Worry-Free Investing: Calculate Your Risk-Free Savings Rate For Retirement

Conventional advice has been that we should invest in some mix of stocks and bonds to reach our retirement goals. But as we’ve seen, rolling the dice on a varying return distribution every year can be quite stressful. What if we start our retirement planning based on buying a safe investment that guarantees a steady after-inflation return instead? This question is posed in the book Worry-Free Investing by Bodie and Clowes.

Treasury Inflation-Protected Securities (TIPS) are bonds that promise you a total return that adjusts with the CPI index for inflation. Very generally, it works like this: if the stated real yield is 2% and inflation ends up at 4%, your return would be 6%. TIPS are issued and backed by full faith of the U.S. government, so they are as safe as they get. As your investment the automatically adjust with inflation, you will never have to deal with the stomach-churning swings of stocks, and also you avoid the risk of underperforming inflation that traditional (nominal) bonds have.

How much would you have to save if you decided to take zero market risk and invest solely in TIPS? The book outlines the mathematical formulas to use, but also provides a free spreadsheet calculator to do the heavy lifting for us. I uploaded it to ZohoSheets:

I would recommend playing with the numbers a bit. To start, the book was written in 2003 when the real rates were relatively high at around 3%. Given the recent history of the 20-year TIPS yield (shown below), I would assume a maximum of a 2.5% real interest rate.

I would also change the replacement rate to something that more closely tracks your specific expected expenses. The book recommends the income required to maintain your “minimum acceptable living standard”. For the skeptical and/or early retirees, don’t put in anything for Social Security. Finally, don’t forget to input your current savings.

You now have your personal risk-free savings rate to reach your goals. (Warning: It might be really high! If so, try retiring at 65 and input something for Social Security.) But let’s say you need to save 10%, but you are able to save 15%. You could put the 10% in the ultra-safe TIPS, and put the other 5% in something riskier to boost your returns while still guaranteeing a minimum future income. I’ll share a possible solution from the book once I get access to a flatbed scanner.

Now, there are lots of potential glitches with this simulation. For one, there is reinvestment risk because the TIPS real interest rate will continue to vary, and could drop to much lower levels. The government could even conceivably stop selling new TIPS at any time. Some people are skeptical that the CPI properly tracks inflation. Finally, TIPS are taxed at ordinary income levels, so one should keep them in tax-advantaged accounts. However, most people’s 401ks don’t include TIPS as an option! Otherwise, taxes are going to hurt returns.

In the end, I think a portfolio of 100% TIPS is impractical for most people. However, I definitely like TIPS as a component, and see this thought process as a way to estimate a “target” savings rate that can let those so-inclined to take less risk and sleep better at night.


  1. I played around with it for a minute, I need to save $36,000 a year. It’s a useful tool, it shows me I will need to take on more risk to make my goals. There’s a bracketed range of retirement savings versus investment risk that will get you across the goal line, this is the conservative limit.

  2. I didn’t quite understand the Intermediate Calculations. What are they? The annual savings needed was a reasonable number for me – close to current amount I save. May be I should take less risk :)

  3. Dan Isaacs says:

    If it’s taxed at normal rates, I’m not so sure it would make sense over tax-exempt Munis.

  4. Very informative.
    However I feel that Real Estate Investing ( rental properties), with proper knowledge is still the best vehicle for retirement and worrying free investment

  5. US government underestimates CPI by about 3-5%,so factor this into any long term investments.

  6. A 5% allocation for VIPSX or TIP is recommended in “Gone Fishing Portfolio” ( Alexander Green).
    There is a 5% allocation for GDX or VGPMX or BGEIX as well.

    The concern that CPI estimates are incorrect can be balanced by allocating an equal percentage in assets that perform in -’ve correlation to inflation.

    The author wants us to put VIPSX /TIP in tax-deferred and if possible GDX/VGPMX in the same.

  7. The people I trust generally believe inflation is slightly OVERestimated by the CPI. This is because it’s really hard to count for those quality gains and separate them from price inflation, and I think the bean-counters try to be conservative whenever they can. I don’t want to start a war over this subject, I understand many people believe the government has a vested interest in understating inflation.

    Look at in another way: The TIPS spread (10-year TIPS minus 10-year bond) is consistently less than the CPI. Meaning the market sees less inflation than the government ends up reporting. That being said, I have heard the 10-year bond has yielded more than the 10-year TIPS over time. TIPS are interesting, but may not be as good of an investment as they often sound. Especially now that we are experiencing deflation.

  8. I do not understand what is the goal of this spreadsheet. What do these numbers represent? At retirement should I have the same income as I do with the current salary or a minimum retirement income?

    Also, what is the definition of all these rows?

  9. One other thing to consider when investing in TIPs is a potential impact of deflation if we get one. While your original investment is safe, the inflation increases occurred up to this point are reduced if there is deflation, I believe. So far we haven’t had a deflationary period, but we might now.

  10. Laurence @ CakeFinancial.com says:

    This is a great post. It is so important for investors to understand their level of risk in order to manage their portfolio and meet their goals. The actual calculation of risk is often very challenging for mainstream investors.

    Cake Financial offers a risk calculation for the equity portion of a portfolio (stocks, mutual funds and ETFs). It calculates risk by looking at the actual returns of the securities and producing the standard deviation. Investors can also see how mush risk they are incurring in the context of the market (other investors) as well.

  11. john black says:

    Generally I do not post on blogs, but I would like to say that this post really forced me to do so! really nice post.

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