Where to Invest if Inflation Stays 3%: After-Tax Reality

The sneaky fee you’re paying: 3% inflation plus taxes

You know the math most folks skip because it feels annoying? The part where you take your shiny yield and drag it through taxes and inflation to see what’s actually left. I keep a sticky note on my monitor that just says: nominal, taxes, inflation = reality. It’s not pretty, but it’s honest.

Here’s the issue right now: if inflation hangs around 3%, your cash and bond yields have to clear two hurdles, taxes first, then inflation, just to tread water in purchasing power. And that 3% doesn’t sound scary until you realize it quietly compounds the damage. A 3% price level creep for three years is roughly a 9.3% hit to what your money buys. Same dollars, smaller cart at Costco.

Context for 2025 matters. The Bureau of Labor Statistics showed CPI cooling from the 9.1% peak in June 2022 to the low-3% range by late 2023-2024. Specific prints: 3.0% year-over-year in June 2023, 3.4% in December 2023, and back to 3.0% in June 2024 (BLS). That regime change is exactly when investors started repricing what “real” returns meant. You could feel it in flows, money moved into T-bills and short-duration funds because nominal finally looked decent again, but the real question (pun intended) became: what’s left after tax and inflation?

Let’s make it tangible. Say you’re earning a 5% nominal yield in a taxable account. If you’re in a 32% federal bracket (skip state for simplicity), your after-tax yield is roughly 3.4%. Now subtract 3% inflation. You’re at ~0.4% real. If you’re at a lower 24% bracket and add a 5% state tax, your combined ~29% haircut takes 5% to ~3.55% after-tax; net of 3% inflation, that’s about 0.55% real. It feels like 5%, it spends like half a percent. Different words, same idea: taxes compress yields; inflation compresses what’s left.

And this is why the nominal headline can be misleading. A savings account at 4.5% sounds great until you remember the IRS takes a slice every year, and inflation takes a slice every day. You need to think in real, after-tax terms, even for “safe” assets. Especially for taxable accounts.

My take (not gospel): in a 3%-ish inflation world, the hurdle rate for cash and bonds in taxable accounts is closer to 4-5% after tax just to earn 1-2% real. If that sounds high, it is. That’s the sneaky fee.

So this section is your decoder ring. We’ll use the simple frame, nominal, taxes, inflation = reality, to weigh cash, Treasuries, munis, corporates, and beyond. And we’ll keep it practical: what actually improves your purchasing power, and what just looks good on a monthly statement. Same theme said twice, because it matters: your yield isn’t your yield until you net out taxes and inflation.

Parking cash smartly: short ladders, T‑bills, and when CDs make sense

Cash isn’t trash, but it is expensive if it lounges below inflation after tax. With CPI running around ~3% year over year this summer (BLS, 2025), the hurdle is real. Here’s a simple, resilient setup that keeps liquidity without playing hero ball.

• Start with the boring but essential: emergency fund first. Park 3-6 months of core expenses in something truly liquid, an FDIC savings account or a government money market fund (MMF). If you’re self-employed or have variable income, 6-12 months isn’t crazy. Only after that do we improve yield. I’ve seen too many folks chase 40 extra basis points and then need cash the week after their CD locks. Not fun.
• Build a 3-12 month Treasury-bill ladder for the “core cash sleeve.” Think four rungs: 3, 6, 9, 12 months. Buy via TreasuryDirect or a brokerage auction. When a rung matures, decide whether to roll to the back of the ladder or to let the cash sit if you need it. This rolling setup does two useful things:
  • Flexibility: monthly or quarterly maturities give you off-ramps for surprises.
  • Rate sensitivity: as yields move, your average yield adjusts without timing heroics.
• Prefer Treasuries in taxable accounts. Interest on U.S. Treasuries is exempt from state and local income taxes, which matters if you live in a 5-10% state-tax world. Quick math: a 4.8% T‑bill in a 6% state means ~0.29% “saved” vs a fully taxable CD, before federal tax. On a $200k cash sleeve, that’s ~$580 a year. It’s not dinner at Per Se, but it’s real.
• CDs: selective, not default. CDs can beat T‑bills occasionally, especially at online banks fishing for deposits. But CD interest is fully taxable at both federal and state levels, and you give up liquidity unless you pay an early withdrawal penalty (often 3-6 months of interest for 1-2 year CDs; check your bank’s fine print). Use CDs when:
  • You’re in a low/no state-tax state, and the CD rate clears your after-tax hurdle by a decent margin.
  • You’re comfortable with the penalty as a “liquidity fee” if you need out early.
• Munis: only if your bracket justifies it, and keep them short. For high earners in high-tax states, short-duration muni funds or individual notes can make sense in taxable accounts. Taxable‑equivalent yield (TEY) math helps: a 3.5% muni for someone at a 37% federal bracket is ~5.6% TEY (ignoring state). But credit risk and liquidity are not the same as T‑bills. If this is truly “cash,” keep duration ultrashort and quality high (AA/Aa or better). Honestly, if you’re not in the top brackets, Treasuries usually win.
• Money market funds are fine for operational cash. Two checks:
  • Expense ratio: Government MMFs with net expense ratios under ~0.20% are competitive; fees compound against you. Some funds waive fees…until they don’t.
  • What’s inside: “Government” MMFs hold Treasuries/Agency paper; “Prime” MMFs hold corporate/CP and can impose liquidity fees under SEC rules adopted in 2023-2024 for institutional share classes. For simplicity and state tax reasons, many households just use government MMFs.

