price Retirement 2040 (TRRDX) has 3.7% of its portfolio in the real assets fund. As the retirement date approaches, the managers phase out the real assets fund and begin introducing inflation-protected securities. The 2010 fund has 2.1% in real assets and 11.8% in inflation securities.

Very cautious retirees may prefer T. Rowe Price Retirement Income (TRRIX) , which has a fairly static allocation that includes 1.6% in real assets and 29.4% in inflation securities.

If you decide to buy TIPS, keep in mind the securities provide returns in two ways. Like other bonds, the inflation securities pay fixed yields. In addition, the principal of the securities rises along with the consumer price index. Say you put $10,000 in TIPS, and inflation rises by 2%. At the end of the first year, your principal would be $10,020.

Lately TIPS have rallied sharply as nervous investors worried that the flood of money coming from the Federal Reserve could unleash inflation. With prices rising, yields have collapsed. The five-year TIPS now has a yield of -1.23%.

So if inflation is flat, the investor would lose principal. If the CPI rises 1.5%, you would about break even. "It is hard for me to pound the table and say that TIPS are a screaming buy," says Dan Shackelford, a T. Rowe Price portfolio manager.

But even if TIPS don't produce any short-term windfalls, they make sound long-term holdings, argues Shackelford. Eventually inflation could rise and erode the purchasing power of retirees. Savers can guard against that risk by taking a stake in TIPS.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.