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Financial Planning

TIPS for Inflation

 

Given the current inflationary climate and how it has affected many of our Fortune 500 clients, we believe that they will find this article particularly helpful. Jerome Powell was appointed chairman of the Federal Reserve Board of Governors in February 2018. He became the sixteenth chair to lead the most influential central bank in the world.1 In an effort to promote overall economic development, he and the Fed governors are tasked with adjusting short-term interest rates to help control inflation.

Inflation has remained modest in recent years, enabling the Fed to maintain low short-term interest rates. However, some are concerned that the Federal Reserve's interest rate policy may accelerate inflation in the future, and they are searching for investment opportunities with the potential to react to higher interest rates.

A Few TIPS

Treasury Inflation-Protected Securities, or "TIPS," differ from conventional U.S. Treasury bonds in that their principal amount is adjusted in response to changes in the Consumer Price Index (CPI), which measures inflation. When the CPI increases, the principal of a TIPS also increases. If the CPI declines, the principal balance is reduced.

Because the relationship between TIPS and the CPI can affect the amount of interest you receive every six months as well as the amount you receive when your TIPS matures, we believe it is essential that Fortune 500 employees understand this.2

We would like Fortune 500 customers to remember that TIPS pay a fixed interest rate. Since the fixed interest rate is applied to the recalculated principal, interest payments can fluctuate from period to period.

When TIPS mature, the bondholder will receive the greater of the original principal or the adjusted principal.2,3

TIPS are a potential investment option for our Fortune 500 customers who are concerned about inflation and who anticipate that short-term interest rates will rise. In an environment of fluctuating interest rates, a thorough examination of your overall strategy may also reveal other investment options that are suitable.

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Inflation in Perspective

In recent years, the Consumer Price Index has fluctuated below the 20-year average rate of 2.16 percent.

Inflation in Perspective

Source: USinflationcalculator.com, 2018

Board of Governors of the Federal Reserve, 2018. 
 
State and local taxes do not apply to Treasury Inflation-Protected Securities (TIPS) interest income. Nevertheless, under the current tax code, it is subject to federal income tax.
 
Adjustments in principle are taxed as interest in the year they occur, even if the bondholder does not receive the principal adjustment until maturity. Before investing, individuals should consider their capacity to pay current taxes.

Added Fact:

Recent studies have shown that TIPS (Treasury Inflation-Protected Securities) can be an attractive investment option for Fortune 500 employees concerned about inflation. According to research published by Morningstar in April 2023, TIPS have historically outperformed conventional Treasury bonds during periods of higher inflation, providing a potential hedge against rising prices. The study highlights the importance of considering TIPS as part of an overall investment strategy, especially for retirees or those nearing retirement who want to protect their purchasing power and maintain stable income streams in the face of inflationary pressures. This information can empower Fortune 500 employees to make informed decisions about their investment portfolios in an inflationary environment. Source: Morningstar, "TIPS: A Hedge Against Inflation?" (April 2023).

Added Analogy:

Imagine you're sailing on a vast ocean, and the weather forecast predicts stormy seas ahead. As a seasoned sailor, you want to ensure your ship remains steady amidst the turbulent waters. In this analogy, your ship represents your financial portfolio, and the storm represents inflation. To protect your ship from being tossed around, you deploy specialized anchors called TIPS (Treasury Inflation-Protected Securities). These anchors automatically adjust their strength and position as the storm intensifies, keeping your ship securely in place. Similarly, TIPS adjust their principal value in response to changes in inflation, safeguarding your investment from the erosive effects of rising prices. Just as sailors rely on sturdy anchors to weather the storm, Fortune 500 workers nearing retirement or already retired can trust TIPS to provide stability and preserve their purchasing power amidst the unpredictable winds of inflation.

TreasuryDirect.gov, 2018

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.


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