Where people get tripped up is the after‑tax, after‑inflation piece. A quick example, not a recommendation. If you buy a 6‑month T‑bill yielding 5.0% and you’re in the 24% federal bracket (no state tax on Treasuries), your after‑tax yield is ~3.8%. Net out 3% inflation, and you’re earning ~0.8% real. Decent, not magic. If the yield is 4.2% and you’re in the 32% bracket, your after‑tax is ~2.86%, which means you’re barely treading water vs 3% CPI. That’s the sneaky fee we talked about earlier.

Okay, this is getting wonky, so here’s the simple playbook I actually use with clients (and my own cash):

1. Hold 3-6 months of expenses in a government MMF or high‑yield savings. Don’t stretch.
2. Ladder the next 6-12 months in 3/6/9/12‑month T‑bills. Roll maturities at each auction; adjust size as life happens.
3. Price CDs against Treasuries after state taxes and potential penalties. Only bite if you’re getting paid enough to give up flexibility.
4. For high brackets, compare short muni TEY vs Treasuries, but keep it ultra‑short and high quality if it’s “cash‑like.”
5. Re‑check money market fund expense ratios annually and confirm it’s government, not prime, unless you’re intentionally taking that spread.

Rule of thumb: match cash to time. Money you need in 0-12 months? Bills and government MMFs. 12-36 months? Short ladder with room to breathe. Anything beyond that, consider stepping out the curve or into bonds, but that’s the next section.

Last thing, rates have moved around this year and can shift again later this year as the Fed re‑sizes policy; ladders give you a built‑in way to adapt without guessing. Don’t chase a few basis points with dollars you actually need to be liquid; peace of mind has a yield too, even if your statement doesn’t print it.

Bond strategy at 3% inflation: earn real yield without stepping on rakes

Fixed income finally matters again with inflation hanging around ~3%. You can actually earn real income without betting the farm on rate calls. The trick is sticking to what the math is telling you, breakevens and real yields, rather than slogans about “higher for longer” or “the Fed’s done.” I know, easier said than done when headlines are loud and your cousin won’t stop talking about his REIT fund.

Core allocation: short-to-intermediate, high quality. Think 2-6 year effective duration in Treasuries and agency MBS. That keeps you out of the worst rate volatility while still locking in an actual real yield. If your bond sleeve wobbles as much as your equity sleeve, it’s not doing its job. And yes, I’m oversimplifying a bit, curve shape and convexity matter, but that duration zone has been the workhorse this year.

Blend in TIPS for direct inflation linkage. TIPS give you inflation-adjusted principal and coupon. The simple lens: breakeven inflation = nominal Treasury yield minus TIPS yield for the same maturity. If 5-year Treasuries yield 4.2% and 5-year TIPS yield 1.6%, the market’s breakeven is ~2.6%. If you think inflation will average above that, TIPS likely win; below that, nominals probably do. Treasury data before 2025 shows breakevens hovered near the 2-3% zone in 2023-2024, which is exactly the neighborhood we’re debating now. I keep a small core in TIPS across 5-10 years, then tilt up or down as my inflation view changes. Not perfect. But it’s a clean framework.

