In “Feeling TIPSy”, Kerry Pechter wrote about the value of Treasury Inflation-Protected Securities (TIPS) in the Retirement Income Journal. TIPS are a form of insurance against inflation that is sponsored by the government. The principal of these securities is indexed to the inflation rate and their purpose is to let the government take on some of the inflation risk for investors with fixed income. The price of TIPS was all over the place last year since investors didn’t know what way inflation would go with struggling economic markets. While many people believe that the risk of inflation is growing because of all the the economic stimulus plans, there are those who think it could be a decade before a large inflation occurs.
Regardless of the time frame, inflation is a given and TIPS are a great way to protect your 401(k) and other investment vehicles so that you have enough money to comfortably retire. Compare annuities with inflation risk covered and those without and you can see why this rider would be valuable. Not all 401(k) plans or other investments offer TIPS and they are currently the smallest holding in investment vehicles. The main reason to invest in TIPS now, before large inflation occurs, is because of the price. Costs will rise as we see this anticipated inflation actually occur. Putting money into TIPS funds now ensures that your money will work for you as soon as there is a steep rise in inflation.
