TIPS for a Happy Retirement

You'd have to live in a bunker not to know how much prices have risen lately. From milk to gas, health care to college tuition, one thing you can count on is that you're seeing your living expenses skyrocket.

Ideally, your investments will grow enough to compensate for those higher expenses. But how do you protect your portfolio against inflation without taking on too much risk in the stock market? The answer is simple: inflation-linked bonds.

Financial innovation at work
In the 1990s, the U.S. government started auctioning Treasury Inflation Protected Securities, or TIPS, as one of its regular products to finance the national debt. These securities offered investors an alternative to traditional Treasury bonds.

With regular Treasury bonds, you pay around $1,000 per bond, receive interest payments over the term of the bond, and at maturity, you get your $1,000 back. But after a number of years of maturing, the $1,000 you get back has a lot less purchasing power than the $1,000 you originally invested.

With TIPS, however, your maturity payment is adjusted upward for inflation. For instance, if you buy 10-year TIPS for $1,000 and inflation rises 30% over those 10 years, then you'll get $1,300 at maturity.

Securities that offer similar protection from inflation have become increasingly popular over time. The corporate side of the market started slowly, with Fannie Mae (NYSE: FNM  ) being the big player early on. Gradually, other companies -- Sallie Mae (NYSE: SLM  ) , Morgan Stanley (NYSE: MS  ) , Bear Stearns (NYSE: BSC  ) -- began to offer corporate bonds in 2003-04 that were linked to inflation.

In addition, ABN AMRO's (NYSE: ABN  ) LaSalle Bank offers CDs with returns that adjust with inflation. The firm Incapital has marketed inflation-linked securities under the name Internotes, with issuers like Prudential Financial (NYSE: PRU  ) .

Protecting your income
At our Rule Your Retirement newsletter, Foolish expert Robert Brokamp has suggested that dividend-paying stocks are a solid way to preserve an income stream that will keep up with inflation. But in this month's issue, which comes out today at 4 pm ET, he notes that even high-yielding stocks are prone to market downturns, making bonds an essential part of your portfolio. And while traditional bonds can drop precipitously if inflation heats up -- which is a real danger now -- TIPS provide real protection against inflationary spikes.

There are many ways to buy inflation-linked bonds. You can buy TIPS directly from the Treasury Department through its Treasury Direct website; auctions are held quarterly with a variety of maturities ranging from five to 20 years. An exchange-traded fund, the iShares Lehman TIPS ETF (NYSE: TIP  ) , makes TIPS available to shareholders. Several traditional mutual funds also offer TIPS as investments.

Many fear that the Federal Reserve's dramatic response to the slowing economy may reignite inflation. If so, having an arsenal of TIPS in your portfolio will help protect you from a rapid drop in the the purchasing power of your savings.

Read these articles and learn more about:

Read/Post Comments (0) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 572774, ~/Articles/ArticleHandler.aspx, 10/24/2016 9:56:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 40 minutes ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
BSC.DL $0.00 Down +0.00 +0.00%
ELEMENTS Benjamin… CAPS Rating: No stars
FNMA $1.75 Up +0.01 +0.57%
Fannie Mae CAPS Rating: ***
MS $33.38 Down -0.06 -0.18%
Morgan Stanley CAPS Rating: ****
PRU $83.54 Up +0.39 +0.47%
Prudential Financi… CAPS Rating: ****
SLM $7.19 Up +0.05 +0.70%
SLM CAPS Rating: **
TIP $115.95 Down -0.18 -0.15%
iShares Barclays T… CAPS Rating: *