Investment-grade corporates: be picky, and ladder. Stick with high-quality issuers, avoid concentrated sector bets (I still remember 2008 monolines, no thanks), and ladder maturities to smooth reinvestment risk. A 2-7 year ladder in IG corporates and Treasuries gives you roll-down potential and a steady stream of cash flows to redeploy if the Fed shifts later this year. And if spreads gap wider on a growth scare, your ladder will naturally feed fresh cash into higher spreads without you having to time it perfectly.

High yield and loans: keep it modest. Yes, the income looks good, and floating-rate loans still throw off chunky coupons while policy rates are elevated. But floating-rate also transfers rate risk into credit stress when growth slows and interest coverage tightens. Default cycles are cyclical, shocker, and you don’t need much HY to move the needle. I generally cap the junk/loan sleeve in the mid-single digits of a diversified bond portfolio and favor up-in-quality BBs, actively managed, with real risk controls. If you want a stress test: ask what happens to income and NAV if defaults tick up and recoveries slip below historical averages. If the answer is “we’ll see,” size it smaller.

Taxes matter: tilt to munis if you’re in a high bracket. For top brackets, tax-equivalent yields on short-to-intermediate munis can look compelling versus Treasuries. I still prefer shorter duration in munis right now because the curve is… let’s just say not exactly reliable. High quality only; this isn’t the time to stretch for yield in odd-lot revenue bonds you can’t sell on a rainy day. And please, match your state exposure to your tax situation.

Put it together

• Core: 50-70% in short-to-intermediate Treasuries/Agencies (low fee, broad, liquid).
• TIPS sleeve: 10-25% across 5-10 years; adjust versus your inflation view and current breakevens.
• IG corporates: 15-30%, diversified, laddered, up in quality.
• HY/loans: 0-10%, sized modestly, bias to higher quality and active risk mgmt.
• Munis: use for taxable accounts in high brackets; keep duration on the shorter side.

And remember, bonds aren’t magic. They’re just contracts. If you anchor on real yield and breakevens, you cut through the noise. The rest, Fed path, election chatter, soft landing hard landing medium landing, is portfolio construction and position sizing. If this is feeling too granular, yeah, that’s bonds: a little messy, but the math is honest.

Equities that keep pricing power: dividend growers, quality, and a pinch of value

At ~3% inflation, the market usually pays up for companies that can nudge prices without losing customers, and frankly without apologizing for it. My bias here is simple: pick businesses that raise dividends like clockwork, produce more cash than they need, and don’t rely on cheap money to look good, because cheap money isn’t the base case anymore in 2025.

Dividend growth over yield traps

Don’t reach for the fattest yield; reach for the most reliable growth. Screens I like: 5-10 year dividend CAGR of ~5-10%, payout ratios in the 30-60% zone (room to reinvest and room to keep paying in a wobble), and free cash flow covering dividends 1.5-2.0x. That mix tends to be where boards commit to raises even when winds shift. Historical work backs this up. S&P Dow Jones Indices’ Dividend Aristocrats series (data through 2024) shows steadier drawdowns and lower volatility than the broad S&P 500 over multiple cycles, while compounding competitively over 10-30 year windows. Translation: less drama, similar or better math. And yes, that matters when inflation is moderate and choppy.

Quality travels well in moderate inflation

Quality metrics I actually care about: high ROIC (teens+), strong FCF conversion (70-90% of net income), sensible use (net debt/EBITDA <2x; banks are different, use CET1 and loan loss coverage there). Across long histories, the quality/profitability factor has earned a positive premium; Fama-French data (1963-2023) shows profitability and value factors delivering long-run annual premiums in the 3-4% range, which is not nothing when inflation takes a bite. Add to that S&P’s sector studies (pre-2025) highlighting that firms with durable margins tended to hold up better in 2-4% inflation regimes. It’s not a promise, it’s just how the tape has behaved on average.

A pinch of value and some cyclicals, tempered with defensives

If nominal GDP runs ~5% (say 2% real + 3% inflation), value and economically sensitive names can participate. I like a barbell: industrials with backlog and pricing clauses, healthcare tools and services that bill on volumes not whims, select financials (insurers, exchanges) that benefit from higher nominal levels, and energy infrastructure where cash flows tie to volumes and regulated tariffs. Balance that with defensives, staples with brand equity, utilities that aren’t drowning in capex bloat, to smooth drawdowns. It’s the mix that matters; the mix keeps you in the game.

