Home Most Popular Investing Benefits of TIPS Bonds for Retirees: Inflation Protection and Potential Profit

Benefits of TIPS Bonds for Retirees: Inflation Protection and Potential Profit

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Benefits of TIPS Bonds for Retirees: Inflation Protection and Potential Profit

Often overlooked by individual investors, Treasury Inflation-Protected Securities (TIPS) provide inflation protection and more. After a 2% increase across all maturity lengths last month, TIPS yields are now at their highest in over a decade.

Treasury Inflation-Protected Securities Explained

TIPS differ from traditional Treasury bonds because their payout adjusts based on inflation, specifically the consumer price index (CPI). The bond consists of two parts: the purchase price (principal) and the yield. While the yield is fixed at purchase, the principal is adjusted for inflation every six months. If the adjusted principal is higher at maturity, investors earn a gain. If it falls below the original price, the bondholder still receives the initial purchase price. TIPS pay a fixed interest rate every six months, but the payments vary to match the adjusted principal and the current rate of inflation. Interest from TIPS is exempt from state and local taxes, but it is subject to federal tax.

How TIPS Yields Have Increased

In the week of August 14th, the guaranteed yield on TIPS climbed to 2%, offering investors a guaranteed yield that is 2% higher than inflation for a duration of up to 30 years. The yield on a 10-year TIPS also increased by over 2%, a level not seen since 2009. As noted by Brett Arends on MarketWatch.com, investing $1 in TIPS today ensures it will be worth $1.80 in real, purchasing power terms in 2053, regardless of market conditions.

How to Purchase TIPS

TIPS bonds can be purchased through the government’s TreasuryDirect.gov website. However, setting up a TreasuryDirect account can be complex and time-consuming. Alternatively, investors can find TIPS mutual funds and ETFs. TIPS are issued on a regular schedule with maturities of 5, 10, or 30 years. The minimum purchase amount is $100, and the maximum is $10 million (non-competitive bid) or 35% of the offering amount (competitive bid). Investors can choose to hold the bonds until maturity or sell them early.

Benefits of TIPS for Retirement

Inflation protection is crucial for retirees, who may rely on their retirement funds for several decades. TIPS offer downside protection and limit losses during periods of market decline, making them a valuable addition to a portfolio of other investments, such as stocks. The recent surge in TIPS yields makes them particularly attractive.

Tips for Dealing with Inflation

  • Work with a financial advisor who specializes in inflation-protected investments for retirement. SmartAsset’s free tool can match you with up to three vetted financial advisors in your area.
  • Use our free inflation calculator to determine the purchasing power of a dollar over time in the United States.