Retire With a Treasury Inflation Protected Securities (TIPS) Portfolio

Retire With a Treasury Inflation Protected Securities (TIPS) Portfolio

The great majority of employees today have to save and plan for their own retirement. They confront enormous challenges: inflation, low interest rates, an extremely volatile and unpredictable stock market, and job insecurity. It was not always this difficult. Decades ago, far more employees worked for companies that provided defined-assistance pension plans promising their employees a basic inflation-modificated retirement income stream upon retirement. Most of those plans have been terminated and replaced with defined contribution plans, such as 401(k)s. Today, most employees have to save and plan for their own retirement.

So how can today’s employees effectively save and prepare for retirement, on their own, if they don’t want to trust their retirement security to the vicissitudes of the stock market? Many simply plow their money into Certificates of place (CD). But with CD interest rates generally low, inflation generally high, and all of the interest taxed every year, this is a very poor option. Some retirees will choose to buy an immediate income annuity. But annuities are generally expensive. The premiums sustain not only the annuity payments, but also a large commission, a generous compensation package for the insurance company’s executives, and the insurance company’s large overhead, operating and advertising expenses.

Fortunately, there is a better option – buying inflation-indexed bonds known as Treasury Inflation-Protected Securities (TIPS). In 1997, the U.S. Treasury began issuing TIPS in 5, 10, and 20-year maturities. Unlike treasury bonds, TIPS protect the holder from inflation by adjustments, based on the Consumer Price Index (CPI), to the principal. Because they are backed by the complete faith and credit of the U.S. government, TIPS are just as safe as a FDIC-backed CD and safer than an annuity.

The interest given off by TIPS, however – unlike capital gains – is taxed at ordinary income tax rates. consequently, TIPS are best purchased by a tax-advantaged account, such as a self-directed IRA. There are some low-cost brokerages that allow customers to buy TIPS by a self-directed IRA account, so call a few of them and find out.

instead of building a laddered portfolio of CDs, retirees should consider building a laddered portfolio of TIPS of different maturities, in a self-directed IRA. Retirees should also consider delaying their application for Social Security benefits until they reach the age of 70 – and taking distributions from an IRA holding TIPS until they reach age 70.

To execute a retire-with-TIPS strategy, retirees should calculate the retirement expenditures that a TIPS-based portfolio would sustain. For example, a million-dollar IRA portfolio of laddered TIPS with a 3% real provide would sustain inflation-modificated retirement expenditures of more than $65,000/year for 20 years.

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