Global mix, and yes, the currency thing

Don’t ignore developed ex-U.S. because it’s not “fun.” Valuations help your margin of safety. As of September 2025, broad estimates put the S&P 500 at ~20-21x 12‑month forward earnings, while MSCI EAFE screens closer to ~12-13x. That gap isn’t new, but it’s wide enough to care about. If FX whipsaws make you queasy, hedge selectively: EUR/USD hedges cost roughly ~1% annualized this year given rate differentials, while JPY hedges actually pick up carry in the 3-4% range (ballpark, it moves with front-end rates). You don’t have to hedge everything; I rarely do. But it’s a tool.

Real-asset linkage and pricing power

At this inflation level, I tilt toward sectors with real-asset linkage or contractual escalators: industrials with CPI pass-throughs, healthcare equipment with sticky installed bases, select financials where pricing rides nominal activity, and energy infrastructure (midstream) where long-term contracts and regulated tariffs support 5-7% cash yields in 2025 with mid-single-digit distribution growth. Not all “value” is cheap for a reason; some of it is just ignored because AI got all the airtime. That’s fine. I don’t need perfect timing; I need repeatable cash flow.

My rule of thumb: dividend CAGR 5-10%, ROIC in the teens, FCF that actually shows up in the bank account, and balance sheets that can take a hit without calling the underwriters. If I can’t explain the pricing power in one sentence, I probably don’t own it.

One last practical note, position sizing. Even quality stumbles. Spread the exposure: a dividend-growth core, a quality sleeve, and a measured value/cyclical tilt. Then rebalance when the market forgets that cash flow beats stories and, well, cash flow beats stories.

Inflation-linked and real assets: TIPS, I Bonds, infrastructure, and measured commodities

You don’t need to hoard copper in the garage. Small, intentional sleeves of inflation-aware assets can boost resilience without turning the portfolio into a roller coaster. I like to anchor this with instruments that actually reference inflation directly, then layer in cash-flow assets that reprice reasonably fast, and only then consider the more volatile stuff.

TIPS as a strategic core. Treasury Inflation-Protected Securities are the cleanest hedge because principal adjusts with CPI-U and you lock a real yield. As of Q3 2025, 10-year TIPS real yields are hovering roughly ~2.0-2.2%, and 5-10 year breakevens are sitting in the ~2.2-2.5% range. That combo means you can earn a real return and let inflation do the work on principal, no heroics. I usually slot TIPS where high-quality core bonds would sit, then let nominal duration carry do the rest. Being honest, breakevens do move; if growth wobbles, breakevens can compress. I’d size TIPS as a strategic piece, not a trade.

I Bonds for taxable investors. For households, Series I Savings Bonds are the boring-but-good option in taxable accounts. Rules remain the same as of 2024: $10,000 per person per calendar year electronically (plus up to $5,000 via tax refund in paper form); rates reset every May and November off CPI-U, with a fixed-rate component set at purchase. You have to hold 12 months, and if you redeem within five years you forfeit the last three months of interest. I keep a mental note that I Bonds aren’t tradable and you can’t load the boat, but that’s the point. They build a steady, CPI-linked base without duration mark-to-market.

Infrastructure and midstream pipelines. Listed infrastructure often embeds explicit CPI escalators in concession and offtake contracts, while U.S. midstream benefits from long-term, fee-based agreements and regulated tariff mechanisms tied to inflation measures. The result, when selected carefully, is cash flow that keeps pace with prices. My filter is simple: balance sheet first (Net debt/EBITDA comfortably sub-4x), contract quality second, and then payout sustainability. I’ll admit I’m blanking on the exact share of contracts with CPI linkage for one of the big European operators, it was high, north of half, but the point stands: CPI escalators aren’t marketing fluff; they show up in the math.

REITs that reprice faster. Real estate isn’t monolithic. Sectors with shorter lease terms or CPI linkage tend to reset rents faster: logistics/industrial (3-5 year average with strong mark-to-market), housing (12-month leases), and self-storage (often month-to-month). I avoid over-levered names, simple as that, because higher-for-longer funding costs in 2025 can swamp any rent growth. Look for laddered debt maturities, mostly fixed-rate, and liquidity that doesn’t rely on ATM equity taps every quarter.

