Is TIPS the best Way to Beat Inflation for Retirees?

Posted by Lynn Eisler February 5, 2013 0 Comment 413 views

Retirees are always on the lookout for good investments where they can put their hard earn money in safely. Their main objective of course is to protect the value of their assets and their income from inflation. If that is the case, a good recommendation is to consider Treasury Inflation Protected Securities or TIPS. But the question is, could TIPS be a good investment option for a retiree?

If you are a retiree and you want to try out this investment scheme, you must first have the best answer for that question. Before you can have that, you must first have a good understanding of the inflation risks you could face during retirement. You should also try to remember that you are already facing a heavy inflation buffer with Social security since its payments are dependent to inflation rate.

Essentially, your aim is to protect your money from two types of inflation in retirement. The first one is the expected inflation, explained by economists as the steady increase of the price level that happens over a long time. Hedging against this type of inflation is comparatively easy: You just need find investments with great potential to generate returns of several points over long term inflation rate and keep a part of your savings there. One good example of such investment is stocks, as well as mutual funds and real estate investments.

The second version of inflation that you need to guard yourself against is the unexpected inflation. According to economists, this is the type that can suddenly flare, like the mid 70s and early 80s oil-price shocks.

The good thing about these spikes is that they are usually relatively short-lived, which means that they’re not a big issue for those who are putting investments for a retirement that is yet to happen. If, however, a retiree who is very much dependent on your investments for your everyday spending money, even little surges of inflation can make it harder to maintain a good standard of living.

The main concern here, therefore, is on dealing with the second inflation risk. It is recommended by advisers to try other forma of investments like gold or commodities because these have great potential of generating huge returns when unexpected inflation surges off. But according to John Ameriks, Principal of Vanguard Investment Counseling and Research, there were also instances when commodities could also post negative return in case inflation surges up, so the huge returns on commodities should considered as given.

Now let us deal with TIPS. This type of investment scheme is highly recommended by economists because they believe it is highly suitable for handling and dealing with unanticipated inflation. Unlike with gold or commodities that have possibilities of climbing up in value during high inflation, TIPS have been designed specifically to go along with the growth of the consumer price index. So, to answer the question posted above, yes, TIPS is a good investment option for retirees.

About Lynn Eisler

Lynn Eisler is a national news reporter focusing on economic issues, data analysis and the financial health of state and local governments. Lynn has been honored with the H.L. Mencken Award for Investigative Reporting, the Champion of Justice Award for reporting on the drug war, and the John Hancock Award for business reporting. Lynn was also a Knight Medical School Fellow at the University of Michigan.

View all post by Lynn Eisler Visit author's website

Write Your Comment