For the first time in about two decades, safe money pays. On October 2, 2026, the 10-year U.S. Treasury yielded 5.28% (Board of Governors of the Federal Reserve System [Federal Reserve], 2026). The Federal Reserve raised its target rate again on September 16, to a range of 3.75% to 4.00% (Charles Schwab, 2026). If you’ve been holding cash in a savings account at 0.5% for years, a 5% Treasury looks like a gift.
Here’s my position: a 5% yield is a good thing, and it’s still not the number that matters. What you keep after inflation and taxes is the number that matters. And if your household has a military pension, you already own a very large, inflation-protected bond, which changes how much more “safe” money you need. Let me walk you through both.
Why does the 5% number mislead you?
Economists call it money illusion: the habit of judging money in nominal dollars (the number on the statement) instead of real dollars (what that money can buy). It’s one of the most stubborn biases in personal finance. One study found that investors who suffer from money illusion shift away from inflation-protected bonds and toward regular bonds, and in doing so give up most of the benefit inflation protection provides (Lioui & Tarelli, 2022). A 2026 experiment found the same pattern even after participants were told exactly how inflation and taxes would affect them, and found money illusion harder to undo than tax illusion (Blaufus et al., 2026).
So let’s undo it on purpose.
What is a “real” return, and how do you calculate yours?
Your real return is your return after inflation. Your after-tax real return also subtracts what you owe the IRS. Three numbers get you there:
- The nominal yield. The 10-year Treasury: 5.28%.
- Expected inflation. The market gives us a clean estimate. Treasury Inflation-Protected Securities (TIPS) pay a yield above inflation; on the same day, the 10-year TIPS yielded 2.92% (Federal Reserve, 2026). The gap between the two, about 2.36%, is called breakeven inflation: the inflation rate the bond market expects over the next decade.
- Your tax rate. Treasury interest is taxed federally but exempt from state income tax (31 U.S.C. § 3124).
Now the math. These are illustrative calculations using the October 2 yields, not a forecast:
| Federal bracket | 10-yr Treasury after federal tax | Minus expected inflation (2.36%) | Minus last year’s actual CPI (3.4%) |
|---|---|---|---|
| 12% | 4.65% | about 2.3% real | about 1.3% real |
| 22% | 4.12% | about 1.8% real | about 0.7% real |
| 24% | 4.01% | about 1.7% real | about 0.6% real |
Consumer Price Index data: U.S. Bureau of Labor Statistics (2026), all items, 12 months ending August 2026.
That 5.28% quietly becomes something closer to 1.7% to 2.3% in a taxable account. That’s still a real, positive return (which savers didn’t get for most of the 2010s), but it’s a far cry from 5%.
Inside the TSP or an IRA the tax column changes, because the tax is deferred or, in a Roth, eliminated. That’s one reason where you hold bonds matters almost as much as whether you hold them.
Will rates come back down?
I get this question every week. My answer: maybe, and you shouldn’t build your plan on the answer.
The Fed’s own September projections show most policymakers expecting at least one more increase before year-end, and inflation not returning to the 2% target until 2029 (Charles Schwab, 2026). Markets can change their minds quickly, though. And the research on forecasting is humbling. Studies of professional interest-rate forecasts have repeatedly found they don’t beat a simple “random walk,” the assumption that tomorrow’s rate equals today’s (Kolb & Stekler, 1996; Baghestani et al., 2015). Combining expert views with economic models helps a little over 12 months (den Butter & Jansen, 2013), and that’s about the extent of the good news.
So instead of guessing, ask a better question: at today’s yields, what does each option realistically pay me after inflation?
How do stocks compare when safe money pays 2% to 3% real?
When you take risk in stocks, the extra return you expect over safe bonds is called the equity risk premium. Nobody knows its true size, and serious researchers disagree:
- Ibbotson and Chen (2003), building up from earnings and economic growth, estimated a long-run premium over government bonds of about 4% per year (geometric).
- Arnott and Bernstein (2002) argued the premium investors could reasonably have expected historically was closer to 2.4%.
- Siegel (2005) suggested 2% to 3% over bonds is a reasonable expectation going forward.
- McQuarrie (2024), using U.S. data back to 1792, found long stretches where stocks beat bonds, long stretches where bonds beat stocks, and long stretches where they tied.
Put those together with today’s 2.9% TIPS yield and you get an illustrative expected real return on stocks of roughly 5% to 7% per year, with a wide range of outcomes and no guarantee. Compare that with the 2010s, when TIPS yields sat near zero and at times below it. The premium you’re paid for taking stock risk didn’t grow; the safe alternative just got a lot better.
That doesn’t mean “sell your stocks.” It means the trade-off is more balanced than it has been in a long time, and the right answer depends on what else you own.
Why does a military pension change everything?
Look, this is the part most articles miss, and it’s where military families have a real advantage.
A military retirement pays a monthly check for life, adjusted every year by the Consumer Price Index (10 U.S.C. § 1401a). Financially, that is an inflation-protected bond, backed by the U.S. government. Researchers call this the extended portfolio: your financial accounts plus bond-like assets such as pensions and Social Security (Jennings & Reichenstein, 2008). Their conclusion: households with large bond-like assets can generally hold more stocks in their investment accounts, because the pension already does the “safe” job.