Commodities: tactical and small. Broad commodities can hedge inflation surprises, but the ride is bumpy. If you use them, use diversified, collateralized vehicles that hold futures and T-bills as collateral, and size modestly, think 3-7%, so a drawdown doesn’t hijack the whole portfolio. Watch the curve. Contango eats carry; backwardation pays you. This year, I’ve treated commodities as a shock absorber rather than a core allocation.

Gold as insurance. Gold doesn’t produce cash flow, and that’s okay, it’s tail-risk insurance. I carry it like I carry an umbrella: small when skies look clear, a touch bigger when the macro clouds darken. No more than a low- to mid-single-digit slice. It hedges currency and policy accidents; it’s not a yield play.

Philosophy check: I don’t pretend to nail the exact path of CPI. I’d rather build a mix, TIPS at the core, I Bonds where tax-efficient, infrastructure with CPI passthroughs, selective REITs, and a modest commodities/gold sleeve, that works across a 2-4% inflation regime and doesn’t blow up if we’re wrong.

Debt, taxes, and account placement: where returns quietly leak

Debt, taxes, and account placement: where returns quietly leak. Two people can own the same funds and end up with different wealth ten years later because one respected basic math: interest rates and taxes. It’s not flashy; it’s unglamorous alpha. And in a year where cash yields are still decent and real yields are positive again, the gap is even wider.

Start with the obvious leak: expensive, variable-rate debt. If you’re paying double-digit APR on revolving balances, that’s your highest “risk-free” return. The Federal Reserve’s data on accounts assessed interest showed credit card APRs above 20% last year (2024 averaged near the low-20s), and they’ve stayed in that neighborhood this year. You won’t reliably beat a 20% hurdle with market risk. So I prioritize: variable-rate cards and personal loans first, then private student loans or HELOCs if they’re floating and pricey. I’ve never regretted paying off a 22% card; I’ve occasionally regretted chasing a hot stock instead.

Fixed-rate mortgages are different. A 30-year at 2.75-3.25% from 2020-2021 is a scarce asset today. Over the summer of 2025, the Freddie Mac survey had the 30-year fixed floating around the mid-6s to low-7s. If your coupon is low and fixed, I’m usually fine keeping it, if your expected after-tax, after-inflation return elsewhere is higher and your liquidity is solid. With 10-year TIPS real yields near ~2% in September 2025, a balanced equity allocation with a long horizon still clears that hurdle in expected terms. But I’ll stress-test: what happens if returns are muted for five years? Mortgage prepayment is a guaranteed return equal to your rate; markets aren’t guaranteed. That trade-off is personal and, yeah, a little squishy.

Asset location: put the right stuff in the right buckets. This is where quiet compounding happens.

• Tax-deferred (401(k)/traditional IRA): Park income-heavy assets here, taxable bonds, TIPS, high-turnover strategies, REITs, because ordinary income is deferred until withdrawal. If inflation sits around 3%, the carry from bonds is more valuable when not shaved annually by taxes.
• Taxable brokerage: Favor broad equity index funds/ETFs with low turnover and qualified dividends. You get lower long-term capital gains rates (0/15/20%) and control timing. I’ll also keep municipal bonds here if I need fixed income in taxable; the exemption helps, especially in high-tax states.
• Roth IRA/401(k): This is prime real estate. Put the highest expected-return, highest-growth assets here, small-cap/value tilts, innovative equity, private growth if available and prudent, since qualified withdrawals are tax-free. Every extra point of return you can trap here compounds without the tax drag.

Tax-loss harvesting, useful, not a lifestyle. In taxable accounts, harvest losses to offset gains and up to $3,000 of ordinary income per year (same cap as every year since forever). Just watch the IRS wash-sale rule: avoid buying the same or “substantially identical” security 30 days before/after the sale. I’ll swap an S&P 500 ETF for a slightly different large-cap blend ETF for 31 days, then decide whether to switch back. Don’t burn your asset allocation to save a few basis points in taxes, keep the market exposure intact while you bank the loss.

