Perspectives : Investment | November 15, 2021

Concerned about rising inflation?

Vanguard target Retirement Funds are designed to help.

For more than a decade, inflation has not been a major worry for investors. But in recent months, core inflation has spiked, acting as a stark reminder that retirement investors always need to plan for the risk of unexpected inflation. While Vanguard economists predict that recent price spikes are not likely to trigger 1970s-style inflation, they believe higher core inflation is likely to persist under most scenarios. The question: Is your retirement portfolio prepared for the potential rise in inflation?

Figure 1. Higher core inflation under most scenarios

Under various scenarios for fiscal spending and growth, our models suggest a period of higher core inflation.

The good news for investors in Vanguard Target Retirement Funds is that we have included instruments that hedge against inflation since the beginning. Over time, we have fine-tuned the allocation to help provide retirement savers with purchasing-power protection when they need it most. We aim to proactively address potential risks rather than reactively change the glide-path design after the fact. After all, you can't buy insurance after the accident occurs.

Notes: Our scenarios are based on the following assumptions: Downside—net neutral additional spending (any additional spending offset by revenues), marginal increase in inflation expectations; Baseline—$500 billion in fiscal spending above what has already been approved, a 10-basis-point increase in inflation expectations, and 7% GDP growth in 2021; Upside—$1.5 trillion in fiscal spending above what has already been approved, a 20-basis-point increase in inflation expectations, and 7% GDP growth in 2021; "Go big"—$3 trillion in fiscal spending above what has already been approved, a 50-basis-point increase in inflation expectations, and GDP growth above 7% in 2021. The "go big" scenario forecast dips below the upside forecast early in 2022 because of stronger base effects associated with the "go big" scenario in 2021.

Sources: Vanguard assessment as of April 30, 2021, using data from the U.S. Bureau of Labor Statistics, Federal Reserve Economic Data, Federal Reserve Bank of Atlanta, Federal Reserve Bank of New York, and the U.S. Congressional Budget Office.
Combating inflation risk throughout the life cycle

In the earlier stages of an investor's life cycle, wage increases and higher real-returning assets such as equities can hedge against inflation. But as an investor nears and enters retirement, it becomes much more difficult to add to a portfolio through additional earnings. In these later stages, the risk of inflation becomes pronounced enough to warrant including tools that provide direct inflation protection. For these investors, our Target Retirement Funds aim to balance the need to preserve and grow capital with the need to preserve purchasing power.

To accomplish this, Vanguard dedicates a portion of the Target Retirement Fund asset allocation to Vanguard Short-Term Inflation-Protected Securities Index Fund (ST TIPS) beginning five years before the fund's target date and steadily increasing until reaching a maximum allocation of approximately 17% of the total portfolio (24% of total fixed income allocation) seven years after the target date. Our target-date fund (TDF) design combines this meaningful allocation to ST TIPS with a market-proportional allocation to nominal U.S. and international hedged1 investment-grade bonds to help reduce both inflation and market risk for retired investors.

Figure 2. The Vanguard glide path adds ST TIPS starting at five years before the target date to offer stronger inflation protection when investors are most likely to need it.

We address inflation in three key areas throughout the glide path:

  1. At the start of the glide path, when higher real-returning assets, such as equities, and the potential for pay raises can help guard against inflation.
  2. Five years before retirement, when short-term TIPS are introduced to help provide direct inflation protection.
  3. Seven years after the target date, when the allocation reaches 24% of the total fixed income allocation.
* Target date is the year stated in the fund name. Target retirement allocations are based on a projected age of 65.

Source: Vanguard.

Because inflation-protected securities adjust to changes in inflation quickly, TIPS are an appropriate option for investors seeking to protect a portion of a portfolio's real value during retirement. Vanguard research2,3 has shown that ST TIPS possess several desirable characteristics relative to longer-term TIPS when it comes to hedging inflation risk in a TDF. For example, as shown in Figure 3, ST TIPS have historically displayed a meaningful correlation to expected inflation (inflation the market anticipates) and, more importantly, a high correlation to unexpected inflation (inflation that exceeds market expectations and can derail retirement plans) with less duration risk than longer-term TIPS. Based on this research, we replaced the original allocation to longer-term TIPS through Vanguard Inflation-Protected Securities Fund with Vanguard Short-Term Inflation-Protected Securities Index Fund in 2013.

Figure 3. Correlation to inflation, as of March 31, 2021.

In our ongoing review of the Target Retirement strategy, our team has considered including other inflation-hedging asset classes, including commodities and real estate investment trusts (REITs). These reviews consistently concluded that ST TIPS provided a higher correlation to both expected and unexpected inflation with significantly less volatility compared with both commodities and REITs—both traits that are desirable to investors in the late stages of the investment life cycle.

Note: Inflation data is based on the University of Michigan: Inflation Expectation-Consumer Price Index, which measures the median expected price change for the next 12 months using a survey of consumers. Expected inflation is calculated using correlation of survey results versus asset returns (12 month rolling). Unexpected inflation is captured using the same asset return data versus the difference between survey results and CPI.

Sources: Vanguard calculations based on Bloomberg data from these index/data providers: Short-term TIPS: Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years (9/30/2003–3/31/2021); Broad TIPS: Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (4/30/1998–3/31/2021).
While inflation concerns have rightfully crept back into the retirement narrative after a long hiatus, we hope that our investors can rest soundly knowing that Vanguard Target Retirement Funds have always been built to address inflation risk across the glide path through an age-appropriate level of exposure to asset classes that exhibit both short-and long-term inflation-hedging properties.
1 Our international fixed income assets are hedged back to the U.S. dollar, which minimizes the volatility of global currency fluctuations. These fluctuations, when unhedged, account for a significant portion of the overall volatility of the asset class. We believe our hedging is critical to maintaining the risk and return properties of the asset class.

2 Davis, Joseph, Roger Aliaga-Díaz, Charles J. Thomas, and Nathan Zahm, 2012. The Long and Short of TIPS. Vanguard.

3 Bosse, Paul, June 2019. Commodities and Short-Term TIPS: How Each Combats Unexpected Inflation. Vanguard.


  • For more information about Vanguard funds, visit or call 800-523-1036 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
  • All investing is subject to risk, including the possible loss of money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
  • The Short-Term Inflation-Protected Securities Index Fund invests in bonds that are backed by the full faith and credit of the federal government and whose principal is adjusted periodically based on inflation. The fund is subject to interest rate risk because although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. The fund's quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the fund.