How big is that bond? Here’s an illustrative example with made-up round numbers. Say your household receives $60,000 a year in retired pay and expects 40 years of payments. Discounted at today’s 30-year TIPS yield of 3.34% (Federal Reserve, 2026), that pension is worth roughly $1.31 million as an inflation-protected bond. At a 0.5% real rate, closer to where TIPS traded in 2020 and 2021, the same pension would have been worth about $2.17 million.
Read that again. Your check didn’t change by a dollar, but its market value fell by more than $800,000 as real rates rose. That’s exactly how bonds behave, and it’s proof your pension is one.
Example solution: the same couple, two ways to see their portfolio
Illustrative household (made-up numbers): a retired O-5 with a $60,000 pension and $800,000 in TSP and IRAs, invested 60% stocks and 40% bonds.
- Looking only at the accounts, they’re a “60/40” investor.
- Looking at the extended portfolio, they own $1.31 million of pension bond plus $320,000 of account bonds, against $480,000 of stocks. That’s about 77% “safe” and 23% stocks.
Same family. Same money. Two very different pictures. This couple may be far more conservative than they think, and Treasuries at 5% could tempt them to get more conservative still.
A sound process might look like this:
- Value the pension (and Social Security, VA disability compensation, or a federal annuity if you have them) as bonds.
- Compare TIPS, the TSP G Fund, and regular Treasuries on an after-tax, after-inflation basis, in the account type where you’d actually hold them. (The G Fund’s rate is set monthly by the Treasury from longer-term Treasury yields, and it can’t lose principal; 5 U.S.C. § 8438.)
- Decide how much stock risk you need to meet your goals, rather than how much you’re comfortable with on a calm day.
- Write it down, so the next headline about rates doesn’t make the decision for you.
Where does this analysis fall short?
A few honest limits. Breakeven inflation is a market estimate, not a promise. Pension valuation depends on the discount rate and life expectancy you choose, and reasonable people pick different ones. Military retired pay can be divided in divorce, reduced by VA waivers, or affected by the Survivor Benefit Plan. And none of this considers your spending needs, which are the whole point. Those are exactly the details a planner should work through with you.
Summary
A 5% Treasury yield is real progress for savers, but after inflation and taxes it’s closer to 2%. If you have a military pension, you likely already own more “bonds” than you realize, and that should shape how you respond to higher rates.
What should you do next?
Ask yourself one question this week: Do I know my household’s real, after-tax return, and have I counted my pension as part of my portfolio? If the answer is no, that’s a great conversation to have with an MQFP® professional who understands military pensions, TSP rules, and tax planning. Find an MFAA advisor and bring this article with you.
Disclaimer
This content is for educational purposes only and does not constitute personalized investment, tax, or legal advice. All examples are hypothetical and illustrative; they do not represent any actual client or investment. Yields and inflation figures are as of the dates cited and will change. Past performance does not guarantee future results. Consult a qualified professional before making financial decisions.
References
Arnott, R. D., & Bernstein, P. L. (2002). What risk premium is “normal”? Financial Analysts Journal, 58(2), 64–85. https://doi.org/10.2469/faj.v58.n2.2524
Baghestani, H., Arzaghi, M., & Kaya, I. (2015). On the accuracy of Blue Chip forecasts of interest rates and country risk premiums. Applied Economics. https://doi.org/10.1080/00036846.2014.959656
Blaufus, K., Dräger, L., Milde, M., & Schneider, J. C. (2026). How do money and tax illusion impact long-term investments? An experiment (CESifo Working Paper No. 12799). CESifo. https://www.ifo.de/sites/default/files/docbase/docs/cesifo1_wp12799.pdf
Board of Governors of the Federal Reserve System. (2026, October 5). Selected interest rates (daily): H.15. https://www.federalreserve.gov/releases/h15/
Charles Schwab. (2026). Fed hikes in 12-0 vote, commits to inflation fight. https://www.schwab.com/learn/story/fomc-meeting
den Butter, F. A. G., & Jansen, P. W. (2013). Beating the random walk: A performance assessment of long-term interest rate forecasts. Applied Financial Economics. https://doi.org/10.1080/09603107.2012.752570
Ibbotson, R. G., & Chen, P. (2003). Long-run stock returns: Participating in the real economy. Financial Analysts Journal, 59(1), 88–98. https://doi.org/10.2469/faj.v59.n1.2505
Jennings, W. W., & Reichenstein, W. (2008). The extended portfolio in private wealth management. The Journal of Wealth Management. https://doi.org/10.3905/jwm.2008.706271
Kolb, R. A., & Stekler, H. O. (1996). How well do analysts forecast interest rates? Journal of Forecasting, 15(5), 385–394. https://doi.org/10.1002/(SICI)1099-131X(199609)15:5<385::AID-FOR627>3.0.CO;2-B
Lioui, A., & Tarelli, A. (2022). Money illusion and TIPS demand. Journal of Money, Credit and Banking. https://doi.org/10.1111/jmcb.12923
McQuarrie, E. F. (2024). Stocks for the long run? Sometimes yes, sometimes no. Financial Analysts Journal. https://doi.org/10.1080/0015198X.2023.2268556
Siegel, J. J. (2005). Perspectives on the equity risk premium. Financial Analysts Journal, 61(6). https://doi.org/10.2469/faj.v61.n6.2772
U.S. Bureau of Labor Statistics. (2026, September 11). Consumer price index: August 2026 [News release]. https://www.bls.gov/news.release/cpi.nr0.htm
10 U.S.C. § 1401a.
31 U.S.C. § 3124.
5 U.S.C. § 8438.