HSAs are quietly elite. Triple tax-advantaged: deductible contributions, tax-deferred growth, tax-free withdrawals for qualified medical expenses. For 2025, the contribution limits are $4,300 self-only and $8,550 family (plus $1,000 catch-up at 55+). If you can cover near-term medical costs with cash, invest the HSA in a low-cost, diversified mix and treat it like a stealth Roth for future healthcare. Healthcare inflation is stubborn; let compounding fight it for you.

Here’s how I actually think through it on a Saturday morning, coffee in hand. I’ll line up each dollar by its best use: do I have any floating debt over, say, 8-10%? Kill it. Next, am I maxing the HSA and Roth space? If not, fix that. Then I match assets to accounts: bonds into tax-deferred, equities into taxable (with muni bonds if I need them), growthiest stuff into Roth. I over-explain this to clients, sorry, because once you see the tax drag math, you can’t unsee it.

Rule of thumb: beat your after-tax hurdle, not your cocktail-party benchmark. If headline CPI hangs near ~3%, your pre-tax return target in taxable equity might be 5-7% just to net an acceptable real gain after taxes. Location and debt choices decide whether you get there.

Last note: none of this is binary. If your emergency fund is thin, you might carry a low-coupon mortgage and still pay a bit extra each month while building cash. If a concentrated RSU position is driving taxes, harvesting losses has more value this year than last. The point is to make the small, slightly boring choices that don’t make headlines, but do show up in your net worth statement, every single December.

A simple 3% inflation playbook you can execute this week

No crystal ball. Just sizing positions so 3% inflation doesn’t eat your lunch. This is the template I default to when the CPI print is hanging around that ~3% zone and, frankly, the market is paying you decent cash yields right now. As of September 2025, 3‑month T‑bills have been hovering near ~5% give or take a few tenths, the S&P 500 dividend yield is around 1.3% this year, and 10‑year TIPS breakevens have spent Q3 near ~2.3%, none of which is exotic, but all of which matter when you set your hurdle.

• 1) Cash & short T‑bills for 6-12 months of needs. Park true spending needs in high‑yield savings/treasury bills. I like 4-13 week bills staggered monthly. At current money‑market yields (around high‑4% to low‑5% recently), this clears a 3% inflation hurdle after tax in many states if you use Treasuries (state tax‑free), but check your bracket.
• 2) Core: a 3-5 year bond ladder. Build a 5‑rung ladder (1-5 years) with Treasuries or high‑grade agencies; roll each year. Keep credit simple, AA/A corporates if you must, but I keep the ladder mostly in Treasuries in taxable. Duration roughly 2.5-3.5 years helps if the Fed drifts lower late this year without betting the farm on a single cut path.
• 3) 20-35% in equities. Bias to quality dividend growers (think consistent 5-8% dividend growth historically, yield ~2% give or take) layered with broad market ETFs (S&P 500 or total market). If you can handle tracking error, add a value tilt, cheap cash flows help when rates are not zero and inflation isn’t 1% any more.
• 4) 5-15% in TIPS across accounts. Match your ladder with a TIPS sleeve or use an ETF for simplicity. TIPS principal adjusts with CPI‑U, and with breakevens near ~2.3% in Q3 2025, the math is reasonable protection if you’re nervous 3% becomes 3‑and‑a‑quarter for longer.
• 5) Consider I Bonds (up to the annual limits). TreasuryDirect caps are still $10,000 per person per calendar year (plus up to $5,000 via a federal tax refund). I’m blanking if the fixed rate bumped this May or not, but even when the variable leg softens, the fixed rate component locks in for life, which I like as a ballast.
• 6) 5-10% in real assets. Listed infrastructure and selective REITs with stronger balance sheets and lease escalators tied to CPI or fixed bumps. Keep REITs in tax‑advantaged if you can; ordinary income treatment stings in taxable.
• 7) Optional 2-5% commodities or gold for ballast. Don’t expect perfect timing; use a diversified commodity ETF or a simple gold sleeve. It’s there for the weird quarters when everything else zigzags together.

Tuning knobs this quarter: set rebalancing bands (say ±5% around target weights), and every quarter do three fast checks: (1) after‑tax yields vs your 3% real hurdle, remember state tax on corporates versus Treasuries; (2) modest duration nudges, not wholesale swaps, if the curve is less inverted than last year, inch the ladder out by a year, don’t sprint; (3) dividend health, coverage ratios and payout growth, not just headline yield.

