Yahoo Finance columnist Kerry Hannon explains why retirees should choose TIPS bonds over I bonds amid the current inflationary environment.
video transcript
– There was a big rush to buy I bonds at a rate of 9.62%. But for those looking for longer-term inflation protection, some TIPS may be the best option. Yahoo Finance’s Kerry Hannon is here to explain. So Kerry, why should investors give TIPS a second chance?
Kerry Hannon: Right. Now this is just another way to buffer you against inflation. These are from the Treasury, you know, inflation protected. They are values. They are backed by the government. So even if they were to go down, you will always get your capital back. So they are super secure. But what makes them interesting besides the I bonds, which we all loved this year, is that you have more opportunities to invest more in these TIPS.
With I bonds, you are limited to $10,000. With these, you can invest up to $10 million in them if you want. And so you can have a bigger work here. You can enter in $100 increments. 5-year, 10-year, 30-year maturities can be purchased. But you can sell them at any time. With I bonds, you must hold them for one year. And then you too… you really should hold them for five or you lose some interest.
These have much more liquidity to them. So you can invest more. You have liquidity. And this is the good thing. You can buy them into retirement accounts, which I bonds you can’t put into retirement. So for retirees, it’s not a bad way to park some money where it’s protected against inflation and you’re going to recoup your principal. So it’s that kind of perspective. It’s a longer-term perspective and looking forward to it, where do we think inflation is going? But this is a good way you might consider.
You can also buy them, with I bonds, you have to buy them from Treasury Direct. These can be purchased through brokerage firms. You can buy them in mutual funds. You can buy them as ETFs. Index funds. So there are different ways to get a bit of inflation protection through this type of investment.
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– And Kerry, what about the drawbacks? What do people need to know?
Kerry Hannon: Yeah. I mean, that’s a really good question because if you don’t hold them to maturity, because of the way they work, then interest is applied. And then your principal goes up based on interest. So if you cash them out before maturity, there’s a chance you’ll have a negative return. Now, right now, as I think I mentioned at the top, these are outperforming the I bond. So right now, they’re actually performing well.
But since they fluctuate over time, it’s possible that if you don’t hold them to maturity, you could have a negative return. Also, unlike I-bonds, if you buy them in a mutual fund or a bond index fund, you have a chance that they might also go down in value because they’re part of a bigger system here. The last thing is that the taxes… you’re going to pay federal income taxes on this, like you do with I-bonds.
But it’s a bit complicated. So it’s worth talking to someone about how it works because there can be a little… now if you have them in your retirement accounts, that’s all good. But if you keep them in a taxable account, you are expected to pay some taxes. federal tax. Neither local nor state. But it’s worth talking to your tax professional.
– It’s okay. So do your homework on that. But it’s always nice to have some options. Kerry Hannan, thanks for joining us.
Source: news.google.com