In the last few weeks I have read a number of articles about looking at ones investment strategy given what has happened in the financial markets over this last year. Is it time to rethink where one invests for retirement and in retirement?
I have always been interested in economics and lately I have been reading more from economists and their take on financial planning and investing. In fact I have adopted new financial planning software that has been written by economists that take a different approach to planning compared to other planning software on the market. If you are interested check it out at Economic Security Planner's website.
Most Economists also believe savings is all about insuring and not about speculating and the only true safe asset in which one can invest is Treasury Inflation Protected Securities. TIPS are safe because they are backed by US Government (so long as they can tax and print money and someone buys it) and protected against inflation.
TIPS offer a fixed yield plus the inflation rate keeps pace with changes in the consumer price index. TIPS do well as an investment when prices are rising. There is not much inflation now, maybe a little deflation, but this just makes TIPS cheaper. With the Feds dumping bucket loads of money into the economy inflation is inevitable unless they raise interest rates which won't happen in this economy.
The other big advantage of TIPS is its negative correlation to stock market returns. During inflationary times stock markets usually do poorly. TIPS are a diversifier of one's investment portfolio.
It might be time to rethink how much should be invested in TIPS especially if one is 55 or older. The current market decline puts this in grim perspective. TIPS are the only known investment product the will provide a risk free return and beat inflation at the same time.
TIPS are sold at auction and receive a fixed real rate of return. The principal is adjusted for inflation before the fixed-interest payment is calculated. TIPS can be purchased directly at little or no cost. Buying individual TIPS gives investors the ability to control the maturity of their holdings. TIPS can also be accessed through mutual funds but one needs to be careful because some mutual funds have other investments other than TIPS in them so read the prospectus carefully. A true play TIPS fund is Vanguard Inflation Protected Securities Fund (VIPSX).
TIPS have a tax issue though. Bond income includes the yield or coupon, and the adjustment for inflation. Bondholders receive the coupon but the inflation adjustment is paid once the bond matures. Yet when federal taxes come due, investors are billed for both the income they pocketed and the "phantom income" that was held back. In contrast, funds and ETFs distribute both the coupons and the inflation adjustment, sidestepping the tax problem. Given TIPS are taxed at ordinary income tax rates it is recommended that one hold TIPS in a retirement account.
If one converts part of their retirement balance (401(k), 403(b) or 457) to an immediate annuity adjusted for inflation, social security deferred to age 70 (adjust for inflation) and the balance in TIPS one has a very sold income base that one will not likely outlive their income stream.
Are equities no longer needed to provide a higher return later in the working years and in retirement? Don't tell the investment industry. They don't want to hear this but it is a wise move in my opinion.
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