Account location still matters: bonds in tax‑deferred, equities in taxable, growthier stuff in Roth, munis if your bracket warrants. One more practical thing, write the rules down. I keep a dumb sticky note on my monitor that reads “3% real, after tax” and it stops me from chasing whatever factor worked last month. Is this perfect? No. But it’s simple, repeatable, and you can execute it by Friday without heroic assumptions.

Frequently Asked Questions

Q: How do I quickly estimate my real return after taxes if inflation runs ~3%?

A: Use a back-of-the-envelope: after-tax yield ≈ nominal yield × (1, your tax rate). Then subtract inflation. Example: 5% nominal in a 32% federal bracket → ~3.4% after-tax. 3.4%, 3% inflation ≈ 0.4% real. Not perfect, but directionally right. If you’ve got state tax, include it. I literally keep “nominal, taxes, inflation = reality” on a sticky note.

Q: What’s the difference between TIPS, I Bonds, and T‑bills if inflation hangs near 3%?

A: TIPS adjust principal with CPI, so they target a real yield, but interest and the inflation accretion are taxable annually in taxable accounts (phantom income). They’re cleaner in IRAs/401(k)s. I Bonds credit a fixed rate plus inflation, tax-deferred until redemption, $10k annual limit per SSN, 12‑month lockup and 3‑month interest penalty if redeemed before 5 years. T‑bills are nominal; at 3% inflation, your after-tax real is slim in taxable accounts. Practical mix: hold TIPS in tax-advantaged, use I Bonds up to the cap, and ladder T‑bills/short CDs for liquidity.

Q: Is it better to keep cash in a HYSA or lock into 1-3 year CDs/Treasuries right now?

A: Depends on your time horizon and rate view. HYSAs float, good if the Fed cuts later this year and you want flexibility. 1-3 year CDs/Treasury ladders can lock today’s decent nominal yields and reduce reinvestment risk. If you need the money within 6-12 months, keep it liquid. For 12-36 months, a 6‑, 12‑, 18‑, 24‑, 36‑month ladder diversifies timing. In high brackets, consider Treasuries (state tax-free) or munis for taxable accounts; use CDs if early withdrawal penalties are modest.

Q: Should I worry about my stock allocation if inflation stays around 3% this year?

A: Short answer: calibrate, don’t panic. Around 3% inflation is not 2022-style chaos, but it still taxes sloppy portfolios. Equities, over long stretches, tend to outrun low‑single‑digit inflation, but the leadership can shift. What matters now is quality of earnings and pricing power.

Here’s how I’m thinking about it (and how I position my own stuff):

• Favor businesses with durable gross margins and the ability to pass through cost increases, think staples with brand power, select healthcare, software with sticky contracts, and “toll road” plays in energy/midstream.
• Dividend growth matters more than dividend level. A 2% yield growing 8%/yr beats a static 5% when prices creep.
• Quality + profitability factors hold up better when real rates aren’t zero. Avoid weak balance sheets; higher-for-longer real yields punish junky borrowers.
• Keep some value/cash‑flow tilt. Expensive, long-duration stories are more sensitive to real rate moves.
• REITs: focus on sectors with lease escalators (industrial, data centers, specialty). Be mindful of use and debt maturities.
• International: selective exposure where earnings are cheap and currencies aren’t a headwind can help, but don’t force it.

Actionable steps:

1. Rebalance to target weights; don’t let 2023-2025 winners run your risk.
2. Upgrade quality, net debt/EBITDA, interest coverage, free cash flow consistency.
3. Prioritize tax placement: put REITs/TIPS in IRAs; keep broad equities in taxable for qualified dividends and tax‑loss harvesting.
4. If you live off the portfolio, fund 1-3 years of withdrawals in T‑bills/short CDs to avoid selling stocks during a wobble.

Net: if inflation sticks near ~3%, you don’t need a brand-new playbook, just a cleaner one. Trim the fluff, own pricing power, and keep your cash bucket topped up. And yes, check the fees, 2% fund costs in a 3% inflation world is… not ideal.

@article{where-to-invest-if-inflation-stays-3-after-tax-reality,
    title   = {Where to Invest if Inflation Stays 3%: After-Tax Reality},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/invest-when-inflation-3/}
}